Designing farm supplemental revenue coverage options on top of crop insurance coverage

Abstract

Purpose -The purpose of this paper is to use simulation analysis to assess farmer choice between crop insurance and supplemental revenue options as proposed during development of the Agricultural Act of 2014. Design/methodology/approach -The certainty equivalent of wealth is used to rank farm choices and assess the effects of supplemental revenue options on the crop insurance plan and coverage level chosen by the producer under a range of farm attributes. The risk-reducing effectiveness of the select programs is also examined through their impact on the farm revenue distribution. The dependence structure of yield and prices is modeled by applying copula techniques on historical data. Findings -Farm program supplemental revenue programs generally have no effect on crop insurance choices. Crop insurance supplemental revenue programs typically reduce crop insurance coverage at high coverage levels. An individual plan of crop insurance combined with a supplemental revenue insurance plan may substitute for incumbent area crop insurance plans. Originality/value -The analysis provides insights into farmers' possible choices by focussing on alternative crops and farm attributes and extensive scenarios, using current data, crop insurance plans and programs contained in the 2014 Farm Bill and related bills. The results should be of value to policy officials and producers in regards to the design and use of risk management tools.

Implications and Evaluation of Crop Insurance Choices for Cotton Farmers Under the 2014 Farm Bill

“…In other studies on cotton, the optimal insurance choice was RP with an 85% coverage level (Davis, Anderson, and Smith, 2014; Dismukes et al, 2013) and 80% coverage level (Bulut and Collins, 2014). Similar to the results here, Bulut and Collins also found the RP with STAX is optimal at the 75% coverage level and has higher benefits in all coverage levels.…”

“…The different risk management choices were examined with the certainty equivalent (CE) of the net stochastic ending wealth ( W n α i ). This analysis used a model that is consistent with Vedenov and Power (2008), Power, Vedenov, and Hong (2009), Wang et al (2012), Dismukes et al (2013), and Bulut and Collins (2014) using a CRRA utility function. The expected utility is as follows: …”

“…Here, E represents the expectation operator, and ω n α i is the probability of the respective ending wealth. The r was set equal to 2 to represent the moderate level of risk aversion level, 10 which has been used in several previous studies (Bulut and Collins, 2014; Dismukes et al, 2013; Power, Vedenov, and Hong, 2009; Vedenov and Power, 2008). We calculated the CE from expected utility as shown in equation (4).…”

Evaluation of farm programmes in the 2014 us farm bill

“…In a study of public and private roles in agricultural risk transfer, published on the AGree blog 9 to stimulate policy discussion, comment that irrespective of whether farmers have enrolled in crop insurance or not, the new crop commodity programmes are meant to provide support in case of a relatively small revenue loss because of variations in price (PLC) or revenue (ARC); these programmes have thus been termed as covering "shallow loss" compared with average individual, county or national benchmarks. According to Bulut and Collins (2014), the ARC programme covers shallow losses between 14% and 24% of benchmark revenue. Using a model based on certainty equivalent wealth, the authors simulate farmers' choices between crop insurance and supplemental revenue options, including ARC, PLC, SCO and STAX, to identify possible substitution effects.…”

“…In a selected conference paper, Luckstead and Devadoss (2016) present the results of a model calibrated to a representative Kansas dryland wheat farm, which assumes certainty equivalent wealth to rank farm choices and assess whether supplemental revenue options, including SCO, offer additional benefits to crop insurance at high coverage, Model results show, for example, that electing SCO would bring the farmer a net benefit of USD 6.514/acre of wheat. Using a model based on certainty equivalent wealth to simulate farmers' choices between crop insurance and supplemental revenue options, including ARC, PLC, SCO and STAX, and identify possible substitution effects, Bulut and Collins (2014) find that for most crops, an underlying crop insurance policy combined to SCO and PLC provides a higher farm value than crop insurance alone. However, model results indicate that SCO is less effective in the low price scenario.…”