Farm‐level evaluation of area‐ and agroclimatic‐based index insurance

Tsiboe, Francis; Tack, Jesse; Yu, Jisang

doi:10.1002/jaa2.77

J of Agr & App Econ Assoc

2023

DOI: 10.1002/jaa2.77

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Farm‐level evaluation of area‐ and agroclimatic‐based index insurance

Francis Tsiboe,

Jesse Tack,

Jisang Yu

Abstract: We utilize over 190,000 historical farm‐level dryland row‐crop yield observations (corn, sorghum, soybeans, and winter wheat) spanning over 7000 Kansas farms from 1973 to 2018 coupled with agroclimatic variables to assess the performance of a broad range of weather‐ and area‐based insurance products. Results showed substantial levels of basis risk across agroclimatic‐based indices, limited ability to reduce income variability under fair pricing, and underperformance relative to area‐based yield products. Growt… Show more

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2024

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Cited by 3 publications

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Quantifying basis risk associated with supplemental area-based crop insurance

Tsay,

Paulson

2024

AFR

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PurposeArea-based insurance plans trigger payments based on losses which may not match actual loss experience at the farm level, an issue often referred to as basis risk. The purpose of this paper is to quantify the basis risk associated with the Supplemental and Enhanced Coverage Option (SCO and ECO) crop insurance programs, and the risk reduction that can be achieved when these area-based plans are added to farmers’ risk management portfolios.Design/methodology/approachThis study utilizes simulation techniques to build a stylized model for representative farms at the county-level for non-irrigated corn and soybean production. We model farms for each county in the 17 states included in USDA’s Crop Progress Reports for corn and soybeans, which comprise more than 90% of planted acreage for those crops. Yield and price data from the USDA’s National Agricultural Statistics Service (NASS), futures price data and insurance premiums from the Risk Management Agency are used to calibrate the simulation model.FindingsArea-based plans may provide (1) insufficient coverage for actual losses, which is a risk management concern or (2) payments exceeding actual losses, which is a program efficiency concern given federal support for the insurance program. The risk of insufficient coverage (under-compensation) can be reduced by increasing the coverage level of the area plans, but that also increases the likelihood of support exceeding actual loss experience (over-compensation). The scale of basis risk associated with the area plans differs by region and crop due to differences in yield risk. Area plans do have the potential to provide additional risk reduction; however, risk reduction is inversely related to the level of basis risk.Originality/valueTo the best of the authors’ knowledge, this study is the first to focus on quantifying the basis risk associated with the relatively new supplemental area options (SCO, ECO) currently available in the US federal crop insurance program. It provides important insights which could inform current and future Farm Bill debates as policymakers consider modifications and enhancements to commodity and crop insurance programs. It also provides useful information to help educate farmers and other stakeholders about the use of SCO and ECO in their risk management plans.

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Quantifying basis risk associated with supplemental area-based crop insurance

Tsay,

Paulson

2024

AFR

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Evaluation of alternative farm safety net program combination strategies

Gaku,

Tsiboe

2024

AFR

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PurposeSeveral farm safety net strategies are available to farmers as a source of financial protection against losses due to price instability, government policies, weather fluctuations and global market changes. Producers can employ these strategies combining crop insurance policies with countercyclical policies for several crops and production areas; however, less is known about the efficiency of these strategies in enhancing profit and reducing its variability. In this study, we examine the efficiency of these strategies at minimizing inter crop year farm profit variability.Design/methodology/approachWe utilized relative mean of profit and coefficient of variation, to compare counterfactually calculated farm safety net strategies for a sample of 28,615 observations across 2,486 farms and four dryland crops (corn, soybean, sorghum and wheat) in Kansas spanning nine crop years (2014–2022). A no farm safety net strategy is used as the benchmark for every alternative strategy to ascertain whether a policy customization is statistically different from a no farm safety case.FindingsThe general pattern of the results suggests that program combination strategies that have a high-profit enhancement potential necessarily have low profit risk for dryland wheat and sorghum production. On the contrary, such a connection is absent for dryland corn and soybeans production. Low-cost farm safety net strategies that enhance corn and soybeans profits do not necessarily lower profit risks.Originality/valueThis paper is one of the first to use a large sample of actual farm-level observations to evaluate how combinations of safety net programs offered under the Title I (PLC, ARCCO and ARCIC) and XI (FCIP) of the U.S. Farm Bill rank in terms of profit level enhancement and profit risk reduction.

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Utilizing large‐scale insurance data sets to calibrate sub‐county level crop yields

Tsiboe,

Turner,

2024

J of Risk & Insurance

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Crop yields are crucial for research on agricultural risk and productivity but are typically only available at highly aggregated levels. Yield data at more granular levels of observation have the potential to enhance econometric identification and improve statistical power but are typically inaccessible. Crop insurance contracts offered via the US Federal Crop Insurance Program (FCIP) are priced, in part, based on past yields of the farm meaning year‐to‐year variation in premium rates has the potential to provide insight into how yields vary over time. This paper introduces methods to use observed FCIP rating parameters to calibrate yields for insurance transactions lacking such data. These methods are validated with 148,243 farm‐level observations from Kansas for which yields are known. The calibrated yields are applied empirically to examine the impact of asymmetric information in the FCIP via choice of insurance unit structure and the extent to which legislative changes mitigated this effect.

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Farm‐level evaluation of area‐ and agroclimatic‐based index insurance

Cited by 3 publications

References 55 publications

Quantifying basis risk associated with supplemental area-based crop insurance

Quantifying basis risk associated with supplemental area-based crop insurance

Evaluation of alternative farm safety net program combination strategies

Utilizing large‐scale insurance data sets to calibrate sub‐county level crop yields

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