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Boom Times For Crop Insurance, Bruce A. Babcock Jul 2015

Boom Times For Crop Insurance, Bruce A. Babcock

Iowa Ag Review

Crop farmers are enjoying record high profi ts because of dramatically higher market prices. Farmers’ increased demand for land, seed, fertilizer, and machinery has resulted in higher prices and profi ts for sellers of these inputs as well. One industry that is also enjoying the higher crop prices is the crop insurance industry. It benefits from higher prices because the formulas used to determine industry revenue automatically generate higher expected subsidies as crop prices rise. Actual subsidies depend in part on crop losses, but administrative and operating subsidies are directly tied to crop prices. Figure 1 shows how total industry ...


Corn Belt Contributions To The Crop Insurance Industry, Bruce A. Babcock Jul 2015

Corn Belt Contributions To The Crop Insurance Industry, Bruce A. Babcock

Iowa Ag Review

The crop insurance industry enjoyed another banner year in 2007, collecting $6.5 billion in premiums yet paying out only $3.2 billion in losses. I estimate that the industry will collect a record $2.8 billion from taxpayers. In contrast, the net amount that farmers received from the program in 2007 was only $750 million. Interestingly, since the beginning of this decade, the $11.3 billion in net payments to farmers (indemnities received minus farmer-paid premiums) is about equal to the amount that taxpayers have paid the industry ($11.1 billion). Overall, taxpayers have spent more than $22 billion ...


Drought Tolerance And Risk In The U.S. Crop Insurance Program, Bruce A. Babcock, Tian Yu Jul 2015

Drought Tolerance And Risk In The U.S. Crop Insurance Program, Bruce A. Babcock, Tian Yu

Iowa Ag Review

Are farmers paying too much for crop insurance? It sure seems so, at least in the Corn Belt. With the exception of 2008 when a large drop in price triggered payments, Corn Belt farmers have generally paid more into the program than they have gotten out, despite Congress’s intention that farmers get at least two dollars for each dollar they pay into the program.


Examining The Health Of The U.S. Crop Insurance Industry, Bruce A. Babcock Jul 2015

Examining The Health Of The U.S. Crop Insurance Industry, Bruce A. Babcock

Iowa Ag Review

In late September the Risk Management Agency (RMA) of USDA released the results of commissioned studies that calculated the rate of return that U.S. crop insurance companies have received from selling multi-peril crop insurance (MPCI). Since 2000, the average annual rate of return on equity has been 19 percent. The study also estimated that a reasonable rate of return over the same time period for this line of business would be about 11 percent. One straightforward interpretation of this difference is that since 2000, the crop insurance industry has received a rate of return that is 72 percent higher ...


Is Government Involvement Really Necessary: Implications For Systemic Risk And Crop Reinsurance Contracts, Xiaoguang Feng, Dermot J. Hayes Oct 2014

Is Government Involvement Really Necessary: Implications For Systemic Risk And Crop Reinsurance Contracts, Xiaoguang Feng, Dermot J. Hayes

Economics Presentations, Posters and Proceedings

Agriculture is subject to substantial systemic risk of crop yield losses due to widespread natural disasters. The systemic risk has been a major obstacle for the development of private crop insurance markets. Driven by spatially correlated weather events, crop losses are highly correlated within a certain area. As a result, the portfolio insurance risk associated with the crop losses has been raised far above what it would be if individual losses were independent, as proposed by Miranda and Glauber (1997). For example, Miranda and Glauber (1997) find that the portfolio risk faced by U.S. crop insurers is about ten ...


Diversifying Systemic Risk In Agriculture: A Copula-Based Approach, Xiaoguang Feng, Dermot J. Hayes Jul 2014

Diversifying Systemic Risk In Agriculture: A Copula-Based Approach, Xiaoguang Feng, Dermot J. Hayes

Economics Presentations, Posters and Proceedings

One of the biggest obstacles for the development of private crop insurance markets is the systemic risk inherent in crop yields. Driven by spatially correlated weather events, crop losses are highly correlated within a certain area. As a result, the portfolio insurance risk has been raised prohibitively high for viable private crop insurance markets unless subsidized by the government. For example, the portfolio risk faced by U.S. crop insurers is about ten times larger than that of conventional insurance lines (Miranda and Glauber, 1997).


Crop Insurance In Iowa, Alejandro Plastina, Chad Hart Jan 2014

Crop Insurance In Iowa, Alejandro Plastina, Chad Hart

Agricultural Policy Review

Farmers across the nation rely heavily on crop insurance as a risk management tool—in Iowa alone over 93 percent of corn and soybean planted area was insured in 2014, but that participation rate hasn’t always been the case. Participation in crop insurance declined substantially in the early 1990s after the mandate that required producers to purchase crop insurance in 1989 and 1990 to collect drought assistance in 1988 dissipated.


Price Expectations And Risk Profiles Drive Commodity Program Choices, Alejandro Plastina, Chad Hart Jan 2014

Price Expectations And Risk Profiles Drive Commodity Program Choices, Alejandro Plastina, Chad Hart

Agricultural Policy Review

The optimal commodity program choice depends as much on the specific production system in each farm as on the producer’s expectations about future yields and prices. Furthermore, the risk profile of producers will weigh heavily in the decision. This article illustrates the role of price expectations and risk profiles in commodity program choice using the ISU Farm Bill Analyzer.


Aflatoxin: Crop Insurance, Charles R. Hurburgh Jr., Chad E. Hart Sep 2012

Aflatoxin: Crop Insurance, Charles R. Hurburgh Jr., Chad E. Hart

Integrated Crop Management News

Aflatoxin is covered under multi-peril crop insurance. The settlement is done as a deducted percentage of actual yield depending on the aflatoxin level. Producers will receive the grain after settlement.


Insurance Coverage For Drought-Damaged Crops, William M. Edwards Jul 2012

Insurance Coverage For Drought-Damaged Crops, William M. Edwards

Integrated Crop Management News

Nearly 90 percent of the corn and soybean acres in Iowa are covered by multiple peril crop insurance. Drought damage is an insurable loss under these policies. Producers should consult with their crop insurance agents before harvesting or destroying any drought-damaged crops, however.


Early Planted Acres May Lose Replant Insurance, William M. Edwards Apr 2012

Early Planted Acres May Lose Replant Insurance, William M. Edwards

Integrated Crop Management News

Unusually warm and dry weather has allowed crop producers to start spring field work earlier than can be remembered by most people. Getting an early start on tillage and planting reduces the risk of getting behind schedule later if an extended period of rainy weather occurs, but it also has its risks. The Risk Management Agency (USDA) has some specific rules about early planted crops with regard to crop insurance coverage. For each insurable crop RMA has set an “early planting date.” The earliest planting dates allowed for counties in the state of Iowa are April 11 for corn and ...


Important Crop Insurance Dates, William M. Edwards Feb 2012

Important Crop Insurance Dates, William M. Edwards

Integrated Crop Management News

Even the best crop insurance plan is of little use if the right information is not collected and submitted on time. Likewise, if certain actions are not completed by the necessary date, producers may not receive full benefit from the risk protection that they have selected.


Flood Damaged Crops, Crop Insurance Payments And Lease Contracts, William M. Edwards Aug 2011

Flood Damaged Crops, Crop Insurance Payments And Lease Contracts, William M. Edwards

Integrated Crop Management News

Some Iowa corn and soybean producers are facing substantial if not complete crop losses due to flooding. In particular, many acres of crops in the Missouri River Valley have been under water for a month or more this year. Fortunately, nearly 90 percent of Iowa’s corn and soybean acres are protected by multiple peril crop insurance.


Price Analysis, Risk Assessment, And Insurance For Organic Crops, Ariel Singerman, Chad E. Hart, Sergio H. Lence Aug 2011

Price Analysis, Risk Assessment, And Insurance For Organic Crops, Ariel Singerman, Chad E. Hart, Sergio H. Lence

CARD Policy Briefs

In recent years, the organic sector has grown steadily and significantly. However, little economic research has been performed on risk management in organic agriculture, likely because of the lack of available data. This lack of data may also be why the creation of the current crop insurance policy for organic farmers has been so ad hoc.

The Agricultural Risk Protection Act of 2000 recognized organic farming as a “good farming practice,” making federal crop insurance coverage available for organic crops, and taking into account the idiosyncrasies of the organic production system. In addition to the production risks covered for conventional ...


Time To Revisit Crop Insurance Premium Subsidies?, Bruce A. Babcock Mar 2011

Time To Revisit Crop Insurance Premium Subsidies?, Bruce A. Babcock

CARD Policy Briefs

In 2000, Congress decided to move away from a fixed-dollar-per-acre premium subsidy to a subsidy percentage that applies to any crop insurance product offered. This change reduced the cost to farmers of moving from yield insurance to revenue insurance by more than 50%. In addition, Congress decided to pay a large proportion of the additional premium for higher coverage levels, paying for more than half the cost of moving from the 65% to the 75% coverage level and about 25% of the additional cost of moving from 75% to 80% coverage. Not surprisingly, farmers responded to these lower costs by ...


Costs And Benefits Of Moving To A County Acre Program, Bruce A. Babcock May 2010

Costs And Benefits Of Moving To A County Acre Program, Bruce A. Babcock

CARD Policy Briefs

Better integration of the different programs that comprise the farm safety net seems inevitable in the next farm bill given widespread public concern over the rapidly growing federal debt. With $5 billion in direct payments flowing annually to farmers who own or rent base acres without regard to farm income, $7 billion flowing to crop insurance companies over the last two years, and $2.6 billion flowing to cotton farmers in the last two years from programs that violate our trade commitments, there is substantial room for improvement. One path toward better integration would be to modify the ACRE (Average ...


Using A Farmer's Beta For Improved Estimation Of Expected Yields, Miguel A. Carriquiry, Bruce Babcock, Chad E. Hart Apr 2008

Using A Farmer's Beta For Improved Estimation Of Expected Yields, Miguel A. Carriquiry, Bruce Babcock, Chad E. Hart

Economics Publications

Effects of sampling error in estimation of farmers' mean yields for crop insurance purposes and their implications for actuarial soundness are explored using farm- level corn yield data in Iowa. Results indicate that sampling error, combined with nonlinearities in the indemnity function, leads to empirically estimated insurance rates that exceed actuarially fair values. The difference depends on the coverage level, the number of observations used, and the participation strategy followed by farmers. A new estimator for mean yields based on the decomposition of farm yields into systemic and idiosyncratic components is proposed, which could lead to improved rate-making and reduce ...


Insuring Uncertainty In Value-Added Agriculture: Ethanol Production, Nicholas D. Paulson, Bruce A. Babcock, Chad E. Hart, Dermot J. Hayes Apr 2004

Insuring Uncertainty In Value-Added Agriculture: Ethanol Production, Nicholas D. Paulson, Bruce A. Babcock, Chad E. Hart, Dermot J. Hayes

CARD Working Papers

A wide variety of insurance products is available to agricultural producers to insure against yield or price risks in the markets for the raw commodities they produce. Value-added enterprises, such as ethanol production, have been expanding over the last decade. This paper outlines the development of an insurance product aimed at corn producers who are members of an ethanol production cooperative. The product has the potential to provide these producers with a new and useful risk management tool to insure against price risks in the markets for corn, distillers dried grains with solubles (DDGS), ethanol, and natural gas. Monte Carlo ...


Insuring Eggs In Baskets, Chad E. Hart, Dermot J. Hayes, Bruce A. Babcock Jul 2003

Insuring Eggs In Baskets, Chad E. Hart, Dermot J. Hayes, Bruce A. Babcock

CARD Working Papers

The vast majority of crop and revenue insurance policies sold in the United States are single-crop policies that insure against low yields or low revenues for each crop grown on a particular farm. This practice of insuring one crop at a time runs counter to the traditional risk management practice of diversifying across several enterprises to avoid putting all of ones eggs in a single basket. This paper examines the construction of whole-farm crop revenue insurance programs to include livestock. The whole-farm insurance product covers crop revenues from corn and soybeans and livestock revenues from hog production. The results show ...


Crop Insurance Rates And The Laws Of Probability, Bruce A. Babcock, Chad E. Hart, Dermot J. Hayes Apr 2002

Crop Insurance Rates And The Laws Of Probability, Bruce A. Babcock, Chad E. Hart, Dermot J. Hayes

CARD Working Papers

Increased crop insurance subsidies have increased the demand for insurance at coverage levels higher than the traditional level of 65 percent. Premium rates for higher levels of yield insurance under the Federal Actual Production History (APH) program equal the premium rate at the 65 percent coverage level multiplied by a rate relativity factor that varies by coverage level but not by crop or region. In this paper, we examine the consistency of these constant rate relativity factors with the laws of probability by determining the maximum 65 percent premium rate that is consistent with a well-defined yield distribution. We find ...


Systemic Risk In U.S. Crop And Revenue Insurance Programs, Chuck Mason, Dermot J. Hayes, Sergio H. Lence Mar 2001

Systemic Risk In U.S. Crop And Revenue Insurance Programs, Chuck Mason, Dermot J. Hayes, Sergio H. Lence

CARD Working Papers

This study estimates the probability density function of the Federal Risk Management Agency's (RMA) net income from reinsuring crop insurance for corn, wheat, and soybeans. Based on 1997 data, the authors estimate that there is a 5 percent probability that RMA will need to reimburse at least $1 billion to insurance companies, and that the fair value of RMA's reinsurance services to insurance firms equals $78.7 million. In addition, various hedging strategies are examined for their potential to reduce RMA's reinsurance risk. The risk reduction achievable by hedging is appreciable, but use of derivative contracts alone ...


Livestock Revenue Insurance, Chad E. Hart, Bruce A. Babcock, Dermot J. Hayes Jan 2001

Livestock Revenue Insurance, Chad E. Hart, Bruce A. Babcock, Dermot J. Hayes

CARD Working Papers

This study outlines several possible structures for livestock revenue insurance. The policies take the form of an exotic option—an Asian basket option. The actuarially fair premiums for these policies are equal to the prices of the options they represent. Due to the complexity of pricing Asian basket options, we have combined two techniques for pricing options to reach the actuarially fair premiums. Projected premiums, producer welfare, and program efficiency are evaluated for the insurance products and existing market tools. Using efficiency ratios and certainty equivalent returns, we compare the insurance policies to strategies involving existing futures and options.


Estimating The Costs Of Mpci Under The 1994 Crop Insurance Reform Act, Chad E. Hart, Darnell B. Smith Mar 1996

Estimating The Costs Of Mpci Under The 1994 Crop Insurance Reform Act, Chad E. Hart, Darnell B. Smith

CARD Working Papers

The 1994 Crop Insurance Reform Act addressed two major problems of MPCI (multiple peril crop insurance): low participation and additional disaster assistance. In this study, total government costs for the FCIC (Federal Crop Insurance Corporation) and MPCI are estimated to be more than $2 billion, on average, from 1996 to 2003, with half of this amount being in the form of premium subsidies paid by the government.


Input Demand Under Yield And Revenue Insurance, Bruce A. Babcock, David A. Hennessy Dec 1994

Input Demand Under Yield And Revenue Insurance, Bruce A. Babcock, David A. Hennessy

CARD Working Papers

The question of how insurance programs affect agricultural input use is commanding increasing attention. Previous studies disagree on the likely effects of insurance on fertilizer application rates. Whether insurance is a complement or a substitute for fertilizer depends, in part, on whether the probability of low yields is positively or negatively affected by increased fertilizer rates. This study uses field-level data measuring the response of corn yields to nitrogen fertilizer to determine if the technical relationship between yield and nitrogen fertilizer supports the hypothesis that crop insurance or revenue insurance could induce increased application rates. Our results indicate no support ...


The Safety Net Of Farming: An Introduction And Literature Review Of Agricultural Insurance And Other Stabilization Policies And Proposals, Chad E. Hart, Darnell B. Smith Mar 1994

The Safety Net Of Farming: An Introduction And Literature Review Of Agricultural Insurance And Other Stabilization Policies And Proposals, Chad E. Hart, Darnell B. Smith

CARD Working Papers

With the pending debate on the 1995 Farm Bill, crop insurance and disaster assistance have become major topics for discussion. This paper explores the performance of the current MPCI program and presents alternative programs. The need for a unified approach to ease the problem of agricultural instability is addressed.


Determinants Of Health Insurance Coverage For Farm Family Households: A Midwestern Study, Helen H. Jensen, William E. Saupe Jan 1987

Determinants Of Health Insurance Coverage For Farm Family Households: A Midwestern Study, Helen H. Jensen, William E. Saupe

Economics Publications

Data from interviews with a random sample of farm households in eight counties in southwestern Wisconsin are used to describe the distribution of health insurance coverage among households and health related fringe benefits of off-farm employment. An analysis of health insurance coverage shows major factors associated with lack of health insurance to include lower total household income, larger household size, and being more conservative regarding risk in farming. Although not significant, the signs of coefficients estimated for formal education and lacking fringe benefits in operator off­ farm employment are consistent with expectations.