Mark Boyd } Participation Decisions } Coverage Type Selections } - PowerPoint PPT Presentation

Mark Boyd

} Participation Decisions } Coverage Type Selections } Coverage Level } Unit Type

Policies Acres Total Effective Earning Total Insured Premium Liability Subsidy Applicable Year Premium Subsidy ($millions) ($millions) ($millions) Rate Farm Bills 1980 Federal 1980 268,196 NA 26.28 $156 $3,010 NA Crop 1981 416,798 $47 45.01 $377 $5,984 0.12 Insurance Act 1982 383,495 $91 42.29 $394 $6,102 0.23 1983 310,179 $64 27.96 $287 $4,392 0.22 1984 389,928 $98 42.69 $435 $6,631 0.23 1985 414,707 $100 48.56 $440 $7,164 0.23 1986 406,989 $88 48.68 $380 $6,233 0.23 1987 433,954 $88 49.15 $365 $6,100 0.24 1988 461,032 $108 55.59 $437 $6,968 0.25 1989 946,305 $201 101.35 $800 $13,366 0.25 1990 892,484 $213 101.16 $827 $12,712 0.26 1991 704,546 $187 82.17 $726 $11,102 0.26 1992 661,788 $194 82.93 $749 $11,230 0.26 1993 677,323 $197 83.54 $745 $11,242 0.26 1994 Crop 1994 798,779 $251 99.40 $936 $13,467 0.27 Ins. Reform 1995 2,032,397 $886 220.33 $1,535 $23,639 0.58 Act 1996 Farm 1996 1,612,292 $976 204.69 $1,828 $26,684 0.53 Act (CRC 1997 1,316,318 $894 181.91 $1,759 $25,178 0.51 Added) 1998 1,238,796 $938 181.61 $1,862 $27,656 0.50 1999 1,283,174 $929 196.63 $2,276 $28,772 0.41 2000 2000 1,311,738 $896 206.05 $2,458 $31,071 0.36 Agricultural 2001 1,286,083 $1,704 211.07 $2,877 $32,947 0.59 Risk Protection 2002 1,247,227 $1,660 214.56 $2,811 $32,745 0.59 Act 2003 1,228,955 $1,957 217.12 $3,322 $35,792 0.59 2004 1,217,662 $2,388 223.91 $4,081 $41,595 0.59 2005 1,178,421 $2,245 248.75 $3,831 $38,766 0.59 2006 1,136,154 $2,622 245.85 $4,497 $44,476 0.58 2007 1,126,608 $3,714 275.38 $6,412 $61,638 0.58 2008 Food, 2008 1,138,537 $5,592 275.84 $9,717 $84,205 0.58 Agriculture, 2009 1,162,296 $5,342 268.11 $8,836 $74,392 0.60 Conservation, 2010 1,131,015 $4,630 260.04 $7,484 $73,349 0.62 and Trade 2011 1,143,988 $7,390 266.07 $11,871 $110,030 0.62 Act 2012 1,166,039 $6,909 283.06 $11,019 $113,122 0.63 2013 1,216,305 $7,222 296.18 $11,701 $119,618 0.62 2014 2014 1,198,987 $6,142 294.59 $9,966 $105,951 0.62 Agricultural 2015 1,196,569 $5,988 296.07 $9,623 $98,006 0.62 Act 2016 1,151,368 $5,733 290.32 $9,132 $95,117 0.63 2017 1,116,104 $6,208 311.70 $9,858 $100,435 0.63 Total $84,894 $146,810 $1,550,887

Year Loss Farmer's Earned Prem. Loss Cost Effective Ratio Loss Ratio Rate Ratio Subsidy Rate 2007 0.55 1.30 0.10 0.06 0.58 2008 0.89 2.10 0.12 0.10 0.58 2009 0.58 1.48 0.12 0.07 0.60 2010 0.56 1.47 0.10 0.06 0.62 2011 0.91 2.42 0.11 0.10 0.62 2012 1.58 4.24 0.10 0.15 0.63 2013 1.03 2.69 0.10 0.10 0.62 2014 0.91 2.37 0.09 0.09 0.62 2015 0.65 1.71 0.10 0.06 0.62 2016 0.41 1.09 0.10 0.04 0.63 2017 0.53 1.43 0.10 0.05 0.63 Total Since 1980 0.86 2.05 0.09 0.08

} Existing research appears to lack a clear explanation for why producers choose to insure at widely differing coverage levels } Coverage choices appear to be counter to economic predictions } Are cash flow expectations a significant factor?

} Are producers intentionally choosing coverage levels in order to maximize subsidy extraction? Fr From om the e Liter erat ature : } While crop insurance began as a response to farmer losses during the great depression, it has arguably become a vehicle for income transfer subsidies above and beyond risk management (Goodwin & Smith, 2013) } Results from Du et al. (2016) provide indication that farmers preferences tend toward lower premium payments in favor of retaining less risk

Annual RP Corn Percentage of Acres Insured under each Coverage Level Annually in North Dakota 70% 60% Percentage of Acres Insured 50% 40% 30% 20% 10% 0% 0.50 0.55 0.60 0.65 0.70 0.75 0.80 0.85 Coverage Level 2011 2012 2013 2014 2015 2016 2017 2018

Annual RP Corn Percentage of Acres Insured under each Coverage Level Annually in Indiana 70% 60% Total Acres Insured 50% Percentage of 40% 30% 20% 10% 0% 0.50 0.55 0.60 0.65 0.70 0.75 0.80 0.85 Coverage Level 2011 2012 2013 2014 2015 2016 2017 2018

} Producers are assumed to maximize the expected profit at year end subject to liquid asset constraints.

} Sign of coverage level FOC dependent on the functional form of premium and indemnity calculation } An increase in subsidy results in higher coverage selection } Rating changes are ambiguous due to the distortion caused by the subsidy. } The effect of costs on coverage level selection are also ambiguous

} Agricultural Resource Management Survey (ARMS) ◦ Individual level survey data from 2014 and 2016 } RMA rating data from the Actuarial Data Master (ADMs) ◦ County level base rates for AYP } Summary of Business (SOB) data from the Risk Management (RMA) ◦ County level IE data

Summary of Variable Definitions Variable Name Units Definition Financial: Revenue: Off-Farm Income $1000s Off-farm income earned by household Gross Farm Income/Acre 100s Gross cash farm income Expenses: Total VC/Acre $100s Total variable expenses Total FC/Acre $100s Total fixed expenses Int.& Prin. Pyts/Acre $100s Interest and principal payments Assets & Liabilities: Debt/Asset Ratio Ratio Farm business debt to asset ratio Net Worth/Acre $1000s Net worth (equity) Acreage: Total Crop Acres Acres in 100s Total crop acres operated by farm Household: Operator Age Years Age of Primary Operator Number of Owners Number of Owners Number of Owners (1) Less than a High School diploma, (2) a High School Indicator of Operator diploma, (3) some college including an associate’s Education Four Classes degree, and (4) at least a four-year college degree BaseRate Insurance: Rate RMA Area Yield Plan Base Rate BaseRate Slope Binary Dummy for Exponential or Linear Slope 5 Year Loss Ratio Ratio Loss Ratio in County over past 5 Years 5 Year Earned Premium Rate Ratio Earned Premium Rate in County over past 5 years

} 5 year Loss Ratio !"#$% '()*+(,#- ."/ 0/,"/ 1 -*$/2 } !"#$% 3/*+,4+ ."/ 0/,"/ 1 -*$/ } 5 year Earned Premium Rate !"#$% 3/*+,4+ 0$,) ."/ 0/,"/ 1 -*$/2 !"#$% 5,$6,%,#- ,(24/*) ."/ 0/,"/ 1 -*$/

𝐷𝑝𝑤𝑀 ,=0# = 𝛾 G + 𝛾 ? OFI ,=0# + 𝛾 9 GFIacre ,=0# + 𝛾 Q 𝑊𝐷𝑏𝑑𝑠𝑓 ,=0# + 𝛾 : 𝐺𝐷𝑏𝑑𝑠𝑓 ,=0# + 𝛾 1 𝑀𝑆 ,=0# + 𝛾 X 𝐹𝑄𝑆 ,=0# + 𝛾 [ 𝐶𝑏𝑡𝑓𝑆𝑏𝑢𝑓70 ,=0# + 𝛾 a 𝐶𝑆𝑡𝑚𝑝𝑞𝑓 ,=0# + 𝛾 d 𝐸𝐵𝑆 ,=0# + 𝛾 ?G 𝑂𝑓𝑢𝑥𝐵𝑑𝑠𝑓 ,=0# + 𝛾 ?? 𝑈𝑝𝑢𝐵𝑑𝑠𝑓𝑡 ,=0# + 𝛾 ?9 𝑍2016 ,=0# + 𝛾 ?Q 𝑂𝑝𝑔𝑃𝑥𝑜𝑡 ,=0# + 𝛾 ?: 𝑃𝑓𝑒𝑣𝑑 ,=0# + 𝛾 ?1 𝐵𝑕𝑓 ,=0# + =>? ∑ 𝛾 9: 𝑇𝐺 + 𝑣 ,=0# ,=0# @A? } CovL icp : by entity i , for crop c , under policy p , in year t =>? } ∑ 𝛾 9: 𝑇𝐺 ,=0# : County Effects, where s is equal to the number of counties @A?

Table 4.2 De Kalb county Indiana RP Corn Premium Information by Coverage Level Cov. Level 85% 80% 75% 70% 65% 60% 55% 50% Liability $53,856 $50,688 $47,520 $44,352 $41,184 $38,016 $34,848 $31,680 Total Prem. $7,614 $5,876 $4,682 $3,669 $2,813 $2,140 $1,604 $1,177 Prod. Prem. $4,721 $3,056 $2,107 $1,504 $1,153 $770 $577 $388 Subsidy $2,893 $2,820 $2,575 $2,165 $1,660 $1,370 $1,027 $789 Trigger (Bu.) 136 128 120 112 104 96 88 80 Subsidy/Liab. 5.4% 5.6% 5.4% 4.9% 4.0% 3.6% 2.9% 2.5% Subsidy Rate 38% 48% 55% 59% 59% 64% 64% 67% Source: RMA Cost Estimator 1 Table 4.3 McClean county North Dakota RP Corn Premium Information by Coverage Level Cov. Level 85% 80% 75% 70% 65% 60% 55% 50% Liability $53,856 $50,688 $47,520 $44,352 $41,184 $38,016 $34,848 $31,680 Total Prem. $14,820 $12,389 $10,600 $8,998 $7,571 $6,285 $5,126 $4,114 Prod. Prem. $9,188 $6,442 $4,770 $3,689 $3,104 $2,263 $1,845 $1,358 Subsidy $5,632 $5,947 $5,830 $5,309 $4,467 $4,022 $3,281 $2,756 Trigger (Bu.) 136 128 120 112 104 96 88 80 Subsidy/Liab. 10.5% 11.7% 12.3% 12.0% 10.8% 10.6% 9.4% 8.7% Subsidy Rate 38% 48% 55% 59% 59% 64% 64% 67% Source: RMA Cost Estimator 2

} $1000-dollar increase in gross farm income per acre is associated with around a .5 increase in coverage level for both corn and soybeans } $400/acre in fixed costs is associated with a 2.8- point increase in coverage level (Corn model 4) and 4.6 point increase in soybeans } A $1000 increase in net worth per acre is associated with a decrease in coverage level of 2.7 points for corn RP models (1) and (2) and 1.3 in model (6)

◦ Indicate that farmers may make coverage selections based on expected cash flow depending on the type of expected cost or revenue ◦ Farms with higher cash constraints respond by lowering their premiums, despite the positive long run expected returns from crop insurance ◦ Farmers coverage selection choices respond differently to changes in long term and short term costs