Keith Coble
Giles Distinguished Professor
[email protected] @DrKeithHCoble
The Future of Crop Insurance and
Farm Safety Nets
Agricultural Risk Policy &
Insurance Collaboratory
Where I am coming from: Grew up on a farm in Missouri
In grad school determined to spend my career focus on two things:
Agricultural economics must account for price and yield risk
Farmers are not yield or profit maximizers, they are risk-return
managers
The revolutionary idea that defines the boundary between modern times and the past
is the mastery of risk….Risk management guides us over the vast range of decision
making from allocating wealth to safeguarding public health, from waging a war to
planning a family, from paying insurance premiums to wearing a seatbelt; from
planting corn to marketing cornflakes.
Peter Bernstein in “Against the Gods: The Remarkable Story of Risk
Where I am coming from:
I am a policy empiricist, former hill staffer, & aim to be an ‘honest
broker’ of scientific information
Ag policy is evolutionary
Ag policy is in a crisis
Crop revenue insurance has become the core of the ag safety net
Title I programs are on base acres
ARC & SCO are revenue index experiments in this bill
Crop yield & revenue risk is really really hard to insure
Have spent years consulting with RMA to improve crop insurance
‘Big ag data’ will revolutionize crop insurance & farm policy
When you become ‘THE Program’ You
become the ‘THE Target’
$953
$5,722
$694
$879
$10
$1,145
$228
$0
-$8,000
$139 -$3,967
-$14,307 -$6,400
Miscellaneous
Crop Insurance
Horticulture
Energy
Forestry
Research & Extension
Rural Development
Credit
Nutrition
Trade
Conservation
Commodity Programs
Sequester
Change in Baseline Funding (Millions)
Agricultural Act of 2014 Budget Implications (Total Savings of $23,008 million)
The Past
Factors leading to the 2014 Farm Bill
& the evolution of crop insurance
The Old Political Triangle of Farm Policy
Farm
Groups
Legislative
Branch
Administration
Source: Knutson, Penn,
and Flinchbaugh
Traditional foodie
(SNAP school
lunch, WIC, etc.)
The New Political Context of Farm Policy
Farm
Groups
Legislative
Branch
Administration
Environmental
Dealers
Environmental
No Dealers
Traditional
foodie
New foodies
Tea Party/
Heritage Action
Crop insurance: Where have
we been? The modern era since 1980
Legislative changes and revenue insurance in mid-1990s
ARPA 2000
Subsidy grew & ad hoc disappeared
Agricultural Act of 2014 The cotton experiment
Shallow loss emphasis
Crop Insurance Program Growth
0
50
100
150
200
250
300
350
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Mil
lio
n A
cre
s
Bil
lio
n S
ub
sid
y
Subsidy ($) Acres
Improved Loss Ratio (indemnity / premium)
0
0.5
1
1.5
2
2.5
3
Lo
ss R
atio
Year
RMA Aggregate Loss Ratio 1980-2014
Loss Ratio 80-95 AVG 96-14 AVG
1980-1995 Avg. =1.48
1996-2014 Avg. = 0.88
Why? Mixture of good weather, more participants, better production
practices, better rates, better genetics, climate change??
Federal Crop Insurance Program Cost
-4,000
-2,000
0
2,000
4,000
6,000
8,000
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
$ M
ILL
ION
S
FISCAL YEAR
Premium Subsidies A&O Reimbursement Underwriting Loss
Enrollment Period Implied Price
Volatilities Vary Across Years
24.28 23.02
25.79 23.31
25.64 24.95
21.99 21.68
26.3 26.46 28.71
32.89
37.35
41.81
32.78
36.7
28.03 25.89
23.8
21
0
5
10
15
20
25
30
35
40
45
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
End of February Implied Corn Price Volatility
The Present
So what do lower prices do to these
baselines?
0
2000
4000
6000
8000
10000
12000
14000
16000
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
MIL
LIO
N $
YEAR
2007-2013 CBO Actual and April 2014 Projected Outlays
Crop Ins Title I
Lower Insurance Cost
Higher Title I Cost
In 2015 Corn value down 10%
& Soybeans down 15%
2015 Insurance Plan Premium
Shares STAXSCO
1%
WFRP 1% YP
5%
RP 77%
RPHPE 0%
RAINF 3%
All other 11%
All Area 2%
Chart Title
STAXSCO
WFRP
YP
RP
RPHPE
RAINF
All other
All Area
Reducing harvest price
protection would save
$1.1-1.3 Billion/year
Coverage
Levels
Enterprise
units are
increasing
Deceiving ourselves about ag risk &
why it matters for crop insurance
“It's easier to fool people than to convince them that they have been fooled.” ― Mark Twain
Why, sometimes I've believed as many as six impossible things before breakfast. - Alice in Wonderland.
The creature we study in economics is similar to Mr. Spock from Star Trek … The world I study is full of people more like Homer Simpson — Robert Thaler
Small samples lie!
In the case of yield and revenue associated with crop
agriculture we get one observation per year.
Small samples grow quite slowly into large samples.
Producer and economists sometimes behave as if they believe
small samples are big samples
too much weight on an evaluation based on very small
samples.
“show us what the policy would have done over the last five years.”
“just input the last five years yields and evaluate crop insurance”
Even using 24 years of data leads to
inaccurate insurance rates
0.000
5.000
10.000
15.000
20.000
25.000
30.000
35.000
40.000
1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89 93 97 101
105
109
113
117
121
125
129
133
137
141
145
149
153
157
161
165
169
173
Expected Soybean Indemnity Based on 6, 12, & 24 Years of History
TRUE 24 Years 12 years 6 Years
So how does one use actual losses with
more robust probability?
Recent history likely to misrepresent weather effects.
Was a bad year a 1 in 10 or a 1 in 50 year event?
RMA now
Uses weather-weighting by climate division using data
back to 1895
a base rating period to 20 years,
Coble, K.H., M. F. Miller, R. M. Rejesus, R. Boyles, B. K. Goodwin, T. O. Knight (2015)
Accounting for Weather Probabilities in Crop Insurance Rating. Journal of Agricultural and
Resource Economics 40(2):306–324.
Example Loss Cost Index
0.000
0.050
0.100
0.150
0.200
0.250
189
5
189
8
190
1
190
4
190
7
191
0
191
3
191
6
191
9
192
2
192
5
192
8
193
1
193
4
193
7
194
0
194
3
194
6
194
9
195
2
195
5
195
8
1961
196
4
1967
197
0
1973
197
6
197
9
198
2
198
5
198
8
199
1
199
4
199
7
200
0
200
3
200
6
200
9
Climate District 9 Iowa Simulated Loss Cost
The Future
Four Big Questions 1. What is the future of ARC, PLC, and LDPs?
- A shrinking baseline
- Competition with conservation and crop insurance
2. Can we harness ‘big ag data’ and technology to improve crop insurance?
- knowledge of soils, inputs, practices & risk
- Privacy issues, policy issues
3. What next for crop insurance
- The subsidy bullseye
- Incentives for environmental behavior
4. What will the next farm bill look like?
1. What is the future of ARC, PLC,
and LDPs?
County yields are difficult to estimate
The satisfaction with county-yield triggered
programs remains to be seen
Base acres risk protection < planted acre risk
protection
Yield basis risk
Farm Program sign up
Percent of Farms and Base Acres that Made an ARC/PLC Election --
National by Crop
Percent of Bases Electing …
PLC ARC-CO ARC-IC
BARLEY 75% 22% 4%
CANOLA 97% 2% 1%
CORN 7% 93% 0%
GRAIN SORGHUM 66% 33% 0%
LONG GRAIN RICE 100% 0% 0%
MEDIUM GRAIN RICE
(SOUTHERN) 96% 4% 0%
OATS 32% 67% 1%
PEANUTS 100% 0% 0%
SOYBEANS 3% 97% 0%
SUNFLOWERS 56% 43% 1%
WHEAT 42% 56% 2%
Trend in Estimated Soybean
Payment over the Life of the Bill
$0.00
$5.00
$10.00
$15.00
$20.00
$25.00
$30.00
$35.00
2015 2016 2017 2018
$/B
ase
Acr
e T
itle
Mississippi Delta Soybean Expected Payments 2015-2018
PLC+SCO ARC
Title I baselines are likely to shrink
Crop
Likely CBO Baseline in 2018 relative to
the current baseline
Total
-14%
Feed Grains -26%
Wheat -13%
Soybeans -28% Based March 2015 CBO baseline with adjustment for a 3
year step forward
2. Can we harness ‘big ag data’ and
technology to improve crop insurance?
Past decade marked by
Improved data quality & quantity
Re-estimation of various parameters
Implementation of revenue insurance
Weather weighting of loss history
Possible future
The next step forward is fully geo-referenced data More accurate crop location = soil
More accurate practice rating such as environmental attributes
Incorporating precision ag into rates, underwriting, and loss adjustment
If we don’t do this top producers will leave in a less subsidized world
Yield =f(land, operator) ???
RMA will require full CLU reporting in
2016
In 2016 Common
Land Unit
reporting is
required for
major insurance
plans.
High quality soils maps + CLU Loss
Experience = Rate Game Changer
3. What next for crop insurance policy?
The subsidy bullseye
Incentives for environmental behavior
The 2014 Act Subsidy Schedule
Coverage Level Basic & Optional
Subsidy %
Enterprise Unit Subsidy
% SCO Subsidy
RP, RPHPE, YP
50% 67% 80% 65%
55% 64% 80% 65%
60% 64% 80% 65%
65% 59% 80% 65%
70% 59% 80% 65%
75% 55% 77% 65%
80% 48% 68% 65%
85% 38% 53% 65%
Subsidizing Crop Insurance Subsidy = RMA estimated breakeven
premium – producer paid premium
Subsidy will increase with Higher crop value Greater risk Higher coverage level Enterprise Units RP > RPHPE > YP
Masking asymmetric information
problems in the crop insurance program
Coble et al 2010 Review of RMA Rates
Crop insurance rates must account for practices / technology /
weather
Inaccurate rates undercharge some and overcharges others.
Subsidy may entice over-rated producers into the program.
This is costly as the undercharged producer also receive subsidy
A 10% reduction in subsidy will likely result in a 4-7%
reduction in liability and 2-4% fewer insured acres.
How impactful is a subsidy cap?
Do
Farmers
Maximize
Subsidy?
Beyond Conservation Compliance
Good soil health is a long term commitment
Insurance practices are ‘current practice focused’
APH yields are a crude approximation
Crop insurance as a ‘carrot’ to incentivize environmental
stewardship
Some environmental practices are risk reducing
Is crop insurance the vehicle to reducing nitrogen runoff?
4. What will the next farm bill look like?
Will it matter to our best producers?
Compared to trade, macro economics, regulation, or the
RFS
Will the ag alliance stand together?
Will the ag/SNAP collation prevail?
4. What will the next farm bill look like?
How to put all programs on auto-pilot
Deep losses versus shallow losses
Risk management vs. Environmental Services vs. ?????
Corn and Soybeans ARC + Crop
Insurance
Ag Risk Coverage
Program
86%
76%
Crop
Insurance
coverage
level
20 or 35%
Co-Pay
$2.2 billion of 2015 corn &
soybean insurance liability
overlapping with ARC
85%
The question avoided in the 2014 farm bill: How
will these three USDA Agencies relate to one
another?
RMA
FSA
NRCS Will they
duplicate,
counteract, or
complement
each other?
How will these three USDA Agencies
Relate to one another?
RMA
FSA
NRCS Will they
duplicate,
counteract, or
complement
each other?
Safety net
programs, but
what of
delivery, & the
past attempt to
combine these
agencies?
How will these three USDA Agencies
Relate to one another?
RMA
FSA
NRCS Will they
duplicate,
counteract, or
complement
each other?
Working land
environmental
services?
How will these three USDA Agencies
Relate to one another?
RMA
FSA
NRCS Will they
duplicate,
counteract, or
complement
each other?
Rating
&conserving
practices
Rank how would typical taxpayers
view ag tax dollars support?
A. Helping farmers manage price & yield risk
B. Helping farmers conserve and protect the
environment
C. None of the above just cut taxes
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