Analyzing corn and cotton producers optimal prevented planting decision on moral hazard

Abstract

AbstractThe prevented planting provision U.S. crop insurance programs protects producers from financial losses and risk associated with delayed planting. This provision has recently undergone some changes due to concerns about moral hazard in this provision. However, little is known about the likelihood of moral hazard in prevented planting and how these changes impact this possibility. We compared the net returns and variability of net returns for the four prevented planting options available for a corn (Zea mays L.) and upland cotton (Gossypium hirsutum L.) producer assuming soybean [Glycine max (L.) Merr.] as a viable second crop. We determine the optimal prevented planting option using the current prevented planting coverage factor at three crop insurance coverage levels. We also show how reductions in the prevented planting coverage factor would change the optimal selection and moral hazard in prevented planting. Data were collected from non‐irrigated corn, upland cotton, and soybean planting date experiments located in Tennessee. Yield response functions to planting date for corn, cotton, and soybean were estimated and incorporated into simulation models to generate distributions of net returns. Risk neutral, profit maximizers would choose a late planting option over the full prevented planting payment, but as risk aversion increases, the full prevented planting payment was preferred. Reduction in prevented planting coverage factors will likely reduce the likelihood an insured producer chooses to not produce a crop and take the full prevented planting indemnity payment, despite planting during the late planting period or switching crops being more profitable options.