Does federal crop insurance lead to higher farm debt use? Evidence from the Agricultural Resource Management Survey (ARMS)

Abstract

Purpose – The purpose of this paper is to consider how the federal crop insurance (FCI) program influences farm debt use, one of the key financial decisions made by farm operators. Design/methodology/approach – Using data from the nationally representative Agricultural Resource Management Survey, the paper implements a propensity score matching model of the impact of FCI participation on various measures of farm business debt use. To account for the simultaneity of financial decisions, the paper further tests this relationship using a seemingly unrelated regression model. Findings – FCI participation is associated with an increase in use of short-term farm debt, but not long-term debt, consistent with risk balancing behavior and current trends in the farm sector. Research limitations/implications – In addition to risk balancing, the results are also consistent with credit constraints or lender preferences. The paper cannot fully establish causality between crop insurance participation and short-term debt levels. Future research should address these limitations. Practical implications – Agricultural lending standards are generally conservative and the farm sector as a whole currently has historically low leverage, which implies that an increase in debt use may not be a threat to the financial health of the farm sector. Social implications – The results indicate that the reduction in total risk facing the farm sector is significantly less than the decline in risk provided by FCI, which is an important consideration for policymakers. Originality/value – This is the first paper to use an econometric model to analyze the relationship between FCI and farm debt use decisions. This paper can inform future research on the FCI program and farm financial decisions.