Abstract
AbstractWe analyze the effects of Price Loss Coverage (PLC), Agriculture Risk Coverage (ARC), individual revenue protection insurance (RP), and Supplemental Coverage Option (SCO) on the RP coverage level, certainty equivalent, and program payments. The model is calibrated to a representative wheat farm in Mitchell County in Kansas to analyze the effects of various policies. The result highlights that when insurance is framed as an investment, cumulative prospect theory predicts farmers’ coverage decisions accurately at 70%. ARC or PLC program increases the RP coverage level to 75%, but PLC and SCO jointly decrease the RP coverage level to 70%.
Highlights
The 2014 Farm Bill implemented the largest changes to commodity programs in recent decades by ending long-standing price supports and decoupled payments and, instead, focusing on mitigating risk faced by farmers (Campiche, 2014)
The specific objectives of this study are to (a) develop a theoretical model detailing the mathematical formulation of important commodity programs (PLC and Agriculture Risk Coverage (ARC)-CO) and crop insurance (RP and Supplemental Coverage Option (SCO)) policies for a risk-averse wheat farmer; (b) model and nonparametrically estimate the bivariate wheat yield and price distribution; (c) calibrate the model to a representative Kansas wheat farm; and (d) simulate the effects of these policies on optimal revenue protection (RP) coverage levels, commodity program payments, and crop insurance payments
Price Loss Coverage (PLC) payments are ωdGεc ;εf ω: We focus on ARC-CO only because no wheat farmers enrolled in ARC-IC (USDA-FSA, 2015)
Summary
The 2014 Farm Bill implemented the largest changes to commodity programs in recent decades by ending long-standing price supports and decoupled payments and, instead, focusing on mitigating risk faced by farmers (Campiche, 2014). This farm bill maintained the Loan Deficiency Payments (LDP) program from previous farm bills and introduced the Price Loss Coverage (PLC) and Agriculture Risk Coverage (ARC) programs. Coverage Option (SCO) crop insurance program was introduced. ARC is a revenue support program, and farmers can select either the County (ARC-CO) or Individual Coverage (ARC-IC) revenue option..
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