Federal Crop Insurance Corporation Research Articles

Hedging the Price Risk Inherent in Revenue Protection Insurance

AbstractCrop revenue insurance is unique, because it involves a guarantee subsuming yield risk and highly systematic price risk. This study examines whether crop insurers could use options instead of, or in addition to, assigning policies to the Commercial Funds of the USDA Federal Crop Insurance Corporation (FCIC) as per the Standard Reinsurance Agreement (SRA) to hedge the price risk of revenue insurance policies. The behavioral model examines the optimal hedge ratio for a crop insurer with a book of business consisting of corn Revenue Protection (RP) policies. Results show that a mix of put and call options can hedge the price risk of the RP policies. The higher optimal hedge ratios of call options as compared to put options imply that the risk of increased liability due to upside price risk can be hedged using options better than downside price risk. This study also analyzed the combination of options with the SRA at 35, 50, and 75% retention levels. The zero optimal hedge ratios at each retention level and the negative correlation between RP indemnities and the option returns when the crop insurer mixed options and SRA suggest that the purchasing of options provides no additional risk protection to crop insurers beyond what is provided by the SRA despite retention limits.

Asymmetric Information and Profit Taking in Crop Insurance

Excess returns to producers insured by the Federal Crop Insurance Corporation can arise due to asymmetric information or from the design of the insurance programs themselves. Using unique, unit‐level crop insurance contract data for major crops such as corn, soybeans, and wheat in five growing regions, we find evidence that producers in most regions may profit by selecting optional units, buy‐up coverage, or by using transitional yields to participate in the federal crop insurance program. We also find evidence that advantages increase with land resource heterogeneity. However, the results do not support hypotheses that producers profit by selecting revenue insurance, nor that high levels of government “incompetence” exist in the design and administration of the crop insurance system.

Livestock Gross Margin Insurance for Dairy: The Other Dairy Safety Net Solution

With all the attention on the new Margin Protection Program for Dairy Producers (MPP) let us not forget about Livestock Gross Margin Insurance for Dairy Cattle (LGM-Dairy). Similar to MPP, LGM-Dairy is also a USDA risk management instrument which offers protection against declines in average dairy income-over-feed-cost (IOFC) margins. Introduced in 2008, LGM-Dairy is an insurance product overseen by USDA’s Risk Management Agency. Like crop insurance, LGM-Dairy is sold by private insurance agents and underwritten by the Federal Crop Insurance Corporation (for a complete description of LGM-Dairy rules see here).

Crop Insurance Bad Faith: Protection for America's Farmers

It is anticipated a large number of farmers will be filing crop insurance claims with private crop insurers in the wake of the drought of 2012. It is also possible that there will be instances where a private crop insurer allegedly acts in bad faith concerning a claim.The future availability of a crop insurance bad faith remedy is a critical issue for America’s farmers facing the courts. This article offers an examination of the issues surrounding crop insurance bad faith liability. The first part of the article provides an overview of the history, scope and availability of the Federal Crop Insurance Corporation and federal crop insurance program which helps protect America’s farmers. Next, the article discusses reported cases which have involved situations where crop insurance bad faith has been provided as a remedy for insurer misconduct. The article also examines caselaw to date on the issue of federal preemption of bad faith claims under state law by the FCIA and the development of a general rule that bad faith claims under state law are not preempted by the FCIA. Finally, the article discusses the critical recent decision of the Tennessee Court of Appeals in Plants v. Fireman’s Fund which places the future availability of the crop insurance bad faith remedy in question. In conclusion, the crop insurance bad faith remedy is designed as a check against egregious, intentional and reckless misconduct of a crop insurer in the handling of a claim and should be preserved by the courts.

The Growth Of The Federal Crop Insurance Program, 1990–2011

American Journal of Agricultural EconomicsVolume 95, Issue 2 p. 482-488 AAEA Meeting Invited Paper Session The Growth Of The Federal Crop Insurance Program, 1990–2011 Joseph W. Glauber, Corresponding Author Joseph W. Glauber jglauber@oce.usda.gov (jglauber@oce.usda.gov)Search for more papers by this author Joseph W. Glauber, Corresponding Author Joseph W. Glauber jglauber@oce.usda.gov (jglauber@oce.usda.gov)Search for more papers by this author First published: 01 January 2013 https://doi.org/10.1093/ajae/aas091Citations: 91 Joseph W. Glauber (jglauber@oce.usda.gov) is Chief Economist at the U.S. Department of Agriculture. The views expressed herein do not necessarily reflect those of USDA nor the Federal Crop Insurance Corporation. This article was presented in an invited paper session at the 2012 AAEA annual meeting in Seattle, WA. The articles in these sessions are not subjected to the journal's standard refereeing process. Read the full textAboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinkedInRedditWechat Citing Literature Volume95, Issue2January 2013Pages 482-488 RelatedInformation

Pervasive wetland flooding in the glacial drift prairie of North Dakota (USA)

This article describes a unique flood hazard, produced by the dramatic expansion of wetlands in Nelson County, located within the North American Prairie Pothole Region of North Dakota, USA. There has been an unprecedented increase in the number, average size, and permanence of prairie wetlands, and a significant increase in the size of a closed lake (Stump Lake) due to a decade-long wet spell that began in 1993 following a prolonged drying trend. Base-line land cover information from the 1992 USGS National Land Cover Characterization dataset, and a Landsat TM scene acquired 9 July 2001 are used to assess the growth of the closed lake and wetland pond surface areas, and to analyze the type and area of various land cover classes inundated between 1992 and 2001. The open water profile in Nelson County changed from one marked by relatively comparable coverage of closed lake and wetland pond areas in 1992, to one in which wetland open water accounted for the vast majority of total open water in 2001. The bulk of the wetland pond area expansion occurred by displacing existing wetland vegetation and agricultural cropland. Producers responded to the flood hazard by filing Federal Crop Insurance Corporation (FCIC) claims and enrolling cropland in the Conservation Reserve Program (CRP), a federal land retirement program. Land taken out of agricultural production has had an enormous impact upon the agricultural sector that forms the economic base of the rural economy. In 2001 the land taken out of production due to CRP enrollment and preventive planting claims represented nearly 42% of Nelson County’s 205.2 K ha base agricultural land. The patterns obtained from this detailed study of Nelson County are likely to be the representative of the more publicized flood disaster occurring within the Devils Lake Basin of North Dakota.

Economic analysis of the standard reinsurance agreement

An economic analysis is presented of the Standard Reinsurance Agreement (SRA), the contract governing the relationship between the Federal Crop Insurance Corporation and the private insurance companies that deliver crop insurance products to farmers. The paper outlines provisions of the SRA and describes the modeling methodology behind the SRA simulator, a computer program developed to assist crop insurers and policy makers in assessing the economic impact of the Agreement. The simulator is then used to analyze how the SRA affects returns from underwriting crop insurance. The results are presented in aggregate and also at the regional and individual company levels.

Designing and Rating an Area Yield Crop Insurance Contract

AbstractThis article documents the design and rate‐making procedures used in the development of the Group Risk Plan (GRP)—the new federal crop insurance product that insures based on area yield. The authors of this article worked closely with personnel in the Federal Crop Insurance Corporation and others in developing methodological and practical constraints needed in implementing a workable area yield contract. GRP indemnity payments are made based on percentage shortfalls in actual county yields relative to a forecasted yield. Historical county yield data are used to develop forecasted yields and premium rates.

The Impact of Size on Yield Variability and Crop Insurance Premiums

tions of enterprises, the benefits of diversification, and farmer response to different farm programs. Studies comparing the risk of different cropping practices have required data on farm yield variability (Williams, Llewelyn, and Mikesell; Mikesell, Williams, and Long). Crop insurance studies have needed the data for developing appropriate crop insurance rates (Carriker et al.). In some of these studies, availability of farm-level yield variability data has been a major problem. Frequently, other data have been used because they were the only data available. In particular, county-level data or experiment station data have been used as substitutes for actual farm-level data (Rowell, Williams, and Hickman; Williams, Llewelyn and Barnaby; Marra and Carlson). The accuracy of these data sources in representing farm-level data is not known. Frequently, county-level variability in yield is assumed to be less than farm-level variability, because it is more aggregated. On the other hand, variability in yield from experiment station data is sometimes assumed to be greater than farm-level yield variability, because the plots are usually small. The issues of aggregation level (Eisgruber and Schuman) and the impact of aggregation on variability are implicit in these assumptions about county and experiment station variability relative to farm-level variability. Marra and Schurle have recently addressed the possibility that aggregation on a farm can also influence yield variability on the farm. The implications of yield variability on the farm being related to the number of acres of the crop, and thus in many cases to the size of the farm, are far reaching. Pope and Prescott addressed the issue of diversification and farm size, and identified the trade-off between risk reduction and possible economies of size in a particular activity. Robison and Barry also addressed diversification and specialization as strategies for managing risk. If yield variability is less for larger acreage, and thus larger farms, then large farms may have a business-risk advantage (ceterius paribus) over small farms; i.e., business-risk economies of size. Then, it would also follow that farms with larger acreage should pay lower premiums per acre for crop insurance, other things being equal. In addition, model modifications may need to be developed that recognize the impact of enterprise size on yield variability. Current risk models typically consider variability and enterprise size to be independent. The Federal Crop Insurance Corporation (FCIC) has recognized a need to offer different premiums for different size acreage. They began offering a financial incentive to combine smaller insurance units into larger insurance units in the mid to late 1980's. A crop insurance premium reduction of 10 percent has been allowed if an acreage of one crop owned by one entity in one county is insured as a total unit rather than as smaller segments. Unit subdivision is allowed by section or by irrigated or dryland practice with supporting historical yield records of planted Bryan Schurle is a Professor in the Department of Agricultural Economics at Kansas State University, Manhattan, Kansas. This work was supported in part by the Federal Crop Insurance Corporation under agreement No. 92-EXCA-30203. The author thanks Jong-I Perng for her extensive computer work and patience throughout this project, Ken Harrison at FCIC for his provision of information and help, Art Barnaby and Barry Goodwin for help and review of previous manuscripts, three anonymous reviewers, and Ted Schroeder for his suggestions that improved the manuscript. Contribution No. 95-48-J from the Kansas

Almost Ideal Area Yield Crop Insurance Contracts

Using yield data for a sample of 123 dryland wheat producers in Montana, the effects of three area yield contracts, including the contract currently offered by the United States Federal Crop Insurance Corporation and two individual yield contracts on individual farm yield variability, are examined. The results indicate that while the Federal Crop Insurance Corporation area yield contract provides all farmers in the sample with some protection against yield variability, a simpler, actuarially equivalent “almost ideal” area yield contract provides substantially larger reductions in yield variability. However, actuarially equivalent individual yield contracts provide levels of protection against yield variability similar to those obtained under the “almost ideal” area yield contract at much lower premiums.

Temperature Insurance: An Alternative to Frost Insurance in Citrus

PRIOR to the creation of the Federal Crop Insurance Corporation through Title 5 of the Agricultural Adjustment Act of 1938, there were a number of attempts at all-risk crop insurance by private companies. Without exception, these ventures into general crop insurance by private companies have been short lived. Writers in the field have attributed failure primarily to (1) lack of adequate actuarial data, (2) adverse selection of individual risks in any given year, (3) adverse selection over time due to late-season sales of insurance, (4) insurance of price as well as physical yield, and (5) inadequate geographic diversification.1 These reasons for failure, of course, do not apply with equal force to all insurance plans which have been offered by private companies. However, whatever the cause, it is clear that private companies have not met with success in offering all-risk crop insurance to farmers. The federal crop insurance experiment is now (1951) in its 12th active year. The combined operations over twelve years show an unfavorable loss ratio, although periodic revision of insurance plans based on accumulated experience has contributed to a more favorable premium indemnity balance for recent years. The features of the federal crop insurance plan which have contributed to the unfavorable loss ratio over the years have been suggested by several writers in the field.2 At least one of the important factors contributing to the failure of several private companies in the general crop insurance field must be excluded since, from the beginning, federal crop insurance has carefully avoided insuring against

Organization of the Executive Branch of the National Government of the United States: Changes between December 1, 1937, and May 31, 1938

As in previous lists, mention is here confined generally to units specifically authorized by law or established by the President by executive order under general authority vested in him. Changes in units created by heads of departments or independent establishments are excluded unless of major importance.Advisory Committee for Federal Crop Insurance Corporation. Authorized by the Agricultural Adjustment Act of 1938, Public Act No. 430, 75th Congress, approved February 16, 1938.