It was discussed on April 5 PharmDoc daily It found that payments to farmers through programs other than commodity programs and crop insurance offset U.S. net cash income. This finding prompts the question, “Are crop insurance indemnities net of farm-paid premiums and commodity program payments as opposed to net returns to production? This analysis shows that net crop insurance indemnities are not inverse of net returns. Commodity program payments, however, are countercyclical, their A general description is consistent. Crop insurance thus serves a different function from other farm safety net programs at the US level. In particular, the US crop insurance program not only helps cover yield losses in years of low net returns but also helps farms with yield losses in high net returns. allows for more complete participation in years.The latter feature of crop insurance is rarely mentioned.
Data and Methods
Crops in this study are barley, corn, cotton, oats, peanuts, rice, sorghum, soybeans, and wheat. Each had a crop insurance contract throughout the 2002-2020 study period. This period follows Agricultural Risk Protection Act of 2000. It also approved many changes in crop insurance including higher premium subsidies. Crop insurance indemnities and farm-paid premiums are obtained from USDA, RMA (US Department of Agriculture, Risk Management Agency). Business Summary. Farm-paid premiums are subtracted from compensation to calculate the net compensation paid to farms by crop insurance.
Commodity payments are available at the US level by crop year, crop, and program for the 2002–2020 crop years, which determine the end date of the study period. There is a list of sources for product program payments Journal of the American Society of Farm Managers and Rural Appraisers (ASFMRA) Article by Zulauf, Langemeier, and Schnitkey (2020). Commodity program payments are from programs authorized in Title 1 of the Farm Bill. They are not included this Payment
For each of the nine crops, the USDA, ERS (Economic Research Service) calculates the economic cost of production and the net return per planted acre. All inputs except management are assigned a cost. Land, including land owned by farmers, and unpaid labor are assigned an opportunity cost. Amount of input based on periodic farm survey. Input prices are updated annually using prices collected by NASS (National Agricultural Statistics Service). Net return is calculated using the yield per planted acre and the price in the month of harvest. This is a return to private market management and harvesting risk. It does not include government program payments (commodities, crop insurance, thisstorage, livestock, etc.), farm-paid crop insurance premiums, and storage returns and expenses.
An important assumption is that USDA, ERS data accurately measure costs and thus net returns to crop production in the United States. The author thinks this assumption is reasonable but encourages readers to check the discussion ASFMRA Articles and form their own opinions.
For each crop and year, the economic cost per planted acre and the net return per planted acre are multiplied by the U.S. acres planted for the year. Planted acres are from USDA, NASS Quick stats. Total U.S. economic costs and total U.S. net returns for each crop for a year are summed to obtain U.S. economic costs and net returns for the nine crops as a group for that year.
Three ratios are calculated for each crop for each crop year and collectively for the nine crops. One is US net crop insurance compensation relative to total US production costs. The second is US commodity program payments relative to US total production costs. The third is US net returns relative to US total production costs.
Correlation with net return
For the nine crops as a group, the ratio of net compensation to total production cost had a correlation of +0.48 with the ratio of net return to total cost (see Figure 1). It differs from zero with 96% statistical confidence. A positive sign means that, for the nine crops as a group, net compensation was highest (lowest) while net return to production was highest (lowest). Net compensation thus did not contrast with net returns for the nine crops as a group at the US level. Furthermore, statistical tests suggest that net compensations at the US level as a group for the nine crops are likely to be pro-cyclical with net returns.
In comparison, for the nine crops as a group, the ratio of total cost to commodity program payments had a correlation of -0.48 with the ratio of total cost to net return (see Figure 1). It differs from zero with 96% statistical confidence. The negative sign means that commodity program payments were highest (lowest) while net returns were lowest (highest). Thus, consistent with the usual description, there were commodity payments versus net returns for the nine crops as a group at the US level.
The two correlations differ from each other with 99% statistical confidence. This finding suggests that payments by the two farm safety net programs have a different relationship with US net returns to production for the nine crops as a group, and thus likely have different policy functions. However, it is also important to note that the explanatory power of both relationships is 23% (0.48 squared). Thus, other variables are needed to explain most relationships.
To further examine the relationship between net compensation and net return to production, correlations are calculated for each individual crop. They varied from -0.56 for peanuts to +0.42 for maize, but averaged -0.01 (see Figure 2). Furthermore, only one correlation (peanut with 98% statistical confidence) is statistically different from zero at the 95% statistical confidence criterion that is often used to conclude that a correlation is different from zero. In other words, except for peanuts, this correlation is not statistically different from zero. Furthermore, from the theory of statistical tests, it is not unexpected that one or two of the nine correlations will be statistically different from zero if the correlation is random. In summary, the weight of the aggregate evidence from the correlation analysis of individual crops suggests that crop insurance net compensation is likely unrelated to net returns to production at the US level and thus not opposite to net returns to production.
A separate crop analysis is not performed for commodity programs because many commodity program payments since 2002, including the Agricultural Risk Coverage Program (ARC) and Price Loss Coverage (PLC), are paid on a historical basis (not planted) acres. Farmers may or may not plant any crops and still receive an acre base payment with some, limited exceptions. However, almost all base acres are planted to some crop, most of which are planted with at least one production cost (Zulauf, Langemier, and Snitkey). Payments in a commodity program cost of production crop are thus likely made for the cost of production of an acre planted, even if it is not planted for the cost of production receiving the payment. Therefore, the aggregate analysis should be valid for the product program payments discussed above.
Net farm crop insurance compensation does not contrast with net returns at the US level for the nine large acreage crops examined in this article. Moreover, the net compensation of the nine crops as a group at the US level may be pro-cyclical with net returns. In contrast, this study finds that commodity program payments are countercyclical to net returns at the US level for the crops examined.
The search for individual crops for crop insurance is not a surprise. About 70% of the compensation provided by Revenue Insurance, the most widely purchased crop insurance in the United States, is for yield loss (PharmDoc daily, September 14, 2022). One farm or a small area may experience yield loss while other farms and areas do not. It is unlikely that these yield losses are related to net returns for both individual crops as well as crop groups at the US level. The previous observation implies a near-zero correlation between US compensation and US net output. Moreover, insurance compensation is unevenly paid when yield-reducing events such as drought affect a large area. For example, for the 2011–2021 crop years 20% of the compensation provided by crop insurance for the nine crops in this study was paid for 2012, a crop year with a widespread and severe drought. A widespread and severe drought in the United States often leads to higher prices that offset some or all of the yield losses, as was the case in 2012. This observation implies that, even with lower average US yields, net returns for the total US can be higher in drought years, and thus a nearly zero correlation between US compensation and US net returns for a crop. Finally, the purpose of crop insurance programs is to provide stability against unexpected declines in yield and price during a growing season. Crop insurance would not be expected to cover multi-year market cycles, which falls under the program’s objective for commodity programs to provide stability throughout the growing season. In summary, these three considerations indicate a near-zero correlation between US compensation and US net returns for an individual crop.
The different correlations between different types of farm safety net programs imply that, at the US level, farm safety nets are performing different functions than crop insurance products and other production-related farm assistance programs. In particular, the US crop insurance program not only helps cover yield losses in years of low net returns but also allows farms with yield losses to participate more fully in years of high net returns. The next feature of crop insurance is rarely mentioned.
One reason that crop insurance allows farms with yield losses to participate more fully in years of high net returns is the crop value option that is widely purchased with revenue products. The crop value option uses the higher of the estimated insurance value or the crop insurance value to value the yield loss. Thus, the current design of crop insurance products, particularly the use of crop price options, may be one reason why crop insurance serves a different function in farm safety nets than other farm safety net programs. This observation prompts the question, “Should the crop price option be extended to crop insurance products that do not currently have it in order to more fully isolate the safety net function of the US crop insurance program?”
References and information sources
US Department of Agriculture, National Agricultural Statistics Service. March 2023. Quick stats. http://quickstats.nass.USda.gov/
US Department of Agriculture, Risk Management Agency. March 2023. Business Summary. https://www.rma.usda.gov/SummaryOfBusiness
Zulauf, CM Langemier and G. Snitkey 2022. US Crop Profitability and Farm Safety Net Payments Since 1975. American Society of Farm Managers and Journal of Rural Evaluation. Pages 60-69. https://www.asfmra.org/resources/asfmra-journal
Zulauf, C., n. Paulson and G. Snitkey “Farm Payments by Commodity Programs and Programs Other than Crop Insurance: The Third Pillar of the US Farm Safety Net.” PharmDoc daily (13):63, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, April 5, 2023.
Zulauf, C., K. Swanson, G. Snitsky and N. Paulson. “Decomposition of Crop Revenue Insurance Compensation into Types of Loss Cover.” PharmDoc daily (12):141, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, September 14, 2022.