What is the relationship between crop insurance and commodity program payments? • daily farmdoc

A problem in recent farm bills has been concern that crop insurance and ARC-CO (Agricultural Risk Coverage – County Commodity Program) will make payments for the same loss. The analysis discussed in this article reveals that, over the 2014-2020 crop years, ARC-CO payments to American farms explain only 11% of the variation in net crop insurance indemnities paid to farms. American agriculture. PLC (Price Loss Coverage Program) payments explain a higher, but still small, percentage of 22% of the change in net claims. These results suggest that payments by crop insurance and ARC-CO/PLC for the same loss are probably not significant at the US program level.

Different political objectives: The purpose of crop insurance policy is to provide assistance in the event of a decline in yield or price during the production period of a crop. The purpose of ARC-CO is to provide assistance when income transitions from a period of several years of high income to a period of low income. PLC’s objective is to provide support for low prices during a crop’s marketing year. For a more in-depth discussion of the policy objectives of ARC-CO and PLC, see February 24, 2022 daily farmdoc item.

Different program design: Different policy objectives lead to different program design. Insurance assistance is based on pre-planting market prices and historical trend-adjusted yields for a crop year. ARC-CO aid for a crop year is based on an Olympic average (removing high and low values) of historical yields corrected for trends and market prices over 5 crop years preceding the previous crop year. For the 2021 crop year, the calculation window is the 2015-2019 crop year. PLC aid for a crop year is based on a fixed yield set using a historical period, a statutory target price set by Congress, and a price escalation option (see data note 1) . The actual values ​​used for a crop year are the harvest price and yield for crop insurance, the harvest yield and market year price for ARC-CO, and the price of l market year for the PLC.

Relationship between insurance and ARC-CO payments: Payments are compared for covered program commodities that have an insurance contract (see data note 2) for crop years 2014-2020 (years in which ARC-CO was authorized). There are 101 harvest and harvest year observations. For each observation, US ARC-CO payments after removal of generic base acre payments (see data note 3) are divided by state ARC-CO base acres United States crop insurance and net US crop insurance claims (benefits less premiums paid by the farm) are divided by insured acres in the United States. . A positive relationship exists with 99% statistical confidence (see Figure 1). However, the variation in the ARC-CO payment per base acre explains only 11% of the variation in the net indemnity per insured acre. Other variables explain 89%. Reasons for the weak relationship include different windows and types of prices (harvest month prices for insurance versus historical 5 year market prices for ARC-CO), individual farm yields (most insured acres) versus county returns (ARC-CO) and payments. on planted acreage (insurance) versus historical base acreage (ACR-CO) which may also have different spatial distributions.

Relationship between insurance and PLC payments: As with the ACR-CO, a positive relationship with 99% statistical confidence exists between the US PLC payment per US PLC base acre and the US net crop insurance indemnity per insured US acre (see Figure 2 ). The variation in PLC payment per base acre explains 22% of the variation in net indemnity per insured acre. Although the explanation is twice as great for PLC as for ARC-CO, other variables explain 78% of the variation in net indemnity payment per insured acre. PLC payment per acre and crop insurance can overlap when the price drops during the growing season, resulting in crop insurance payments and a lower market year price, resulting in payments of PLC if the price is lower than the reference price.

Sensitivity analysis: Smaller acreage crops may have greater variability in program payments per acre, which may affect the estimated relationship. Thus, relationships were only estimated for crops and years where insured areas exceeded 1 million (observations = 73). The explanation shares changed little: 9% against 11% for ARC-CO and 22% for PLC in the two analyses.

Summary observations

It is feared that crop insurance and ARC-CO will make payments for the same loss.

If this overlap is significant, the variation in payments over time should be similar across programs.

Using US-level data for the 2014-2020 crop years, the change in ARC-CO payment per ARC-CO base acre was positively related to the change in net crop insurance indemnity payment per insured acre. , but explained only 11% of the variation.

PLC payments per base acre explained a larger portion of the variation in net crop insurance payment per insured acre, but only explained 22% of the variation.

These results suggest that payment overlap is probably not a substantive issue between crop insurance and ARC-CO or PLC at the US program level.

This finding is not surprising given that policy objectives and, therefore, program design parameters differ significantly among agricultural safety net programs.

Data Notes

  1. The escalation option means that the effective reference price of a covered product is equal to the greater of (a) the statutory reference price set by Congress or (b) 85% of the Olympic average price for the 5 campaigns previous agricultural periods, subject to a ceiling of 115% of the statutory reference price. reference price.
  2. Comments include barley, canola, corn, dry peas, mustard, oats, peanuts, rice, safflower, sesame, sorghum, soybeans, sunflower and wheat for 2014-2020 crop years and upland cotton for the 2018-2020 crop years.
  3. Payments made for program products planted on generic base acreage during the 2014-2017 crop years were, in fact, payments for upland cotton base acreage, not for base acreage of a product covered by the program. Upland cotton was not a program commodity for these four crop years.

The references

Zulauf, C., J. Coppess, G. Schnitkey, N. Paulson, and K. Swanson. “2018 Farm Bill Benchmark Price Escalator for Market Year 2019.” daily farmdoc (9):31, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, February 21, 2019.

Zulauf, C., G. Schnitkey, N. Paulson, and K. Swanson. “ARC vs. PLC: Their Different Policy Goals and the Design of Commodity Programs.” daily farmdoc (12):33, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, March 16, 2022.

Zulauf, C., G. Schnitkey, K. Swanson, and N. Paulson. “2022 Commodities Program Decision: ARC-CO – PLC Decision Indicator.” daily farmdoc (12):25, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, 24 Feb 2022.

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