Effects of Crop Insurance Premium Subsidies on Crop Acreage

Abstract

Crop insurance premium subsidies affect patterns of crop acreage for two reasons. First, holding insurance coverage constant, premium subsidies directly increase expected profit, which encourages more acreage of insured crops (direct profit effect). Second, premium subsidies encourage farms to increase crop insurance coverage. With more insurance coverage, farms obtain more subsidies, and farm revenue becomes less variable as indemnities offset revenue shortfalls, so acreage of insured crops likely increases (indirect coverage effect). By exploiting exogenous policy changes and using approximately 180,000 county‐crop‐year observations, we estimate the sum of these two effects of premium subsidies on the pattern of U.S. acreage across seven major field crops. We estimate that a 10% increase in the premium subsidy causes a 0.43% increase in the acreage of a crop in a county holding the premium subsidy of its competing crop constant. Taking into account the small share of premium subsidies in expected crop revenue, this subsidy impact is analogous to an own‐subsidy acreage elasticity of 1.24, which exceeds own‐price acreage elasticity estimates in the literature. One explanation for the larger acreage response to premium subsidies is that insurance causes an indirect coverage effect in addition to a direct profit effect.

Are Actuarial Crop Insurance Rates Fair?: An Analysis Using a Penalized BivariateB-Spline Method

“…Also, in a US national study, Yu et al . () have estimated an acreage response of 0.43% to a 10% change in crop insurance subsidy rates. Most of the additional land would be of low productivity.…”

“…For the Corn Belt region, Claassen et al (2017) found evidence that crop revenue insurance has slightly increased the conversion of non-cropland to cropland in addition to a somewhat larger effect on crop choices. Also, in a US national study, Yu et al (2017) have estimated an acreage response of 0.43% to a 10% change in crop insurance subsidy rates. Most of the additional land would be of low productivity.…”

Effects of subsidized crop insurance on crop choices

“…There are only few explicit discussions on how premium subsidies in crop insurance affect crop choice (e.g., Goodwin and Smith, ; Miao et al., ; Yu et al., ). The interaction between crop insurance and self‐insurance and its relationship with choice across crops remains to be fully characterized.…”

“…Yu et al. () directly estimate the acreage effect of crop insurance premium subsidies. Goodwin and Smith () present preliminary empirical estimates indicating potential positive effect of premium subsidy.…”

Output and input bias effects of U.S. direct payments

“…This form of domestic support tends to be trade distorting (Chau and de Gorter, ; Goodwin and Mishra, ; Key and Roberts, ; Latruffe and Le Mouël, ; O'Toole and Hennessy, ; Urban et al., ). While interest in the impact of commodity support on input use dates as far back as in Floyd () and has continued in recent times (Yu et al., ), to our knowledge, none of the extant literature has explored whether direct payments induce input‐ and output‐biased technical change in U.S. agriculture at the national level.…”