Economic Tidbits

Large Farms Less Risky

The federal crop insurance program is a growing portion of the federal budget, amounting to roughly $8 billion per year. So, when federal budget cutters are searching for budget cuts, crop insurance often gets mentioned as a potential source. An idea often suggested to reduce the cost of federal crop insurance is to impose caps on premium subsidies, the argument being large farms do not need to be subsidized by the federal government to purchase crop insurance. Opponents to caps on premium subsidies argue the policy will result in large farms exiting the program. Large farms are less risky, they argue, and if less-risky farms leave the insurance risk pool, the level of risk increases resulting in higher premiums for farmers remaining in the program.

A study by two Mississippi State professors, Keith Coble and Brian Williams, examines whether opponents’ arguments “hold water” and whether large farms are less risky. Coble and Williams used yield data over 10 years for corn and soybeans across 29 states, including Nebraska, to simulate indemnities for each of the 10 years and average indemnities per acre for each insured unit. Acres from insured units were then aggregated to the policy level and the average indemnities compared across policies. The results show large farms are indeed a less risky sub-population in the insurance pool. Estimated indemnities for corn were $10.44 per acre for farms with policies consisting of 100 acres and less than $7.00 per acre for farms with over 4,000 acres. A similar result is observed for soybeans. Estimated indemnities amounted to $4.00 per acre for small farms and less than $3.25 per acre for larger farms. The analysis also shows that indemnities decline rapidly as the percent of irrigated acres under the policy increase, showing irrigation is an effective tool for risk mitigation.

The results suggest opponents of caps on premium subsidies have a valid argument in that large farms appear less risky. Given Nebraska is the top irrigated state in the nation in terms of the number of irrigated acres, the study results also raise an interesting question whether these acres would remain enrolled in crop insurance program if subsidy caps were imposed and it led to higher premiums. (A working paper addressing: Are Large Farms Less Risky to Insure?, Keith H. Coble and Brian Williams, Mississippi State University Department of Agricultural Economics, Agricultural Risk, Policy, & Insurance Collaboratory)

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