Looking at the economics of crop insurance and dicamba-resistant soybeans

AgCenter economist Lawson Connor is evaluating the rating methods and returns to crop insurance in Louisiana.

While crop insurance has become one of the primary agricultural risk management instruments provided by the federal government, the cost and potential benefits from the program vary widely across the country.

“Our aim is to understand the methods for determining crop insurance premium rates and evaluate the returns to farmers from using crop insurance,” Connor said.

He has been using parish-level soybean yields separated by irrigated versus nonirrigated to simulate yield fluctuations.

“Our results indicate that while crop insurance premiums per acre in Louisiana tend to be higher than premiums per acre in the Midwest, payout frequencies in Louisiana are also higher,” he said. This means that while Louisiana farmers pay more in premiums, they also receive more in payments.

“That finding is very context-specific,” he said. For example, Louisiana results indicate that crop insurance payments depend both on the parish in question and on the irrigation practices. In some cases, average payments may be higher than in some of the more-productive counties in the Midwest and other parishes where the returns are considerably lower.

“In addition, we find that crop insurance returns are higher on irrigated acres than they are on nonirrigated acres,” Connor said.

Conversations with the chief actuarial scientist at the U.S. Department of Agriculture Risk Management Agency suggest the frequency of payment triggers significantly affects the premium rates and the returns to coverage across areas. This point is being further investigated.

Another concern is the county approach to rate setting. Under this practice, the benefit to an individual may be reduced because risks are heavily weighted by average yields at the county or parish level.

“An idea being explored to combat this is a good farmer discount, which may help to solve multiple issues,” Connor said.

On the other hand, Connor’s results are beginning to shed some light on how crop insurance may be most beneficially used in the state.

“Currently, we find that the benefit, and therefore the optimal insurance plan to choose, may depend on the specific parish and irrigation practice, with benefits being greater on irrigated acres,” he said. “Our results also indicate that depending on the parish, 70% coverage on nonirrigated acres may be more beneficial than opting for higher or lower coverage when selecting a yield plan.”

Connor is exploring collaboration with Mississippi to augment the mathematical models used to simulate returns on other plans, such as revenue plans. Another avenue is to investigate the value of crop insurance under more realistic assumptions that are used in combination with hedging instruments, such as a futures or options contract, as well as with newly introduced Agriculture Risk Coverage and Price Loss Coverage payment schemes.

“These results may suggest more appropriate coverage and insurance plan selections for farmers in our state,” he said.

Along with looking at differences with the Midwest, Connor is examining differences between Louisiana parishes and bordering counties in Arkansas and Mississippi.

“We started looking at broad regions; now we’re looking at our neighbors,” he said. And based on initial observations, he’s seeing some differences.

“We suspect there could be effects of things like soil types and even weather patterns caused by being on different sides of the Mississippi River,” he said.

Connor also will revisit previous results with the Midwest and look at farming practices, climate, soils and other differences that could further explain discrepancies.

“Even in Louisiana, some parishes receive better benefits and some parishes receive lower benefits,” he said.

Connor has been talking with representatives of the Risk Management Agency and insurance providers to determine if rates could be changed.

“It’s a place to start a conversation,” he said.

In another area, Connor is working on a project looking at the returns to planting dicamba-resistant soybeans in the absence of significant glyphosate resistance in local weeds.

Some questions have arisen as to whether sufficient yield advantages exist with dicamba-resistant varieties that would support their adoption even where weed resistance is not prevalent. Preliminary results suggest the answer depends on the location and the likelihood of dicamba drift to nontolerant varieties, he said.

“Where farmers have a low prevalence of weed resistance, the benefit to adopting dicamba-resistant varieties increases as the risk for drift increases with the exact threshold depending on the farmer’s tolerance for risk,” he said.

Research on the issue is continuing with AgCenter yield trials.

This story is featured in the Louisiana Soybean and Grain Research and Promotion Board 2020 Report.

9/15/2020 8:48:13 PM
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