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Keith Coble Giles Distinguished Professor [email protected] @DrKeithHCoble The Future of Crop Insurance and Farm Safety Nets Agricultural Risk Policy & Insurance Collaboratory

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  • Keith Coble

    Giles Distinguished Professor

    [email protected] @DrKeithHCoble

    The Future of Crop Insurance and

    Farm Safety Nets

    Agricultural Risk Policy &

    Insurance Collaboratory

  • Where I am coming from: Grew up on a farm in Missouri

    In grad school determined to spend my career focus on two things:

    Agricultural economics must account for price and yield risk

    Farmers are not yield or profit maximizers, they are risk-return

    managers

    The revolutionary idea that defines the boundary between modern times and the past

    is the mastery of risk.Risk management guides us over the vast range of decision

    making from allocating wealth to safeguarding public health, from waging a war to

    planning a family, from paying insurance premiums to wearing a seatbelt; from

    planting corn to marketing cornflakes.

    Peter Bernstein in Against the Gods: The Remarkable Story of Risk

  • Where I am coming from:

    I am a policy empiricist, former hill staffer, & aim to be an honest

    broker of scientific information

    Ag policy is evolutionary

    Ag policy is in a crisis

    Crop revenue insurance has become the core of the ag safety net

    Title I programs are on base acres

    ARC & SCO are revenue index experiments in this bill

    Crop yield & revenue risk is really really hard to insure

    Have spent years consulting with RMA to improve crop insurance

    Big ag data will revolutionize crop insurance & farm policy

  • When you become THE Program You

    become the THE Target

    $953

    $5,722

    $694

    $879

    $10

    $1,145

    $228

    $0

    -$8,000

    $139 -$3,967

    -$14,307 -$6,400

    Miscellaneous

    Crop Insurance

    Horticulture

    Energy

    Forestry

    Research & Extension

    Rural Development

    Credit

    Nutrition

    Trade

    Conservation

    Commodity Programs

    Sequester

    Change in Baseline Funding (Millions)

    Agricultural Act of 2014 Budget Implications (Total Savings of $23,008 million)

  • The Past

    Factors leading to the 2014 Farm Bill

    & the evolution of crop insurance

  • The Old Political Triangle of Farm Policy

    Farm

    Groups

    Legislative

    Branch

    Administration

    Source: Knutson, Penn, and Flinchbaugh

    Traditional foodie

    (SNAP school

    lunch, WIC, etc.)

  • The New Political Context of Farm Policy

    Farm

    Groups

    Legislative

    Branch

    Administration

    Environmental

    Dealers

    Environmental

    No Dealers

    Traditional

    foodie

    New foodies

    Tea Party/

    Heritage Action

  • Crop insurance: Where have

    we been? The modern era since 1980

    Legislative changes and revenue insurance in mid-1990s

    ARPA 2000

    Subsidy grew & ad hoc disappeared

    Agricultural Act of 2014 The cotton experiment

    Shallow loss emphasis

  • Crop Insurance Program Growth

    0

    50

    100

    150

    200

    250

    300

    350

    $0.00

    $1.00

    $2.00

    $3.00

    $4.00

    $5.00

    $6.00

    $7.00

    $8.00

    1989

    1990

    1991

    1992

    1993

    1994

    1995

    1996

    1997

    1998

    1999

    2000

    2001

    2002

    2003

    2004

    2005

    2006

    2007

    2008

    2009

    2010

    2011

    2012

    2013

    2014

    2015

    Mil

    lio

    n A

    cre

    s

    Bil

    lio

    n S

    ub

    sid

    y

    Subsidy ($) Acres

  • Improved Loss Ratio (indemnity / premium)

    0

    0.5

    1

    1.5

    2

    2.5

    3

    Lo

    ss R

    atio

    Year

    RMA Aggregate Loss Ratio 1980-2014

    Loss Ratio 80-95 AVG 96-14 AVG

    1980-1995 Avg. =1.48

    1996-2014 Avg. = 0.88

    Why? Mixture of good weather, more participants, better production

    practices, better rates, better genetics, climate change??

  • Federal Crop Insurance Program Cost

    -4,000

    -2,000

    0

    2,000

    4,000

    6,000

    8,000

    2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

    $ M

    ILL

    ION

    S

    FISCAL YEAR

    Premium Subsidies A&O Reimbursement Underwriting Loss

  • Enrollment Period Implied Price

    Volatilities Vary Across Years

    24.28 23.02

    25.79 23.31

    25.64 24.95

    21.99 21.68

    26.3 26.46 28.71

    32.89

    37.35

    41.81

    32.78

    36.7

    28.03 25.89

    23.8

    21

    0

    5

    10

    15

    20

    25

    30

    35

    40

    45

    1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

    End of February Implied Corn Price Volatility

  • The Present

  • So what do lower prices do to these

    baselines?

    0

    2000

    4000

    6000

    8000

    10000

    12000

    14000

    16000

    2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

    MIL

    LIO

    N $

    YEAR

    2007-2013 CBO Actual and April 2014 Projected Outlays

    Crop Ins Title I

    Lower Insurance Cost

    Higher Title I Cost

    In 2015 Corn value down 10%

    & Soybeans down 15%

  • 2015 Insurance Plan Premium

    Shares STAXSCO

    1%

    WFRP 1% YP

    5%

    RP 77%

    RPHPE 0%

    RAINF 3%

    All other 11%

    All Area 2%

    Chart Title

    STAXSCO

    WFRP

    YP

    RP

    RPHPE

    RAINF

    All other

    All Area

    Reducing harvest price

    protection would save

    $1.1-1.3 Billion/year

  • Coverage

    Levels

  • Enterprise

    units are

    increasing

  • Deceiving ourselves about ag risk &

    why it matters for crop insurance

    It's easier to fool people than to convince them that they have been fooled. Mark Twain

    Why, sometimes I've believed as many as six impossible things before breakfast. - Alice in Wonderland.

    The creature we study in economics is similar to Mr. Spock from Star Trek The world I study is full of people more like Homer Simpson Robert Thaler

  • Small samples lie!

    In the case of yield and revenue associated with crop

    agriculture we get one observation per year.

    Small samples grow quite slowly into large samples.

    Producer and economists sometimes behave as if they believe

    small samples are big samples

    too much weight on an evaluation based on very small

    samples.

    show us what the policy would have done over the last five years.

    just input the last five years yields and evaluate crop insurance

  • Even using 24 years of data leads to

    inaccurate insurance rates

    0.000

    5.000

    10.000

    15.000

    20.000

    25.000

    30.000

    35.000

    40.000

    1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89 93 97 101

    105

    109

    113

    117

    121

    125

    129

    133

    137

    141

    145

    149

    153

    157

    161

    165

    169

    173

    Expected Soybean Indemnity Based on 6, 12, & 24 Years of History

    TRUE 24 Years 12 years 6 Years

  • So how does one use actual losses with

    more robust probability?

    Recent history likely to misrepresent weather effects.

    Was a bad year a 1 in 10 or a 1 in 50 year event?

    RMA now

    Uses weather-weighting by climate division using data

    back to 1895

    a base rating period to 20 years,

    Coble, K.H., M. F. Miller, R. M. Rejesus, R. Boyles, B. K. Goodwin, T. O. Knight (2015)

    Accounting for Weather Probabilities in Crop Insurance Rating. Journal of Agricultural and

    Resource Economics 40(2):306324.

  • Example Loss Cost Index

    0.000

    0.050

    0.100

    0.150

    0.200

    0.250

    189

    5

    189

    8

    190

    1

    190

    4

    190

    7

    191

    0

    191

    3

    191

    6

    191

    9

    192

    2

    192

    5

    192

    8

    193

    1

    193

    4

    193

    7

    194

    0

    194

    3

    194

    6

    194

    9

    195

    2

    195

    5

    195

    8

    1961

    196

    4

    1967

    197

    0

    1973

    197

    6

    197

    9

    198

    2

    198

    5

    198

    8

    199

    1

    199

    4

    199

    7

    200

    0

    200

    3

    200

    6

    200

    9

    Climate District 9 Iowa Simulated Loss Cost

  • The Future

  • Four Big Questions 1. What is the future of ARC, PLC, and LDPs?

    - A shrinking baseline

    - Competition with conservation and crop insurance

    2. Can we harness big ag data and technology to improve crop insurance?

    - knowledge of soils, inputs, practices & risk - Privacy issues, policy issues

    3. What next for crop insurance

    - The subsidy bullseye

    - Incentives for environmental behavior

    4. What will the next farm bill look like?

  • 1. What is the future of ARC, PLC,

    and LDPs?

    County yields are difficult to estimate

    The satisfaction with county-yield triggered

    programs remains to be seen

    Base acres risk protection < planted acre risk

    protection

    Yield basis risk

  • Farm Program sign up

    Percent of Farms and Base Acres that Made an ARC/PLC Election --

    National by Crop

    Percent of Bases Electing

    PLC ARC-CO ARC-IC

    BARLEY 75% 22% 4%

    CANOLA 97% 2% 1%

    CORN 7% 93% 0%

    GRAIN SORGHUM 66% 33% 0%

    LONG GRAIN RICE 100% 0% 0%

    MEDIUM GRAIN RICE

    (SOUTHERN) 96% 4% 0%

    OATS 32% 67% 1%

    PEANUTS 100% 0% 0%

    SOYBEANS 3% 97% 0%

    SUNFLOWERS 56% 43% 1%

    WHEAT 42% 56% 2%

  • Trend in Estimated Soybean

    Payment over the Life of the Bill

    $0.00

    $5.00

    $10.00

    $15.00

    $20.00

    $25.00

    $30.00

    $35.00

    2015 2016 2017 2018

    $/B

    ase

    Acr

    e T

    itle

    Mississippi Delta Soybean Expected Payments 2015-2018

    PLC+SCO ARC

  • Title I baselines are likely to shrink

    Crop

    Likely CBO Baseline in 2018 relative to

    the current baseline

    Total

    -14%

    Feed Grains -26%

    Wheat -13%

    Soybeans -28% Based March 2015 CBO baseline with adjustment for a 3

    year step forward

  • 2. Can we harness big ag data and

    technology to improve crop insurance?

    Past decade marked by

    Improved data quality & quantity

    Re-estimation of various parameters

    Implementation of revenue insurance

    Weather weighting of loss history

    Possible future

    The next step forward is fully geo-referenced data More accurate crop location = soil

    More accurate practice rating such as environmental attributes

    Incorporating precision ag into rates, underwriting, and loss adjustment

    If we dont do this top producers will leave in a less subsidized world

    Yield =f(land, operator) ???

  • RMA will require full CLU reporting in

    2016

    In 2016 Common

    Land Unit

    reporting is

    required for

    major insurance

    plans.

  • High quality soils maps + CLU Loss

    Experience = Rate Game Changer

  • 3. What next for crop insurance policy?

    The subsidy bullseye

    Incentives for environmental behavior

  • The 2014 Act Subsidy Schedule

    Coverage Level Basic & Optional

    Subsidy %

    Enterprise Unit Subsidy

    % SCO Subsidy

    RP, RPHPE, YP

    50% 67% 80% 65%

    55% 64% 80% 65%

    60% 64% 80% 65%

    65% 59% 80% 65%

    70% 59% 80% 65%

    75% 55% 77% 65%

    80% 48% 68% 65%

    85% 38% 53% 65%

  • Subsidizing Crop Insurance Subsidy = RMA estimated breakeven

    premium producer paid premium

    Subsidy will increase with Higher crop value Greater risk Higher coverage level Enterprise Units RP > RPHPE > YP

  • Masking asymmetric information

    problems in the crop insurance program

    Coble et al 2010 Review of RMA Rates

    Crop insurance rates must account for practices / technology /

    weather

    Inaccurate rates undercharge some and overcharges others.

    Subsidy may entice over-rated producers into the program.

    This is costly as the undercharged producer also receive subsidy

    A 10% reduction in subsidy will likely result in a 4-7%

    reduction in liability and 2-4% fewer insured acres.

  • How impactful is a subsidy cap?

  • Do

    Farmers

    Maximize

    Subsidy?

  • Beyond Conservation Compliance

    Good soil health is a long term commitment

    Insurance practices are current practice focused

    APH yields are a crude approximation

    Crop insurance as a carrot to incentivize environmental

    stewardship

    Some environmental practices are risk reducing

    Is crop insurance the vehicle to reducing nitrogen runoff?

  • 4. What will the next farm bill look like?

    Will it matter to our best producers?

    Compared to trade, macro economics, regulation, or the

    RFS

    Will the ag alliance stand together?

    Will the ag/SNAP collation prevail?

  • 4. What will the next farm bill look like?

    How to put all programs on auto-pilot

    Deep losses versus shallow losses

    Risk management vs. Environmental Services vs. ?????

  • Corn and Soybeans ARC + Crop

    Insurance

    Ag Risk Coverage

    Program

    86%

    76%

    Crop

    Insurance

    coverage

    level

    20 or 35%

    Co-Pay

    $2.2 billion of 2015 corn &

    soybean insurance liability

    overlapping with ARC

    85%

  • The question avoided in the 2014 farm bill: How

    will these three USDA Agencies relate to one

    another?

    RMA

    FSA

    NRCS Will they

    duplicate,

    counteract, or

    complement

    each other?

  • How will these three USDA Agencies

    Relate to one another?

    RMA

    FSA

    NRCS Will they

    duplicate,

    counteract, or

    complement

    each other?

    Safety net

    programs, but

    what of

    delivery, & the

    past attempt to

    combine these

    agencies?

  • How will these three USDA Agencies

    Relate to one another?

    RMA

    FSA

    NRCS Will they

    duplicate,

    counteract, or

    complement

    each other?

    Working land

    environmental

    services?

  • How will these three USDA Agencies

    Relate to one another?

    RMA

    FSA

    NRCS Will they

    duplicate,

    counteract, or

    complement

    each other?

    Rating

    &conserving

    practices

  • Rank how would typical taxpayers

    view ag tax dollars support?

    A. Helping farmers manage price & yield risk

    B. Helping farmers conserve and protect the

    environment

    C. None of the above just cut taxes

  • Thank You

    Contact me: [email protected]

    Follow me: @DrKeithhCoble