Revenue Protection for Organic Producers: Too Much or Too Little?

By Singerman, Ariel; Hart, Chad E. et al. | Journal of Agricultural and Resource Economics, December 2012 | Go to article overview

Revenue Protection for Organic Producers: Too Much or Too Little?


Singerman, Ariel, Hart, Chad E., Lence, Sergio H., Journal of Agricultural and Resource Economics


A framework is developed to examine organic crop insurance established by the Risk Management Agency (RMA). Given that the RMA links organic and conventional crop prices, the model is calibrated to reflect both markets to illustrate the impacts that pricing has on insurance coverage. Findings indicate that at the 75% coverage level, the RMA's fixed-price factor implies an effective coverage ranging from 43% to 105% depending on the ratio of planting-time organic to conventional market prices. Results suggest the RMA's program is likely to induce adverse selection because the nominal coverage level is likely to deviate substantially from the effective coverage.

Key words: adverse selection, crop insurance, organic agriculture

(ProQuest: ... denotes formulae omitted.)

Introduction

The Food, Conservation, and Energy Act of 2008, which amended part of the Federal Crop Insurance Act, required the U.S. Department of Agriculture to examine currently offered federal crop-insurance coverage for organic crops as described in the organic policy provisions of the 2008 Farm Bill. The provisions established the need to review underwriting risk and loss experience of organic crops and determine whether significant, consistent, or systematic variations in loss history exist between organic and nonorganic production. Based on examinations of loss history, the Risk Management Agency (RMA) is tasked with revising the 5% premium surcharge for organic crop coverage that applies to all crops and regions across the United States. While federal crop insurance for organic crops accounts for some of the idiosyncrasies in organic production, the incorporation of organic production data into the crop-insurance rating structure has been limited.

Organic producers are charged an arbitrary 5% premium surcharge over conventional crop insurance. The actuarial fairness of this premium is questionable (see Singerman, Hart, and Lence, 2010), and no other adjustments are made to the premium rate to reflect organic production practices. Moreover, in the case of crop failure, organic farmers receive compensation based on prices for conventionally produced crops without accounting for the price premiums that organic producers would have been able obtain for their crops (USDA Risk Management Agency, 2011c).

As a consequence of the 2008 Farm Bill provisions, at the beginning of 2009 the RMA contracted for the development of a pricing methodology to improve crop insurance policies for organic crops. Based on that research, the RMA introduced a pilot program during the 2011 crop year that created a separate price election for certain certified organic crops.1 Under the pilot program, prices of organic corn and soybeans for insurance purposes are the prices of their conventional counterparts multiplied by 1.788 and 1.794. These ratios are based on minimum ratios of organic to conventional prices observed from January 2007 through September 2009.2 In this way, the pilot program links price determination of organic crop prices to their conventional counterparts by a fixed percentage. This change will influence the payouts of both yield and revenue protection products for organic corn and soybeans, but the impact will be greater for revenue insurance products.3

By pegging organic prices to their conventional counterparts and using conventional crop futures markets to forecast what organic crop prices will be at harvest time, the RMA's pilot program assumes that the two markets are affected by the same shocks and that they react to those shocks in a similar fashion. Such linking not only contradicts the findings of Singerman, Lence, and Kimble- Evans (2010), which suggest that there is no basis for advocating the existence of a consistent longrun relationship between organic and conventional prices, but also sharply contrasts with observed market dynamics.

Organic crops have historically sold at a premium over their conventional counterparts. …

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Revenue Protection for Organic Producers: Too Much or Too Little?
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