Academic journal article Journal of Risk and Insurance

Whole Farm Income Insurance

Academic journal article Journal of Risk and Insurance

Whole Farm Income Insurance

Article excerpt

ABSTRACT

This article employs a mathematical programming model to investigate farmers' optimal crop choices under gross revenue insurance, whole farm income insurance (WFI), the Canadian Agricultural Income Stabilization (CAIS) program, and its modified 2008 program AgrInvest. WFI poses a particularly interesting problem since the indemnity/premium structure is dependent upon the choice of crops, whereas the choice of crops is simultaneously influenced by the presence of the whole farm insurance program. Results indicate that farmers will alter farm plans significantly in response to the type of insurance offered and the level of subsidy.

INTRODUCTION

The advent of modern risk management in agriculture is increasingly becoming focused on whole farm income insurance (WFI). By WFI it is meant that a single policy is provided, which covers the covariate risk of jointly produced farm crop and livestock enterprises. The insurer and the insured must balance a host of random variables including yield risk, price risk, and their correlations that make up the entire probability complex that combines to form the joint risks between crops. In addition crops can be grown in a multitude of combinations with new crops being added and removed, or production patterns defined by crop rotational constraints on production.

Whole farm insurance is a separate and distinct approach to those farm safety nets that focus on crop-specific insurance, price insurance and stabilization, or enterprise revenue insurance. Explorations into income insurance in Canada and the United States have been conducted by Turvey and Amanor-Boadu (1989), Hennessy, Babcock, and Hayes (1997), Hennessy, Saak, and Babcock (2003), and Dismukes and Durst (2006), and in a European context by Diaz-Caneja and Garrido (2009) and Meuwissen, Huirne, and Skees (2003) but none, for a variety of reasons, are satisfactory from an economic point of view. The most serious deficiency, and that which is most explored in this article, is the endogeneity of the insurance decision on crop choices. The conventional approach is to define a crop mix and then use Monte Carlo simulation to look at the impact of income insurance on risk reduction, but these types of studies fail to account for how the insurance itself will influence farm plans and strategy. Perhaps the most thorough study of income insurance to date is by Dismukes and Durst (2006). There they recommend a whole farm approach that does not require savings account balances such as Canada's Canadian Agricultural Income Stabilization (CAIS) program or income insurance savings in Australia but rather a whole farm approach that is based on portfolio indemnities and premiums. This is along the lines of the Adjusted Gross Revenue (AGR) and AGR-Lite programs in the United States, which they describe as whole farm revenue insurance coverage for multiple agricultural commodities under one insurance product. In Canada and the United States, these whole farm programs use tax information as a base to provide a level of guaranteed revenue for the insurance period. My interest here is not so much the mechanics of how tax filer information is used but the economic consequences of WFI on farm decisions. In fact, in the forgoing analysis, I ignore the tax filer approach because using past tax filer information may not accurately reflect the choices of the present and from an economic point of view are probably most valuable as a means to determine coverage levels rather than indemnities.

Given the interest in WFI in Canada, the United States, Europe, and elsewhere, it is important to fully understand how whole farm insurance will affect farm decisions. Nonetheless, there has been scant research done on either the design of WFI (with the noted exception of Dismukes and Durst, 2006), how income insurance would affect enterprise selection, the effect of subsidy on crop choices, or the impact income insurance might have in terms of decoupling and World Trade Organization (WTO) guidelines. …

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