Academic journal article Agricultural and Resource Economics Review

The Impact of Pasture Insurance on Farmland Values

Academic journal article Agricultural and Resource Economics Review

The Impact of Pasture Insurance on Farmland Values

Article excerpt

Publicly supported insurance programs are an increasingly important component of U.S. agricultural policy. Acres insured under federal crop insurance, for example, increased from 197 million in 1999 to 265 million in 2011, and total premium subsidies increased from $950 million to $7.4 billion over the same period (Risk Management Agency 2012b). The number of publicly supported insurance programs has also increased in recent years, most notably with introduction of the Average Crop Revenue Election (ACRE) Program in 2008. New farm programs included in the Agricultural Act of 2014 suggest that insurance programs are expected to play a larger role in the agricultural sector in the future.

Previous studies have examined factors that influence farmers' decisions to purchase crop insurance (Sherrick et al. 2004), the decision to exit crop insurance (Cabas, Levia, and Weersink 2008), and the price elasticity of crop insurance (Coble et al. 1996). Others have considered issues related to adverse selection and moral hazard (Just, Calvin, and Quiggin 1999). It is also known that the availability of crop insurance can impact land-use and production decisions. O'Donoghue, Roberts, and Key (2009) found that insurance subsidies implemented as part of the 1994 Federal Crop Insurance Reform Act resulted in a moderate increase in specialization and production efficiency but the value of the efficiency gains was far smaller than the value of the subsidies. Claassen et al. (2011) suggested that benefits of crop insurance stimulated conversion of land from grassland to cropland in the Northern Plains by 2.9 percent between 1998 and 2007. Goodwin, Vandeveer, and Deal (2004) found that increases in participation in insurance programs led to small increases in acreage planted, and a 30 percent decrease in premium could lead to a 0.2-1.1 percent increase in acres planted. Miao, Feng, and Hennessy (2011) concluded that a 5 percent decrease in the subsidy rate would result in 0.60 percent of insured cropland converting away from crop production.

The earlier studies establish a link between publicly supported insurance programs and land use changes. This study examines a related issue-the degree to which publicly supported insurance programs affect the value of farmland. The assertion that agricultural policies can increase the value of farmland has been well explored for various farm acts, including the Agricultural and Consumer Protection Act of 1973 (Harris 1977), the Food and Agricultural Act of 1977 (Boehlje and Griffin 1979), the Food Security Act of 1985 (Featherstone and Baker 1987), and the Federal Agricultural Improvement and Reform Act of 1996 (Goodwin, Mishra, and Ortalo-Magné 2003). In each instance, the analysis indicated that farm program payments increased farmland prices. A comprehensive literature review by Latruffe and LeMouël (2009) showed that between 12 percent and 40 percent of U.S. farmland values at the time reflected benefits provided by farm policies other than insurance. Similar analyses of publicly supported insurance programs have not been done.

As with other types of farm policies, insurance programs can increase land values through income effects and risk-reduction effects. Premium subsidies may have played a key role in increasing participation in such insurance (Young et al. 2001). Because premium subsidies have been provided, the expected value of participating in federal crop insurance programs can be positive (expected indemnities may be larger than the premium the farmer pays). And as with direct payment programs, which represent direct income transfers, increases in income expected as a result of insurance may be reflected in the value of the land. If farmers are risk-averse, the reduction in income variability provided by insurance programs may also be capitalized in eligible farmland acreage.

Farmers' risk aversion is difficult to measure (Cao, Carpentier, and Gohin 2011), but some evidence suggests that farmers typically are risk-averse (i. …

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