Factors affecting the use of forage index insurance: Empirical evidence from Alberta and Saskatchewan, Canada

Abstract

Purpose

The purpose of this paper is to examine factors affecting the use of forage index insurance. Forage is a difficult crop to insure, and index insurance may be well suited for forage insurance and has been implemented in several countries, including Canada, the USA and France. Despite being a promising risk management tool, forage index insurance participation rates in Canada, and other countries are low relative to crop insurance participation rates for grain and oilseed producers.

Design/methodology/approach

A survey was conducted with 87 beef and cattle producers from Alberta and Saskatchewan, Canada. A probit regression model was used, and a number of variables were included to examine the use of forage index insurance.

Findings

In total, 6 of 11 variables in the model are found to be statistically significant in explaining forage producers’ use of forage index insurance. Results suggest that producers who maintain lower feed reserves are more likely to purchase forage index insurance. Also, producers with higher levels of knowledge of crop insurance and a more positive attitude toward forage insurance are more likely to use forage index insurance. Furthermore, producers are more likely to use forage index insurance if they perceive drought and weather risk as being of greater importance, and if they are younger. The importance of the variable forage index insurance premium price was statistically insignificant. This could be due to the effect of subsidization, reducing the importance of price for the decision to purchase. Similarly, the use of other subsidized risk management policies, including a whole-farm margin policy (e.g. the government program and AgriStability), did not reduce forage index insurance use. A possible explanation for this is that the subsidization of the policies may make it profitable to purchase both, despite the overlapping coverage.

Practical implications

These results may be useful for policy makers interested in increasing forage index insurance participation rates, as forage index insurance participation rates have historically been low relative to grain and oilseed producers.

Originality/value

This study is believed to be one of the first studies regarding the use of forage index insurance by forage producers. Producers can be exposed to catastrophic risks such as drought or other extreme weather events, and forage index insurance may be an effective means to manage these risks. Index insurance determines payments using an index that is correlated to producers’ actual yields. A downside of this method is basis risk, which is the mismatch between the insured index and the producer’s actual yield. Research has focused on basis risk and developing improved methods to reduce basis risk. However, less research has investigated the other important factors that may contribute to forage index insurance use. Producers may have a different risk management environment regarding forage production compared to other farm activities, and these differences have largely not been examined.

Citation

Roznik, M., Boyd, M., Porth, L. and Porth, C.B. (2019), "Factors affecting the use of forage index insurance: Empirical evidence from Alberta and Saskatchewan, Canada", Agricultural Finance Review, Vol. 79 No. 5, pp. 565-581. https://doi.org/10.1108/AFR-02-2019-0022