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Article

Gary D. Schnitkey, Bruce J. Sherrick and Scott H. Irwin

This study evaluates the impacts on gross revenue distributions of the use of alternative crop insurance products across different coverage levels and across locations…

Abstract

This study evaluates the impacts on gross revenue distributions of the use of alternative crop insurance products across different coverage levels and across locations with differing yield risks. Results are presented in terms of net costs, values‐at‐risk, and certainty equivalent returns associated with five types of multi‐peril crop insurance across different coverage levels. Findings show that the group policies often result in average payments exceeding their premium costs. Individual revenue products reduce risk in the tails more than group policies, but result in greater reductions in mean revenues. Rankings based on certainty equivalent returns and low frequency VaRs generally favor revenue products. As expected, crop insurance is associated with greater relative risk reduction in locations with greater underlying yield variability.

Details

Agricultural Finance Review, vol. 63 no. 1
Type: Research Article
ISSN: 0002-1466

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Article

Zhangliang Chen, Sandy Dall'Erba and Bruce J. Sherrick

Federal crop insurance programs are the primary risk management programs of the US farm programs. Currently, these programs have been criticized for being…

Abstract

Purpose

Federal crop insurance programs are the primary risk management programs of the US farm programs. Currently, these programs have been criticized for being disproportionally in favor of the riskier areas. Despite previous researchers having widely speculated its existence, a formal study of the scale, spatial pattern and fiscal impacts of such misrating phenomenon is still missing in the literature.

Design/methodology/approach

This paper first purposes an empirically testable definition of misrating, and then detects the scale of the misrating phenomenon by using over two million actuarial records collected by United States Department of Agriculture (USDA's) risk management agency since 1989. Furthermore, multiple spatial statistics methods have been adopted to study the spatial patterns of the misrating statuses. Finally, the paper builds a simple theoretical model to study the potential fiscal impacts of any policy attempts to mitigate the misrating issue.

Findings

The result reveals that roughly 40% of the counties display some degree of misrating. Furthermore, the distribution of misrating displays a significant pattern of positive global spatial autocorrelation, which reflects the existence of regional clusters of premium rate mispricing. Last but not least, the paper concludes that whether an attempt toward fair rating decreases the total program outlay or not relies on the demand elasticity of crop insurance in both overrated and underrated regions.

Originality/value

This paper offers the first attempt to quantify the scale, identify the spatial pattern and evaluate the fiscal impact of the premium misrating in federal crop insurance programs.

Details

Agricultural Finance Review, vol. 80 no. 5
Type: Research Article
ISSN: 0002-1466

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Article

Nicholas D. Paulson, Gary D. Schnitkey and Bruce J. Sherrick

This study seeks to evaluate the impacts of land rental arrangements on crop insurance and grain marketing decisions.

Abstract

Purpose

This study seeks to evaluate the impacts of land rental arrangements on crop insurance and grain marketing decisions.

Design/methodology/approach

The analysis is conducted in an Illinois corn‐soybean setting in which optimal marketing and crop insurance decisions are estimated for a risk‐averse producer under typical cash rent and share rent agreements using numerical simulation methods.

Findings

Results indicate that the availability of crop insurance impacts the intensity of use of put options under both cash and share rent arrangements. Similar to previous work in this area, revenue insurance is found to cause a substitution away from marketing using put options, while yield insurance is complementary to price risk management alternatives. However, while insurance and marketing play a role under both types of land tenure arrangements, shifting from a cash rent to a share rent agreement provides a relatively greater degree of risk reduction.

Practical implications

The results suggest that additional research is needed to explain trends in land rental contracts. Crop insurance and other federal programs may provide incentives to switch from share leases to cash rent arrangements. Changes to the design of these programs could facilitate risk management for producers more efficiently.

Originality/value

The unique contribution of this study is the comparison of insurance and marketing decisions under both cash rent and share rent agreements for crop land.

Details

Agricultural Finance Review, vol. 70 no. 3
Type: Research Article
ISSN: 0002-1466

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Article

Bruce J. Sherrick, Mindy L. Mallory and Timothy Hopper

Relatively high recent returns to farmland investments have led to substantially elevated interest in farmland investments. Absent, however, is a well‐functioning equity…

Abstract

Purpose

Relatively high recent returns to farmland investments have led to substantially elevated interest in farmland investments. Absent, however, is a well‐functioning equity market in farmland real estate, or well‐developed indexes of farmland returns that might contribute to the development of tradable shares tied to farmland returns, or to methods to hedge the value of owned agricultural assets. The purpose of this study is to empirically present relevant measures related to farmland returns and other financial assets to provide a broad context for evaluation of farmland investments in a portfolio context. Issues related to the development of a farmland fund and index construction are discussed along with major risk and transactional factors that are somewhat unique to the asset class.

Design/methodology/approach

Returns data from a broad set of financial categories and broad set of agricultural returns measures are developed and presented in multiple frameworks to convey temporal persistence, relatedness, and portfolio considerations related to farmland. Issues related to the construction of claims based on agricultural assets are discussed.

Findings

Agricultural real estate investments have performed well compared to most other financial assets on most traditional measures of risk adjusted performance. However, the difficulties in direct investment remain and the need to develop securitized conduit exposures to farmland returns is identified.

Originality/value

The study presents a unique set of farmland returns measures and examines the stability of the statistics used to describe these through time. Novel characterizations of the data compared to traditional assets helps investors and asset owners accurately understand the exposure to farmland returns.

Details

Agricultural Finance Review, vol. 73 no. 1
Type: Research Article
ISSN: 0002-1466

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Article

Bruce J. Sherrick, Christopher A. Lanoue, Joshua Woodard, Gary D. Schnitkey and Nicholas D. Paulson

The purpose of this paper is to contribute to the empirical evidence about crop yield distributions that are often used in practical models evaluating crop yield risk and…

Abstract

Purpose

The purpose of this paper is to contribute to the empirical evidence about crop yield distributions that are often used in practical models evaluating crop yield risk and insurance. Additionally, a simulation approach is used to compare the performance of alternative specifications when the underlying form is not known, to identify implications for the choice of parameterization of yield distributions in modeling contexts.

Design/methodology/approach

Using a unique high-quality farm-level corn yield data set, commonly used parametric, semi-parametric, and non-parametric distributions are examined against widely used in-sample goodness-of-fit (GOF) measures. Then, a simulation framework is used to assess the out-of-sample characteristics by using known distributions to generate samples that are assessed in an insurance valuation context under alternative specifications of the yield distribution.

Findings

Bias and efficiency trade-offs are identified for both in- and out-of-sample contexts, including a simple insurance rating application. Use of GOF measures in small samples can lead to inappropriate selection of candidate distributions that perform poorly in straightforward economic applications. The β distribution consistently overstates rates even when fitted to data generated from a β distribution, while the Weibull consistently understates rates; though small sample features slightly favor Weibull. The TCMN and kernel density estimators are least biased in-sample, but can perform very badly out-of-sample due to overfitting issues. The TCMN performs reasonably well across sample sizes and initial conditions.

Practical implications

Economic applications should consider the consequence of bias vs efficiency in the selection of characterizations of yield risk. Parsimonious specifications often outperform more complex characterizations of yield distributions in small sample settings, and in cases where more demanding uses of extreme-event probabilities are required.

Originality/value

The study helps provide guidance on the selection of distributions used to characterize yield risk and provides an extensive empirical demonstration of yield risk measures across a high-quality set of actual farm experiences. The out-of-sample examination provides evidence of the impact of sample size, underlying variability, and region of the probability measure used on the performance of candidate distributions.

Details

Agricultural Finance Review, vol. 74 no. 3
Type: Research Article
ISSN: 0002-1466

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Article

Bruce J. Sherrick, Gary D. Schnitkey and Joshua D. Woodward

The purpose of this paper is to provide empirical information about the past loss experience in major US crop insurance programs, and documents the impacts of ratings…

Abstract

Purpose

The purpose of this paper is to provide empirical information about the past loss experience in major US crop insurance programs, and documents the impacts of ratings changes through time on the premiums and exposure to participants. The losses are also examined within the structure of the current SRA to identify impacts on insurance companies and the government by fund designation.

Design/methodology/approach

- The study uses RMA Summary of Business data and methods consistent with the use of loss-cost ratemaking to analyze loss performance across years with different starting prices and volatilities. Additionally, the RMA premium quoting system was replicated across years with the ability to adjust only one feature at a time to isolate the impacts of changes in individual rating elements from changes in market conditions. Tabulations are provided in map and table form to present the loss ratios through time, in aggregate across time, and within each of the possible funds in which exposures are held. Additionally, the tools developed allow a direct tabulation of the farmer-level premium impacts of individual changes in the policy premium system, and of changing conditions over time.

Findings

Corn and soybeans represent dominant shares of aggregate policy premiums and liability, and also are the crops that underwent the greatest degree of revision in rates over the recent past both due to rate study implications, and to loss rate experience. Despite commonly made arguments that payments associated with the drought of 2012 “more than wiped out all historic gains,” it appears that insurance worked very much as intended and that the loss ratios through time are within reasonable ranges of targets. Fund designation, and the separation under the most recent SRA of Group 1 and Group 2 states substantially dampened the loss sharing and ability to capture gains by private companies, and leads to fairly low rates of return on a pure fund-loss sharing basis for insurance companies. Finally, despite the extreme losses of 2012, the aggregate performance of corn relative to the remainder of the program exhibits lower than average loss rates both in aggregate and on a scale-adjusted basis.

Practical implications

The study provides an important means to isolate and assess implications of rate changes, and to associate causes of losses with rate charges. Additionally, the structure of the SRA, and possible future versions of the SRA are informed by both the aggregate, and the normalized performance results provided. And, the relative performance of major row, crops even with recent extreme losses, appears appropriate or positive to insurance companies after considering the impacts of the SRA on company exposure. In total, the evidence points toward appropriate movement toward target overall loss ratios in the US crop insurance program.

Originality/value

This paper provides an extensive empirical evaluation of ratings for major crop insurance policies and provides a unique means to decompose sources of changes in premiums and rates across locations and through time. It also provides an evaluation of the performance of crop insurance post-SRA in a manner that allows both totals and scale-adjusted performance to be assessed.

Details

Agricultural Finance Review, vol. 74 no. 4
Type: Research Article
ISSN: 0002-1466

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Article

Brent A. Gloy and Eddy L. LaDue

The adoption of several basic financial management practices is examined for a group of New York dairy farms. The study provides estimates of the extent to which various…

Abstract

The adoption of several basic financial management practices is examined for a group of New York dairy farms. The study provides estimates of the extent to which various business analysis and control, investment analysis and decision making, and capital acquisition practices have been adopted. Many practices, such as net present value analysis, are not widely adopted by farmers. The relationship between the adoption of financial management practices and farm profitability is also examined. Results suggest that the adoption of financial management practices, such as using investment analysis techniques, significantly impacts farm financial performance.

Details

Agricultural Finance Review, vol. 63 no. 2
Type: Research Article
ISSN: 0002-1466

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Article

Charles B. Dodson and Bruce L. Ahrendsen

The purpose of this paper is to identify the characteristics of borrowers likely to benefit from loan modifications (restructuring) which includes concessions provided to…

Abstract

Purpose

The purpose of this paper is to identify the characteristics of borrowers likely to benefit from loan modifications (restructuring) which includes concessions provided to the borrower from the lender.

Design/methodology/approach

Data were drawn from the US Department of Agriculture Farm Service Agency (FSA) for borrowers who had received an operating loan modification during 2005-2010. A logistic regression model is estimated to identify the characteristics associated with the likelihood of a borrower paying the modified loan as agreed or receiving a subsequent loan modification within seven years. Explanatory variables included financial condition, type and year of loan modification, farm type, organizational type, borrower demographics, and region.

Findings

Loans requiring more complex loan modifications and borrowers with previous loan restructuring, larger farms, little equity in loan collateral, little or no capital, and/or little to no liquidity are less likely to perform following loan restructuring, which could suggest a possible futility in providing concessions to these types of borrowers. Many of these borrowers ended up having a subsequent restructure within a short period of time. Most of the regional variability in loan performance appears to have been a result of land values and commodity prices and not jurisdictional laws.

Originality/value

FSA has followed a policy of providing loan modifications to the borrowers experiencing repayment problems for more than 25 years. Though farm financial conditions have remained relatively strong through 2016, a continuation of the low farm incomes and declining farm real estate values could increase farm loan repayment problems in upcoming years and increase interest in farm loan modifications from both lenders and policymakers. FSA’s experience provides a rich data source to examine and provide a better understanding of the costs and benefits associated with loan modifications.

Details

Agricultural Finance Review, vol. 78 no. 4
Type: Research Article
ISSN: 0002-1466

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Article

Nicholas D. Paulson, Bruce Babcock and Jonathan Coppess

The purpose of this paper is to discuss the growth and rising costs association with the Federal Crop Insurance program in the USA, justifications for public support, and…

Abstract

Purpose

The purpose of this paper is to discuss the growth and rising costs association with the Federal Crop Insurance program in the USA, justifications for public support, and recent reforms that have been implemented or proposed to reduce program costs. It also analyzes a specific policy to reduce premium assistance spending.

Design/methodology/approach

Data from the Risk Management Agency are used to illustrate historical trends in crop insurance program costs and to analyze the impacts of imposing a per acre cap on premium assistance.

Findings

Imposing a per acre cap on premium assistance could achieve significant savings. A $20 per acre cap is estimated to reduce premium subsidy expenditures by more than 40 percent. However, the impact of such a policy would be most severe on crops currently receiving the largest subsidies per acre, which happen to be some of the largest program crops in the USA.

Originality/value

This paper adds to the literature analyzing potential reform in crop insurance industry. The subsidy cap considered has been proposed and considered by policy makers, and this paper provides estimates for its potential savings.

Details

Agricultural Finance Review, vol. 74 no. 4
Type: Research Article
ISSN: 0002-1466

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Article

Calum G. Turvey

This paper aims to provide a “biography” of sorts on Agricultural Finance Review. The paper tracks the evolution of Agricultural Finance Review from its introduction in…

Abstract

Purpose

This paper aims to provide a “biography” of sorts on Agricultural Finance Review. The paper tracks the evolution of Agricultural Finance Review from its introduction in 1938 to its current status.

Design/methodology/approach

The paper is based on a complete review of every paper and every issue. Not all papers were read by the author, but key papers of interest that in one way or another made significant contributions to the study of agricultural finance were reviewed.

Findings

The paper shows the evolution of agricultural finance from the early days of reporting financial data in the 1930s and 1940s, to its emergence as a major and significant sub discipline of the general field of agricultural economics.

Research limitations/implications

As indicated, not all papers were fully reviewed or read. It is possible that papers identified as “firsts” may have been preceded by other papers. Nonetheless the paper identifies the basic evolutionary path of the journal and defines key points in time when a paradigm shift emerged to change the direction of this discipline.

Practical implications

As Agricultural Finance Review transitions from the Department of Applied Economics and Management at Cornell University to Emerald Group Publishing Limited, this “biography” provides readers with a general overview of the journal's and the discipline's historical development.

Originality/value

This paper is simply a review of the existing literature found in Agricultural Finance Review.

Details

Agricultural Finance Review, vol. 69 no. 1
Type: Research Article
ISSN: 0002-1466

Keywords

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