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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

Jianmei Zhao, Peter J. Barry and Gary D. Schnitkey

A stochastic, multi‐period simulation model is developed based on the prevalent capital structure theories, in searching for and identifying an optimal combination of…

Abstract

A stochastic, multi‐period simulation model is developed based on the prevalent capital structure theories, in searching for and identifying an optimal combination of related financing strategies. The model reflects both conceptual and empirical implications of the pecking order, trade‐off and signalling theories on farm business financing, investment, and expansion process. The comparisons of simulation output indicate that farm businesses could expand at a moderate speed accompanied by financial health when they concurrently adopt these financing tactics. Pecking order financing benefits short‐term financial management, trade‐off strategy effectively adjust farm capital structure, and the signaling theory enables the adoption of risk‐adjusted interest rate policies between the farm borrower and the lender.

Details

Agricultural Finance Review, vol. 68 no. 2
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

Nicholas D. Paulson and Gary D. Schnitkey

This article aims to explore recent trends in farmland rental markets using data for the state of Illinois. Trends in the types of rental agreements used and the…

Abstract

Purpose

This article aims to explore recent trends in farmland rental markets using data for the state of Illinois. Trends in the types of rental agreements used and the relationship between the rental rate for those contracts, land values, crop revenues, production costs, and farm returns are examined.

Design/methodology/approach

Data from various sources and at different levels of aggregation for the state of Illinois are used to provide illustrations of historical trends in farmland rental agreements and rental rates, and how they are related to various market and industry factors. Focus is placed on the more recent period since 2005 characterized by high commodity price levels and volatility.

Findings

The majority of farmland in the Midwest is controlled under rental agreements which are increasingly of the fixed cash rent type. Rental rates have increased, but at a slower rate than farm returns. Average rental and interest rates imply that land values are consistent with the current market environment. Aggregate rental rates mask considerable variation in farm‐level rents, only a portion of which can be explained by differences in soil productivity. Given the current level of price volatility, the tenure position of a farm operation has a significant effect on downside risk exposure.

Originality/value

The illustrations provided in this paper should be of interest to researchers working in the area of farmland values and rental agreements, as well as to practitioners including farmers, landowners, and professional farm managers. The findings should motivate additional research and recognition of the importance of tenure position to the performance and risk exposure of grain farms.

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

Nicholas Paulson, Gary Schnitkey and Patrick Kelly

The purpose of this paper is to evaluate the risk management benefits provided by the supplemental coverage option (SCO) insurance plan which was created in the 2014 Farm…

Abstract

Purpose

The purpose of this paper is to evaluate the risk management benefits provided by the supplemental coverage option (SCO) insurance plan which was created in the 2014 Farm Bill. Specifically, the marginal expected utility benefits are compared with the potential additional subsidy cost introduced by the new program for a stylized example of a corn producer.

Design/methodology/approach

The paper uses a stylized simulation model examines the preferred insurance program choice for a typical Midwestern corn farmer. The expected utility of the farmer is calculated under their preferred insurance program choice both with and without the availability of the SCO program, and compared to the case where crop insurance is not available. Scenarios are examined for a range of farmer risk aversion levels, different levels of correlation between farm-level and county-level corn yields, and case with and without insurance premium subsidies.

Findings

The SCO program is found to enter into the preferred insurance program choice for risk averse farmers. As risk aversion increases, farmers are estimated to prefer higher coverage levels for individual products along with SCO coverage. While the availability of existing crop insurance programs are shown to substantially increase the expected utility of farmers, the marginal impact of adding SCO to the crop insurance program is relatively small. Furthermore, the additional expected benefits generated by SCO are shown to include both risk management and expected return components. With subsidies removed, the estimated marginal benefits provided by SCO are reduced significantly.

Practical implications

The findings of this paper can help inform the policy debate for future farm bills as agricultural support programs continue to evolve. The results in this paper can also be used to help explain farm-level decision making related to crop insurance program choices.

Originality/value

This paper contributes to the literature by documenting a new, federally supported risk management programs made available to farmers in the 2014 Farm Bill and evaluates the marginal benefits the SCO program offers US crop producers.

Details

Agricultural Finance Review, vol. 76 no. 3
Type: Research Article
ISSN: 0002-1466

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Article

Joseph Cooper, Carl Zulauf, Michael Langemeier and Gary Schnitkey

Farm level data are essential to accurate setting of crop insurance premium rates, but their time series tends to be too short to allow them to be the sole data source…

Abstract

Purpose

Farm level data are essential to accurate setting of crop insurance premium rates, but their time series tends to be too short to allow them to be the sole data source. County level data are available in longer time series, however. The purpose of this paper is to present a methodology to make full use of the information inherent in each of these data sets.

Design/methodology/approach

The paper uses a novel application of statistical tools for using farm and county level yield data to generate farm level yield densities that explicitly incorporate within county yield heterogeneity while accounting for systemic risk and other spatial or intertemporal correlations among farms within the county.

Findings

The empirical analysis shows that current approaches used by the Risk Management Agency to individualize premiums for a farm result in substantial mispricing of crop insurance premiums because they do not adequately capture farm yield variability and yield correlations between farms. The new premium setting method is empirically shown to substantially reduce government subsidies for crop insurance premiums.

Originality/value

The paper demonstrates how to extract more information from available data when setting crop insurance premiums, which allows the government to more closely tailor premiums to the farm than do current approaches.

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