The analysis was discussed on 5 April Farmdoc daily It found that payments to farmers through programs other than commodity programs and crop insurance were countercyclical to net cash income in the United States. This finding raised the question, “Is crop insurance compensation net of farm premiums and commodity program payments counter-cyclical to net return on produce?” This analysis concludes that net crop insurance claims are non-cyclical in net return. However, commodity program payments are counter-cyclical, and conform to the popular description of it. Thus, nationwide crop insurance performs a different function than other agricultural safety net programs. In particular, the US crop insurance program not only helps cover yield loss in low net yield years, but allows farms that suffer a yield loss to fully participate in high net yield years. The last feature of crop insurance is rarely mentioned.
Data and methods
The crops in this study are barley, maize, cotton, oats, peanuts, rice, sorghum, soybeans, and wheat. They each had a crop insurance contract for the duration of the study period 2002-2020. This period follows The Agricultural Risk Protection Act of 2000. It allowed several changes to be made to crop insurance, including subsidizing higher premiums. Crop insurance payouts and farm premiums are derived from USDA, RMA (US Department of Agriculture, Risk Management Agency) Business summary. Premiums paid by the farmer are subtracted from the compensation to calculate the net compensation paid to the farmer by crop insurance.
Commodity payments are available nationwide by crop year, crop, and program for the 2002-2020 crop years, which specify the end date of the study period. A list of sources of payments for the Commodity Program can be found at a Journal of the American Society of Farm Managers and Rural Valuers (ASFMRA) Article by Zulauf, Langemeier, and Schnitkey (2020). Commodity program payments are among the programs authorized by Title 1 of the Farm Act. Do not include to this payments.
For each of the nine crops, the USDA, ERS (Economic Research Service) calculates the economic cost of production and net yield per acre planted. All inputs except management are assigned a cost. The opportunity cost is allocated to land, including farmer-owned land and unpaid labour. The amount of inputs depends on periodic surveys of farms. Input prices are updated annually using prices collected by NASS (National Agricultural Statistics Service). The net yield is calculated using the yield per acre planted and the price per month of harvest. It is a special market yield for management and risk when harvesting. It does not include payments for government programs (goods, crop insurance, to thisconservation, livestock, etc.), crop insurance premiums paid by the farmer, and storage yields and costs.
An important assumption is that USDA and ERS data accurately measure the cost and therefore the net return of producing a crop in the United States. The authors believe this assumption is reasonable but encourage readers to examine the discussion in Asmra article and form their own opinion.
For each crop and year, the economic cost per acre planted and the net yield per acre planted are multiplied by the US acres planted for the crop for the year. Acres of cultivated USDA and NAS QuickStats. The total US economic cost and total US net return for each crop year were summed to obtain the US economic cost and net return for the nine crops as a group for that year.
Three percentages are calculated for each crop year for each crop and for the nine crops combined. The first is net crop insurance compensation in the United States relative to the total cost of production in the United States. The second is the American Goods Program payments relative to the total cost of production in the United States. The third is the US net revenue relative to the total cost of production in the US.
Link to net return
For the nine crops as a group, the ratio of net compensation to total cost of production had a correlation of +0.48 with the ratio of net compensation to total cost (see Figure 1). It differs from zero with a statistical confidence of 96%. A positive sign means that for the nine crops as a group, net compensation was higher (lower) when net return on production was higher (lower). Thus, the net compensation was not countercyclical to the net yield of the nine crops as a group at the US level. Furthermore, the statistical test indicates that the nine crops as a group nationwide are more likely to have net procyclical compensation with net yield.
By comparison, for the nine crops as a group, the ratio of commodity program payments to total cost was -0.48 correlated with the ratio of net benefit to total cost (see Figure 1). It differs from zero with a statistical confidence of 96%. A negative sign means that the commodity program payments were the highest (lowest) when the net returns were the lowest (highest). Thus, in keeping with the usual description, commodity payments were countercyclical to the net yield of the nine crops as a US-wide group.
The two correlations differ from each other with a statistical confidence of 99%. This result indicates that payments through the two farm safety net programs have a different relationship with net return on US production for the nine crops as a group, and thus likely have different policy functions. However, it is also important to note that the explanatory power of both relationships is 23% (0.48 squared). Thus, other variables are needed to explain most of the relationship.
To further examine the relationship between net compensation and net yield from production, correlations are calculated for each crop separately. It varies from -0.56 for peanuts to +0.42 for maize, but averages -0.01 (see Figure 2). Furthermore, only one association (peanut with 98% statistical confidence)) is statistically different from zero at the 95% statistical confidence criterion that is often used to infer that an association differs from zero. In other words, with the exception of peanuts, these associations are not statistically different from zero. In addition, from statistical test theory, it is not unexpected that one or two out of nine correlations would be statistically different from zero if the relationship were random. In summary, the weight of the collective evidence from correlation analysis of individual crops indicates that net crop insurance compensation likely has no relationship with net return to production at the US level, and is therefore not countercyclical to net return on production.
No individual crop analysis is performed for commodity programs because many commodity program payments since 2002, including Agriculture Risk Coverage (ARC) and Price Loss Coverage (PLC) payments, are made on a historical (uncultivated) acre basis. Farmers can also plant or not plant any crop and still receive the base acre payment, with few and limited exceptions. However, nearly all of the primary acres are grown on some crop, most of which are grown at least for the cost of one of the production crops (Zelf, Langmeyer, and Schnittke). Thus, a commodity program payment for one of the cost of production crops is likely to be made to an acre sown at the cost of a production crop even if it is not grown for the cost of production of the crop receiving the payment. Therefore, the aggregate analysis of commodity program payments discussed above must be correct.
Net agricultural crop insurance compensation was found to be non-cyclical in net yield at the US level for the nine large field crops examined in this article. Moreover, the net offsets of the nine crops as a group at the US level may be procyclical with net yield. In contrast, commodity program payments were found to be countercyclical to net yields at the US level for the crops examined in this study.
The discovery of individual crops for crop insurance is not surprising. About 70% of the compensation paid out by revenue insurance, the most common crop insurance in the United States, is for crop loss (Farmdoc dailySeptember 14, 2022). A small farm or area can experience yield loss while other farms and areas do not. These yield losses are unlikely to be related to the net yield at the US level for both individual crops as well as for groups of crops. The previous observation indicates that there is a close to zero relationship between US compensation and US net production yield. Furthermore, insurance payouts are disproportionately paid in years when yield-cutting events, such as drought, affect a large area. For example, 20% of the compensation paid by crop insurance was paid to nine crops in this study for crop years 2011-2021 for 2012, a crop year in which severe drought is widespread. A widespread and severe drought in the US often leads to price hikes that offset some or all of the loss in yield, as occurred in 2012. This observation indicates that, even with a lower US average yield, the US net yield Altogether it may end up being higher in a dry year, hence a near-zero correlation between US compensation and US net crop production yield. Finally, the program’s goal for crop insurance is to provide stability against unexpected declines in yield and price during the growing season. Crop insurance would not be expected to cover multi-year market cycles, which instead falls within the program’s objective for commodity programs to provide stability across growing seasons. In summary, these three considerations indicate a close to zero relationship between US offsets and net US production yield for an individual crop.
The different correlations across the different types of farm safety net programs indicate that, at the US level, crop insurance performs a different farm safety net function than that of commodity and other production-related farm assistance programs. In particular, the US crop insurance program not only helps cover yield loss in years of low net yield, but also allows farms that suffer loss in yield to fully participate in years of high net yield. The last feature of crop insurance is rarely mentioned.
One of the reasons crop insurance allows farms with a yield loss to participate fully in years of high net yield is the harvest price option that is widely purchased with revenue products. The harvest price option uses the higher expected insurance price or the harvest insurance price to assess crop losses. Thus, the current design of crop insurance products, particularly the use of the harvest price option, is likely a reason why crop insurance performs a different function in the farm safety net than other farm safety net programs. This observation raises the question, “Should the harvest price option be extended to crop insurance products that are not currently available in order to further differentiate the safety net function of the US crop insurance program?”
References and data sources
US Department of Agriculture, National Agricultural Statistics Service. March 2023. QuickStats. http://quickstats.nass.USda.gov/
US Department of Agriculture, Risk Management Agency. March 2023. Business summary. https://www.rma.usda.gov/SummaryOfBusiness
Zulauf, CM Langemeier, and G. Schnitkey. 2022. U.S. crop profitability and farm safety net payments since 1975. Journal of the American Society of Farm Managers and Rural Appraisers. pp. 60-69. https://www.asfmra.org/resources/asfmra-journal
Zulauf, C., N. Paulson, and G. Schnitkey. “Farm Payments Through Programs Other Than Commodity Programs and Crop Insurance: The Third Pillar of the U.S. Farm Safety Net.” Farmdoc daily (13): 63, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, April 5, 2023.
Zuloff, C, K. Swanson, J.; Schnittke, N.; Paulson. “Analysis of Crop Revenue Insurance Compensation to the Type of Loss Covered.” Farmdoc daily (12): 141, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, Sept. 14, 2022.