Crop Insurance: Shallow Loss vs Multi-Year Loss

This article begins by comparing the relative size of multiple year loss and shallow loss, finding multiple year loss is larger. An argument is made that multiple year loss is also a more appropriate objective for ARC-CO. A proposal is then made for enhancing its multiple-year loss assistance at no increase in cost.

Multiple Year vs. Shallow Loss

Shallow loss is commonly defined as a loss less than the deductible on individual farm insurance. No common definition exists for multiple year loss. Within the context of ARC-CO’s calculation of its payments, a reasonable definition of multiple year loss is when the revenue for a crop year is less than the ARC-CO benchmark revenue for the crop year.

Given these definitions of multiple year and shallow loss, multiple year loss is approximately twice the size of shallow loss for the 4 crops for which both losses are calculated in prior articles (see Figure 1). Details of these calculations are in the prior articles and the appendix below.

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Overlapping Payments from ARC-CO and Crop Insurance

Overlapping payments (double payments for the same event) undermine the fairness of a program and thus the general public’s support for it. Overlapping payments by ARC-CO and insurance are difficult to estimate in advance since the 2 programs use different procedures and data to calculate assistance.

To illustrate, insurance uses futures prices and farm level yields; ARC-CO uses U.S. crop year prices and county yields. Nonetheless, overlapping payments can occur. However, a simple, transparent approach exists to minimize overlapping payments because ARC-CO has a 10% percent cap on per acre payment and because individual insurance highest coverage level is 85%. Specifically, limit ARC-CO payments to years in which its benchmark price exceeds the insurance plant price for a given program crop.

Such a modification reduced estimated indicated payments by ARC-CO for all crops analyzed: barley, corn, oats, sorghum, soybeans, and wheat (see Figure 2). The reduction ranges from 13% for corn to 34% for oats. If all base acres are assumed to be in ARC-CO, total spending on ARC-CO for these 6 crops is estimated to decline by 17% (see Figure 3). Our analysis suggests these savings would pay for an increase in ARC-CO’s coverage level to 90%.

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Summary Observations

  • A key feature of the debate over ARC-CO is whether its objective should be multiple year losses or shallow insurance losses.
  • Given the procedures used by ARC-CO and insurance to calculate payments, multiple year losses are larger than shallow losses for the crops examined in this article at the U.S. level.
  • The two preceding points suggest that ARC-CO should focus on multiple year loss.
  • This objective can be achieved by limiting ARC-CO payments to years that ARC-CO benchmark price is higher than the crop’s plant insurance price, thus minimizing the potential for overlapping payments between ARC-CO and insurance.
  • Savings from this change can be used to increase ARC-CO’s coverage level, thus enhancing ARC-CO’s coverage of multiple year loss.

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