Crop Insurance: Are Yield and Revenue Declines Related?

    Introduction

    The relationship between percent change in U.S. yield and percent change in U.S. revenue per acre over the crop insurance coverage period is found to vary across the 6 crops examined: corn, upland cotton (subsequently referred to as cotton), rice, sorghum, soybeans, and wheat.

    For corn and soybeans, percent change in U.S. revenue per acre and U.S. yield are not associated. Thus, for corn and soybeans, it is incorrect to presume that a decline in national yield will led to lower U.S. revenue per acre.

    In addition, except for sorghum, percent change in revenue per acre is more strongly related to percent change in crop insurance price than percent change in yield. Thus, at the U.S. market level, crop revenue insurance is usually more about price risk than yield risk.

    Data and Analysis

    Revenue per acre is calculated as price time yield for the crop. Change in revenue is calculated as the percent change in revenue between the insurance pre-plant and harvest price discovery periods. Prices are the projected and harvest crop insurance prices for a crop year. Actual yield is U.S. average yield per planted acre for a crop year.

    Projected yield is the Olympic average of planted yield for the 5 prior crop years. The data used to calculate yield per planted acre are from the U.S. Department of Agriculture (USDA), National Agricultural Statistics Service.

    Crop insurance prices are from the USDA, Risk Management Agency and a data set compiled by Art Barnaby of Kansas State University. Price and yield data are collected for the 1974 through 2015 crop years.

    Relationship between Percent Change in U.S. Yield and Revenue

    The relationship between percent change in U.S. yield per planted acre and U.S. revenue per planted acre over the crop insurance coverage period varies notably across the 6 crops analyzed. The correlation between these two variables ranges from +0.55 for sorghum to +0.01 for soybeans and 0.00 for corn (see Figure 1).

    Statistical confidence that the correlation differs from 0 is 99% for sorghum and upland cotton, 91% for wheat, 74% for rice, 4% for soybeans, and 1% for corn. Thus, at the conventional 90% confidence test level, only 3 crops (sorghum, cotton, and wheat) have a statistically significant relationship between percent change in yield and revenue per acre over the crop insurance coverage period.

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    To illustrate the difference in correlation values, a scatter chart of the percent change in revenue observed for a given percent change in yield of sorghum, soybeans, and corn are presented in Figures 2, 3, and 4. The figures also contain the linear line associated with the correlation value. Only the line for sorghum visually differs from a horizontal line. A horizontal line is associated with a correlation of 0.00.

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    fdd061516_fig3.jpg

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    To focus on the observations with the largest percent decline in yield, Figure 5 presents the average percent decline in yield and average percent change in revenue for the 4 years with the largest percent decline in yield. Only for sorghum and cotton does the decline in revenue approach the decline in U.S. yield.

    For the 4 years with the largest decline in corn yield, the average decline in revenue per planted acre is only 4% despite an average 22% decline in yield.

    For rice, soybeans, and wheat; the average percent change in revenue per planted acre is positive, implying the percent increase in crop insurance price more than offset the percent decline in U.S. yield.

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    The finding that a decline in U.S. corn, soybean, and wheat yield over the crop insurance coverage period does not necessarily result in a decline in U.S. revenue per acre is consistent with the author’s assessment of forecasts in USDA’s May World Agricultural Supply and Demand Estimates. This assessment found that a decline in U.S. corn, soybean, and wheat yield from the May forecast value is not necessarily associated with lower revenue per acre.

    Last, even for sorghum, percent change in yield explains only 33% of the percent change in revenue per acre over the crop insurance coverage period (see Figure 1). Thus, for none of the 6 crops does percent in yield explain a majority of the percent change in revenue per acre over the crop insurance coverage period.

    Relationship between Percent Change in U.S. Revenue and Price

    The relationship between percent change in U.S. revenue per planted acre and percent change in U.S. crop insurance price over the insurance coverage period is much stronger for 5 of the 6 crops (see Figure 6). The higher explanatory power of price is particularly striking for rice, soybeans, and wheat. For sorghum, explanatory power is similar for percent change in price and yield.

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    Summary Observations

    • Characteristics of U.S. market level risk over the crop insurance coverage period varied notably across the 6 crops analyzed.
    • Only sorghum and cotton consistently align with the common presumption that a decline in U.S. yield over the crop insurance coverage period results in a decline in U.S. revenue per acre.
    • For the other 4 crops (corn rice, soybeans, and wheat), a decline in U.S. yield can result in higher revenue for U.S. producers of the crop as a group. Such an outcome occurred in the 2012 drought for corn and soybeans. In other words, for these 4 crops at the U.S. market level, a physical loss does not necessarily translate into a financial loss relative to the decision to plant the crop.
    • Except for sorghum, percent change in revenue per acre over the crop insurance coverage period is more strongly related to percent change in crop insurance price than yield. Thus, at the U.S. market level for corn, cotton, rice, soybeans, and wheat; revenue insurance is more about price risk than yield risk. This finding is consistent with the historical policy observation that insurance did not become a widely-used risk instrument across U.S. crops until revenue insurance was introduced.
    • Even if a decline in U.S. yield increases average U.S. revenue per acre relative to the value expected at planting, a reduction in yield for an individual producer can reduce the producer’s revenue per acre if the producer’s individual yield reduction is large enough.
    • Despite the importance of the preceding point, it is also important to understand market level risks because crop insurance payments are highest when a market level risk occurs.
    • Last, this analysis examines the change in revenue over the crop insurance coverage period. It does not examine the change in revenue that can occur across crop years. Both within crop year risk and multiple crop year risk are important risks for U.S. farms.

    Carl Zulauf




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