Department of Agricultural, Food, and Resource Economics Elton R. Smith Endowment

In much of the world, most farmed poultry, hogs, finishing cattle and even dairy cows have been brought indoors into sheltered facilities. Indoors or out, together with good animal husbandry, advances in engineering and animal nutrition, vaccines and therapies have reduced animal loss while industry groups and government have combined to dramatically improve the control of contagious animal disease. Field crops, however, remain far more vulnerable to weather, pest and disease hazards. Although United States involvement in subsidizing domestic crop insurance stretches back to the 1930s, support has grown over the years and the 2014 Farm Bill established crop insurance as one of the main planks of agricultural support. In the middle 1990s I was involved with an initiative supported by Iowa commodity groups to rationalize the efficiency of crop revenue insurance, relative to yield insurance, and to develop rate-setting methodologies.The main research outputs from that endeavor were:

• Babcock, B.A., and D.A. Hennessy. “Input Demand under Yield and Revenue Insurance.” American Journal of Agricultural Economics, 78(May 1996):416-427. Link
• Hennessy, D.A., B.A. Babcock, and D.J. Hayes. “Budgetary and Producer Welfare Effects of Revenue Insurance.” American Journal of Agricultural Economics, 79(August 1997):1024-1034. Link

The pilot programs were subsequently expanded nationally and the revenue insurance form has since become the dominant contract form. Related minor outputs include:

• Hennessy, D.A. “Substitution Between Revenue Futures and Price Futures Contracts.” Journal of Futures Markets, 22(4, 2002):387-391. Link
• Lien, D., and D.A. Hennessy. “A Note on Price Futures versus Revenue Futures Contracts.” Journal of Futures Markets, 24(May, 2004):503-512. Link

while a product authors never got round to finishing was,

• Saak, A.E., D.A. Hennessy, and B.A. Babcock. “Fair Value of Whole-Farm and Crop-Specific Revenue Insurance.” Selected paper, meetings of the American Association of Agricultural Economics, Montreal, Quebec, July, 2003. Link

Although never losing an interest in crop insurance, between then and approximately 2010, my interests were largely on other matters. But the expanding program, a growing interest in how land inputs affect crop outputs, and grant funding opportunities have led a group that I am involved with to revisit the set of programs. Papers that address the impact of crop insurance on land use include:

• Feng, H., D.A. Hennessy, and R. Miao. “The Effects of Government Payments on Cropland Acreage, CRP Enrollment, and Grassland Conversion in the Dakotas.” American Journal of Agricultural Economics 95(2, 2013):412-418. Link
• Miao, R., D.A. Hennessy, and H Feng. “Sodbusting, Crop Insurance and Sunk Conversion Costs.” Land Economics, 90(4, 2014):601-622. Link
• Miao, R., D.A. Hennessy, and H. Feng. “The Effects of Crop Insurance and Sodsaver on Land Use Change.” Journal of Agricultural and Resource Economics, 41(2, 2016):247-265. Link

While an earlier literature dating to the late 1990s and early 2000s had concluded that crop insurance had a very limited effect on land use, the above set of papers show that the conclusion is no longer valid for a portion of the Northern Great Plains.

A matter that was partially addressed in Miao et al (JARE, 2016) was the connection between land/resource geographic characteristics and crop insurance demand. Two other papers have sought to develop a firmer underpinning for these connections.

• Du, X., D.A. Hennessy, and H. Feng. “A Natural Resource Theory of U.S. Crop Insurance Contract Choice.” American Journal of Agricultural Economics, 96(January, 1, 2014):232-252. Link
• Du, X., D.A. Hennessy, H. Feng, and G. Arora. “Land Resilience and Tail Dependence Among Crop Yield Distributions.” Forthcoming at American Journal of Agricultural Economics. Link

The first paper above argues by use of theory and data that where land is better (and yield less risky) then higher insurance coverage levels will be chosen and also that revenue insurance will be chosen over yield insurance. It also argues that where the price yield correlation is greatest (in the center of production) then revenue insurance demand should be stronger. The second paper suggests that land quality attributes determine the extent of yield-yield systemic risk in a locality, and that yield-yield correlations should be expected to become stronger under bad environmental conditions wherever land is marginal for cropping. There are implications for how rates should be set, especially for whole farm and area level products.

Two other lines of inquiry have been pursued regarding crop insurance. In,

• Hennessy, D.A. “Land Retirement Program Design in the Presence of Crop Insurance Subsidies.” Center for Agricultural & Rural Development Working Paper 09-WP-495, July 2009. Link

and then much more much more extensively and coherently (and with data) in,

• Miao, Ruiqing, Hongli Feng, D.A. Hennessy, and Xiaodong Du. “Assessing Cost-effectiveness of the Conservation Reserve Program (CRP) and Interactions between CRP and Crop Insurance.” Land Economics, 92(4, 2016):593-617. Link

the connections between the conservation reserve program and crop insurance were explored. For those interested in this topic, see

• Hellerstein, D.M. “The US Conservation Reserve Program: The evolution of an enrollment mechanism.” Land Use Policy, 63(2017):601-610. Link

The second line of inquiry has had to do with behavioral economic dimensions to demand for crop insurance,

• Du, X., H. Feng, and D.A. Hennessy. “Rationality of Choices in Subsidized Crop Insurance Markets.” American Journal of Agricultural Economics, 99(3, 2017):732-756. Link

This work essentially shows that demand for crop insurance is about much more than profit and risk management, as usually understood. All of land use implications, resource endowment and demand and behavioral economics in crop insurance are ongoing research topics under ERS chair activities, where the ultimate goal is to better understand and improve performance of US crop insurance programs. This line of work has been supported by the following grant:

"Hennessy, D.A., Feng, H., Blankenship, Kevin L. “Exploring a New Paradigm For Understanding Farmers’ Crop Insurance Decisions: Integrating Economic, Psychological, and Farmer Perspectives.” USDA National Institute of Food and Agriculture in Exploratory Program Area (A1801), $99,370."

Extension and outreach from the grant has included:

Extension and Outreach Publications

Doidge, M., H. Feng, D.A. Hennessy, J. Roy Black, and W. Edwards. “Crop Insurance: What’s your motivation?” Michigan Farm News, August 28, 2017. Link

Doidge, M., H. Feng, D.A. Hennessy, J. Roy Black, and W. Edwards. “Farmers’ Crop Insurance Choices in Iowa and Michigan: Survey Summary.” Michigan State University, Department of Agricultural, Food, and Resource Economics, Staff Paper 2017-04, August 2017. Link