Improving Prevented Planting Policies of Revenue Protection Insurance to Incentivize Secondary Crop Plantings and Reduce Indemnity Payments
Presented by:
Nicholas Gallagher
Practice Job Talk
Department of Agricultural and Applied Economics
UW-Madison
Wednesday, January 31, 2024
12:00 pm-1:00 pm
Taylor-Hibbard Seminar Room (Rm103)
Prevented planting coverage is an important component of Revenue Protection crop insurance, paying indemnities to farmers when they are unable to plant their intended crop due to extreme weather conditions during the planting season. Over the last ten years (2014-2023), farmer prevented plant claims have averaged over 6 million acres per year, accounting for over 14 billion dollars in indemnities paid. In years with wet springs, payments are even higher, exceeding 2 billion dollars in 2011, 2013, 2020, and 2022 and exceeding 4 billion dollars in 2019 and accounting for 41 percent of all insurance payments to farms protected under the US Federal Crop Insurance Program for that year. Research shows that prevented planting coverage disincentivizes farmers from planting crops in the later spring, implying lost social surplus from foregone production and excessive indemnities. Adjusting payment schedules for prevented planting indemnities to improve farmer incentives for planting late crops can improve social surplus. Standard static actuarial methods for determining these payment schedules fail to capture the sequential decision process experienced by farmers, so dynamic models are needed to improve their determination. This paper presents a finite-horizon stochastic dynamic model to characterize the prevented planting decision experienced by farmers and uses the model to demonstrate the estimation of socially optimal prevented planting payment schedules.