The Development of a Weather-based Crop Disaster Program

Abstract

Panel regressions are used to relate standardized county weather variables to yield outcomes in order to develop a crop disaster program for the top producing states of corn, soybeans, wheat, and cotton. Farm-level simulations are used to draw yield realizations and provide realistic consistency between county, district, and state yields and national prices. The proposed crop disaster program is estimated to save between $3 and $4 billion per year relative to the current crop insurance program, a reduction of approximately 30% compared to the $10.06 billion in federal expenditures on the crop insurance program in 2016. The savings are realized though two main mechanisms: (1) Focusing agricultural support on systemic weather risk and excluding idiosyncratic risk; and (2) Reducing the administrative cost of the program by eliminating underwriting gains accruing to private companies currently participating in the delivery of crop insurance. The disadvantage of the crop disaster product from the producers’ perspective is the basis risk associated with the program being tied to a simulated and aggregate index rather than field-level yields, with a decrease in downside revenue risk protection relative to the current Revenue Protection (RP) policies available for crops with well-functioning futures markets.