Why Crop Insurance Isn't Used More

In recent years, an increasing number of farmers have used crop insurance to take some of the income risk out of their livelihood. Yet the level of coverage isn't as high as might be expected.

In a study released this month, economists from USDA's Economic Research Service show that over time, some farmers will substitute savings for insurance. Looking at demand over multiple years, crop rotations and other practices also help lower production risks and the need for crop insurance.

"A main finding is that insurance demand, when farmers face two or more growing years, is less dependent on how risk-averse a farmer is, as uptake and choice of coverage level is more dependent on the producer's financial wealth," write the study's authors, Katie Farrin, Mario J. Miranda, and Erik O'Donoghue. "We find that crop insurance is something that low-wealth farmers cannot afford and high-wealth farmers do not want. This result, which does not emerge from the traditional approach to analysis of decision making under risk, has implications for the design and provision of agricultural insurance in the U.S. as well as in developing country settings."

The study doesn't seem to address some of the reasons why crop insurance use has increased, including farmers who are able to market their crops more aggressively after buying revenue coverage.

"Unlike previous research on the topic, which emphasizes a farmer's attitude toward risk as the primary driver of insurance uptake, this report analyzes the relationship between wealth, savings, and insurance over time to identify alternative approaches to managing farm risk," the authors explain.

The report also mentions some of the agronomic ways farmers can reduce risk.

Some economists who are critics of current crop insurance programs have argued that high subsidies for crop insurance premiums encourage monoculture over more complex crop rotations that reduce risk. But this report suggests that over many years, farmers may decide to use crop insurance less in order to improve soil health, for example.

"The demand for crop insurance drops the longer the time horizon explored. Farmers do not make production decisions based solely on what would be best in the current season," the report says. "Instead, they choose to manage their farms in a way that helps them earn the most value over the lifetime of the farm; this longer time period farmers consider when making their choices can span generations. An example of such behavior is crop rotation, where alternative crops are planted to maintain soil quality — even when the production value of the crop rotated in (or of fallow land) may be lower."

The report's title is "How Do Time and Money Affect Agricultural Insurance Uptake? A New Approach to Farm Risk Management Analysis." It's available online here.