(ND Ag Connection) – By Scout Nelson
A recent study by Francis Tsiboe and Dylan Turner from North Dakota State University (NDSU) explores the impact of federal crop insurance on farm revenues and income volatility.
Using data from the Federal Crop Insurance Program (FCIP) for 11 major crops between 2011 and 2022, the researchers evaluated 51 combinations of insurance plans and coverage levels. The goal was to compare net indemnities—payouts minus out-of-pocket premium costs—to the baseline of no insurance.
The results show a clear relationship: for every 1% increase in revenue provided by an insurance policy, there is a 2.25% reduction in income volatility. This means that crop insurance typically provides the most support during times of financial need for farmers.
However, the study also highlights some drawbacks of certain insurance plans, such as index-based products like Area Yield Protection, Area Revenue Protection, and Margin Protection.
These policies can increase revenue variability because of “basis risk,” which occurs when the triggers for payouts don’t match the actual losses on the farm. While index-based products are often cheaper and simpler to manage, they sometimes lead to payments that don’t align with farmers’ real losses.
The study includes a breakdown of each insurance plan’s effect on average revenue (Income Transfer Score) and income stability (Variability Reduction Score). This helps farmers and policymakers understand the tradeoffs involved in choosing different types of crop insurance.
In conclusion, while the overall impact of FCIP is positive, the paper emphasizes the importance of understanding the tradeoffs between policy designs to make the best decision for farm financial security.
