Evaluation of Crop Insurance Yield Guarantees and Producer Welfare with Upward Trending Yields

Actual Production History (APH) yields play a critical role in determining the coverage offered to producers by the Risk Management Agency’s (RMA) Yield Protection, Revenue Protection, and Revenue Protection-Harvest Price Exclusion crop insurance products. The RMA currently uses the simple average of from 4 to 10 years of historical yields to determine the APH yield guarantee. If crop yields are trending upward, use of a simple average of historical yields introduces bias into the insurance offering. Using both county and individual insured unit data, we examine the producer impact of APH yield trends for Texas cotton and Illinois corn. Our findings indicate that biases due to using simple average APH yields when yields are trending upward reduce the expected indemnity and actuarially fair premium rate. Certainty equivalent differences are computed and used as a measure of the magnitude of welfare effect of trend-based biases in APH yields. The estimated welfare effect also varies significantly with different commonly used detrending approaches. This study demonstrates that producer welfare can be enhanced through proper treatment of yield trends in crop insurance programs.