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

Abstract

Actual Production History (APH) yields play a critical role in determining the coverage offered to producers by the Risk Management Agency’s yield-based crop insurance products. Using both county and individual insured unit data, we examine the 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. 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.