Influence of the Premium Subsidy on Farmers’ Crop Insurance Coverage Decisions, April 2005

The Agricultural Risk Protection Act greatly increased the expected marginal net benefit of farmers buying high-coverage crop insurance policies by coupling premium subsidies to coverage level. This policy change, combined with cross-sectional variations in expected marginal net benefits of high-coverage policies, is used to estimate the role that premium subsidies play in farmers’ crop insurance decisions. We use county data for corn, soybeans, and wheat to estimate regression equations that are then used to obtain insight into two policy scenarios. We first estimate that eventual adoption of actuarially fair incremental premiums, combined with current coupled subsidies, would increase farmers’ purchase of high-coverage policies by almost 400 percent from 1998 levels across the three crops and two plans of insurance included in the analysis. We then estimate that a return to decoupled subsidies would decrease farmers’ high-coverage purchase decisions by an average of 36 percent.

Farm-Level Analysis of Risk Management Proposals, March 2000

This paper presents a detailed report of the representative farm analysis (summarized in FAPRI Policy Working Paper #01-00). At the request of several members of the Committee on Agriculture, Nutrition, and Forestry of the U.S. Senate, we have continued to analyze the impacts of the Farmers’ Risk Management Act of 1999 (S. 1666) and the Risk Management for the 21st Century Act (S. 1580). Earlier analysis reported in FAPRI Policy Working Paper #04-99 concentrated on the aggregate net farm income and government outlay impacts. The representative farm analysis is conducted for several types of farms, including both irrigated and non-irrigated cotton farms in Tom Green County, Texas; dryland wheat farms in Morton County, North Dakota and Sumner County, Kansas; and a corn farm in Webster County, Iowa. We consider additional factors that may shed light on the differential impacts of the two plans. 1. Farm-level income impacts under alternative weather scenarios. 2. Additional indirect impacts, such as a change in ability to obtain financing. 3. Implications of within-year price shocks. Our results indicate that farmers who buy crop insurance will increase their coverage levels under S. 1580. Farmers with high yield risk find that the 65 percent coverage level maximizes expected returns, but some who feel that they obtain other benefits from higher coverage will find that the S. 1580 subsidy schedule significantly lowers the cost of obtaining the additional coverage. Farmers with lower yield risk find that the increased indemnities from additional coverage will more than offset the increase in producer premium. In addition, because S. 1580 extends its increased premium subsidy percentages to revenue insurance products, farmers will have an increased incentive to buy revenue insurance. Differences in the ancillary benefits from crop insurance under the baseline and S. 1580 would be driven by the increase in insurance participation and buy-up. Given the same levels of insurance participation and buy-up, the ancillary benefits under the two scenarios would be the same.

The Long-Run Impact of Corn-Based Ethanol on the Grain, Oilseed, and Livestock Sectors: A Preliminary Assessment, November 2006

The ongoing growth of corn-based ethanol production raises some fundamental questions about what impact continued growth will have on U.S. and world agriculture. Estimates of the long-run potential for ethanol production can be made by calculating the corn price at which the incentive to expand ethanol production disappears. Under current ethanol tax policy, if the prices of crude oil, natural gas, and distillers grains stay at current levels, then the break-even corn price is $4.05 per bushel. A multi-commodity, multi country system of integrated commodity models is used to estimate the impacts if we ever get to $4.05 corn. At this price, corn-based ethanol production would reach 31.5 billion gallons per year, or about 20% of projected U.S. fuel consumption in 2015. Supporting this level of production would require 95.6 million acres of corn to be planted. Total corn production would be approximately 15.6 billion bushels, compared to 11.0 billion bushels today. Most of the additional corn acres come from reduced soybean acreage. Wheat markets would adjust to fulfill increased demand for feed wheat. Corn exports and production of pork and poultry would all be reduced in response to higher corn prices and increased utilization of corn by ethanol plants. These results should not be viewed as a prediction of what will eventually materialize. Rather, they indicate a logical end point to the current incentives to invest in corn-based ethanol plants.

Intra-Industry Trade, Multilateral Trade Integration, and Invasive Species Risk, December 2006

We analyze the linkage between protectionism and invasive species (IS) hazard in the context of two-way trade and multilateral trade integration, two major features of real-world agricultural trade. Multilateral integration includes the joint reduction of tariffs and trade costs among trading partners. Multilateral trade integration is more likely to increase damages from IS than predicted by unilateral trade opening under the classic Heckscher-Ohlin-Samuelson (HOS) framework because domestic production (the base susceptible to damages) is likely to increase with expanding export markets. A country integrating its trade with a partner characterized by relatively higher tariff and trade costs is also more likely to experience increased IS damages via expanded domestic production for the same reason. We illustrate our analytical results with a stylized model of the world wheat market.

Emerging Biofuels: Outlook of Effects on U.S. Grain, Oilseed, and Livestock Markets, 2007

Projections of U.S. ethanol production and its impacts on planted acreage, crop prices, livestock production and prices, trade, and retail food costs are presented under the assumption that current tax credits and trade policies are maintained. The projections were made using a multi-product, multi-country deterministic partial equilibrium model. The impacts of higher oil prices, a drought combined with an ethanol mandate, and removal of land from the Conservation Reserve Program (CRP) relative to baseline projections are also presented. The results indicate that expanded U.S. ethanol production will cause long-run crop prices to increase. In response to higher feed costs, livestock farmgate prices will increase enough to cover the feed cost increases. Retail meat, egg, and dairy prices will also increase. If oil prices are permanently $10-per-barrel higher than assumed in the baseline projections, U.S. ethanol will expand significantly. The magnitude of the expansion will depend on the future makeup of the U.S. automobile fleet. If sufficient demand for E-85 from flex-fuel vehicles is available, corn-based ethanol production is projected to increase to over 30 billion gallons per year with the higher oil prices. The direct effect of higher feed costs is that U.S. food prices would increase by a minimum of 1.1% over baseline levels. Results of a model of a 1988-type drought combined with a large mandate for continued ethanol production show sharply higher crop prices, a drop in livestock production, and higher food prices. Corn exports would drop significantly, and feed costs would rise. Wheat feed use would rise sharply. Taking additional land out of the CRP would lower crop prices in the short run. But because long-run corn prices are determined by ethanol prices and not by corn acreage, the long-run impacts on commodity prices and food prices of a smaller CRP are modest. Cellulosic ethanol from switchgrass and biodiesel from soybeans do not become economically viable in the Corn Belt under any of the scenarios. This is so because high energy costs that increase the prices of biodiesel and switchgrass ethanol also increase the price of cornbased ethanol. So long as producers can choose between soybeans for biodiesel, switchgrass for ethanol, and corn for ethanol, they will choose to grow corn. Cellulosic ethanol from corn stover does not enter into any scenario because of the high cost of collecting and transporting corn stover over the large distances required to supply a commercial-sized ethanol facility.