Agricultural Risk Management and Climate Change Adaptation
Current U.S. federal farm policy focuses on risk management. Projected spending for the Federal Crop Insurance Program exceeds that of all other farm-related programs authorized in the 2018 farm bill.
While agriculture has always been subject to the vagaries of weather, climate change is likely to increase weather risk exposure for many farmers. The challenge for policymakers will be ensuring that future federal programs assist farmers with their exigent risk management needs while also facilitating adaptation to a changing climate.
To further understand these issues, the Council on Food, Agriculture, and Resource Economics (C-FARE) hosted a free webinar on Friday, August 27th discussing various issues related to climate change impacts on Federal Crop Insurance and other federal farm programs.
This panel featured Barry Barnett, C-FARE Board Member and Professor/Chair at the University of Kentucky and four panelist: Jesse Tack (Kansas State University), Roderick “Rod” M. Rejesus (North Carolina State University), Eric Belasco (Montana State University), and Brittany Goodrich (University of California, Davis).
Jesse Tack kicked off the webinar with his presentation on “The Important Role of Heat for Understanding Climate Change Impacts on Crop Yields”. This presentation focused on the issues regarding exposure to extreme heat under global warming and its direct effect on crops. Tack’s work on this topic dates back nearly 10-12 years, and it all started with Schlenker & Robert’s article which provided an important advancement for measuring heat exposure in the context of agricultural production, which allows us to understand how detrimental heat can be to crops through both direct (heat stress) and indirect (water deficit stress) channels.
Tack cites another article that measures “global warming has already contributed substantially to rising crop insurance losses, and it’s not a trivial amount, 19% of crop insurance losses over the 1991-2017 period” (Diffenbaugh et al., 2021). Tack shares that warming temperatures can have a compounding effect by simultaneously reducing average yields and increasing yield risk. Recent research has forecasted likely impacts of warming temperatures on the US crop insurance program to include more frequent losses due to heat/drought and higher premium rates (Perry et al. 2020; Tack et al. 2018). It is still important to recognize that adaptation is a real possibility, and the intersection of climate change with cover crops, pasture/forage/ rangeland, and agriculture policy will be important in determining how we can move forward.
Brittany Goodrich continues the webinar with a presentation on “When is rainfall important for forage growth? Implications for Pasture, Rangeland, and Forage Insurance”. The Pasture, Rangeland, and Forage (PRF) rainfall index insurance was introduced by the USDA Risk Management Agency in 2007 and was expanded to 48 states in 2016. The program was established to insure livestock and forage producers against forage losses that are going to occur due to low rainfall such as instances of drought. It was specifically designed as an index insurance to allow lower costs of implementation because there are no yield measurements.
Currently, producers are allowed to choose intervals of months that can be insured against low rainfall. However, these intervals do include months that are not relevant to forage growth, which increases their basis risk. Goodrich found that flexibility is important because it supports “wide variation in the relevant rainfall months due to forage species, production system, location, and rainfall patterns” (Coble et al., 2020).
The next panelist, Eric Belasco begins his presentation introducing “Rethinking Agricultural Policy Responses under Climate Change” which focused on concerns of: increased reliance on crop insurance and equity-related issues with continued growth in crop insurance. The equity-related issues he discusses are participation gaps in underserved groups and increased consolidation of subsidy benefits. Belasco details organic participation, participation gaps by commodity, participation and reliance on bank loans, and the concentration in crop insurance payments.
There are various reasons as to why producers avoid crop insurance, most popular is that they feel that their farms are just too small and it is not worth the trouble. There is opportunity to examine these equity-related issues and to increase equity for all underserved populations. Belasco closes out his presentation with two recommendations to address issues related to crop insurance:
find new products and methods to attract new crop insurance customers.
caps and policy design can provide more equity to subsidy benefits.
The last panelist, Roderick “Rod” Rejesus, closes out the webinar with his presentation on “Crop Insurance and Unintended Consequences for Climate Change Adaptation”. He opens with the statement that “Agriculture is one of the most vulnerable sectors to climate change, with large and growing literature that documents the negative impact of climate change on mean yields and yield risk (or yield variability).” To manage yield variability, governments across the globe have supported crop insurance as the main risk management tool for agriculture.
Rejesus’ study on the topic addresses the question of whether crop insurance participation influences the effect of warming temperatures on yield risk, specifically asking if higher crop insurance participation results in larger yield risk response to extreme heat. The study found that the impact of extreme heat on the variance and kurtosis of yields tend to be statistically larger for counties with higher insurance participation. Rejesus concludes that crop insurance likely disincentivizes adoption of climate change adaptation practices, which could be an unintended consequence of subsidizing crop insurance. The policy implications for this are that:
conservation programs that encourage use of climate change adaptation practices can play a role to counteract crop insurance disincentive effects.
begin policy conversations to refine crop insurance rules to mitigate disincentive effects of climate change adaptation.
Q&A with the audience followed the panelists’ presentations
Question 1
Crop insurance as it is currently structured is a public-private partnership and there’s significant amounts of private sector money at risk in this program. How does that fit with that fact that this isn’t strictly a government program, and how do we work through this?
Rejesus: The federal crop insurance program is indeed a public-private partnership. As such, the Standard Reinsurance Agreement (SRA) is the main instrument that governs the relationship between the government and private sector in terms of the crop insurance program. Hence, in periodic renegotiations of the SRA, the private sector typically can always advocate for positions that are to their benefit. This allows for a healthy “back-and-forth” between the private sector and the public sector to come up with rules that are mutually acceptable to both parties. In addition, the government have historically worked with the private insurance companies (outside of SRA negotiations) by listening to and considering their concerns about the crop insurance program (i.e., especially when there are proposed changes in underwriting rules or rating processes).
Question 2
How much of a disincentive for adaptation is subsidized crop insurance. So farmers are responding to a lot of different incentives out there. Do we have a sense of that? Has there been any work done on how much subsidized crop insurance does create a disincentive for adaptation?
Rejesus: This is a great question and we believe this is an area where more research is required. Results in published papers like Annan and Schenkler (2015) and Wang et al (2021) indicate that subsidized crop insurance provides disincentives for climate change adaptation. However, there is no general consensus in the literature (and limited work has been done) on the issue of whether the crop insurance disincentive effect on climate change adaptation is “small” or “large”. This is also an inherently difficult question because having a “small” versus a “large” effect is subject to interpretation to some extent (i.e., how small is “small”? At what level should I say an effect is “small” or “large”?). The disincentive effect of crop insurance may also differ depending on the particular climate change adaption practice being considered. For example, recent work by Fleckenstein et al. (2020) focused specifically on potential disincentive effect of crop insurance on cover crop adoption – a specific climate change adaptation strategy. Their research, primarily based on survey work and qualitative interviews suggest, that crop insurance is not a barrier to cover crop adoption. However, recent (on-going) work by Connor et al. (2021) based on a statistical analysis of county-level data in Indiana indicate that crop insurance participation may disincentivize cover crop adoption, but they interpret the effect as “small”. In summary, more research is needed in this area to provide an evidence-base of whether the crop insurance disincentive effect is “small” or “large”.
Question 3
The agricultural community has known about the successes of cover crops in addressing several issues related to climate change however, there is a relatively low buy in rate from producers. What are some of the most successful strategies you have seen/employed to increase buy in from farmers?
Rejesus: There has been a number of studies in the general social science and agricultural economics literature that have examined factors that strongly influence cover crop adoption. An interesting recent study by Popovici et al. (2020) summarizes this literature and also conducted a controlled-comparison approach for examining social factors that most strongly influence cover crop adoption (i.e., which provides implications as to what “strategies” may be successful in encouraging more cover crop adoption). Consistent with previous literature, their results indicate that a set of complementary “strategies” may be required (rather than just a single strategy) for further increasing cover crop “buy-in”. Popovici et al (2020) points out that having local community leaders encouraging cover crop adoption, in conjunction with availability and accessibility of technical and financial assistance are key to increasing cover crop adoption. Technical and financial assistance through federal conservation programs (EQIP and CSP), as well as state and local institutions (i.e., universities, and local conservation groups), are important factors for encouraging cover crop usage moving forward. Lastly, a culture of cooperation among the different conservations agencies (e.g., federal, state, and local) and various stakeholder groups (e.g., farmers, extension personnel, researchers) were also found to have a critical role for successful promotion of cover crop use.
Question 4
How would you best measure yield risk? (or what variable could best measure this) How do you differentiate between yield risk and revenue risk?
Rejesus: Yield risk typically refers to the variation in yield outcomes over time (or even over space). Economists typically use the term “yield risk”, while agronomists use the term “yield stability”. In an ideal situation, yield risk is best characterized by having the full distribution of yields over a very long-period of time (and under all possible production conditions). However, using full distributions to describe risk is often cumbersome and so “summary” measures of risk or variability are often used. There are a number of measures that can be used to describe yield risk – variance, standard deviation, coefficient of variation, risk premium, certainty equivalent, cost of risk – and all of these are valid measures. Measures that can capture the features of the yield distribution (e.g., mean, variance, skewness, kurtosis) typically provides good characterizations of risk. Yield risk is different from revenue risk in the sense that revenue is a function of both crop yields and crop prices (i.e., revenue = yield x price).
Question 5
RMA defines good farming practices as those approved by "experts", but also a good farming practice has to not impact historic yields that is the basis of the insurance guarantee... Does this inherently mean that any new practices (cover crops, interseeding) that might adapt to climate change are NOT good farming practices as defined by RMA? How can this be fixed?
Rejesus: We do not necessarily agree with the contention that a good farming practice “has to not impact historic yields that is the basis of the insurance guarantee.” The RMA Good Farming Practice Standards Handbook (p. 11) suggest that a good farming practice “(i) allow the insured crop to make normal progress toward maturity, (ii) produce at least the yield amount that was used to determine the production guarantee or amount of insurance when the crop insurance policy was purchased, (iii) not reduce or adversely affect the yield, or (iv) stand as a generally recognized good farming practice by agricultural experts or organic agricultural experts, depending on the practice, for the area.” So there is enough leeway in the guidelines above such that it does not necessarily say that a particular practice should “not impact yields” and it's not automatic that any new practice will NOT be considered a good farming practice.
References
Annan, F. and W. Schlenker. (2015). “Federal crop insurance and the disincentive to adapt to extreme heat.” American Economic Review. 105(5):262-66.
Connor, L., R.M. Rejesus, M. Yasar. (2021) “Crop insurance participation and cover crop use: Evidence from Indiana county-level data” ARA-AEM Track Session Presentation, 2021 AAEA Meetings, Austin, TX (Aug. 1-3, 2021).
Diffenbaugh, N. S., Davenport, F. V., & Burke, M. (2021). Historical warming has increased U.S. crop insurance losses. Environmental Research Letters, 16(8), 084025. https://doi.org/10.1088/1748-9326/ac1223
Fleckenstein, M., A. Lythgoe, J. Lu, N. Thompson, O. Doering, S. Harden, J.M. Getson, L. Prokopy. (2020). “Crop insurance: a barrier to conservation adoption?” J. of Environmental Management. 276: 1-7.
Perry, E. D., Yu, J., & Tack, J. (2020). Using insurance data to quantify the multidimensional impacts of warming temperatures on yield risk. Nature Communications, 11(1). https://doi.org/10.1038/s41467-020-17707-2
Popovici, R., Bernard, M., Prokopy, L.S. (2020). “The social factors influencing cover crop adoption in the Midwest: A controlled comparison.” Working Paper. West Lafayette: Purdue University. (Available at: https://www.purdue.edu/fnr/prokopy/wpcontent/uploads/2021/03/ TNC_CC_report_final20201130-1.pdf)
Schlenker, W., & Roberts, M. J. (2009). Nonlinear temperature effects indicate severe damages to U.S. crop yields under climate change. Proceedings of the National Academy of Sciences, 106(37), 15594–15598. https://doi.org/10.1073/pnas.0906865106
Tack, J., Coble, K., & Barnett, B. (2018). Warming temperatures will likely induce higher premium rates and government outlays for the U.S. crop insurance program. Agricultural Economics, 49(5), 635–647. https://doi.org/10.1111/agec.12448
Wang, R., Rejesus, R. M., & Aglasan, S. (2021). Warming temperatures, yield risk and crop insurance participation. European Review of Agricultural Economics. https://doi.org/10.1093/erae/jbab034
This program is supported in part by the Agricultural and Applied Economics Association and the US Department of Agriculture’s Economic Research Service, and the National Agricultural Statistics Service.
Those who register but cannot attend our webinar can always view a recording of it later at the council’s YouTube channel.