Files
Abstract
Purpose – The paper considers how the Federal crop insurance program influences farm debt use, one of the key
financial decisions made by farm operators.
Design/methodology/approach – Using data from the nationally-representative Agricultural Resource Management
Survey, the paper implements a propensity score matching model of the impact of Federal crop insurance
participation on various measures of farm business debt use. To account for the simultaneity of financial decisions,
the paper further tests this relationship using a seemingly unrelated regression model.
Findings – Federal crop insurance participation is associated with an increase in use of short term farm debt, but not
long term debt, consistent with risk balancing behavior and current trends in the farm sector.
Research limitations/implications –In addition to risk balancing, the results are also consistent with credit constraints
or lender preferences. The paper cannot fully establish causality between crop insurance participation and short term
debt levels. Future research should address these limitations.
Practical implications – Agricultural lending standards are generally conservative and the farm sector as a whole
currently has historically low leverage, which implies that an increase in debt use may not be a threat to the financial
health of the farm sector.
Social implications – The results indicate that the reduction in total risk facing the farm sector is significantly less than
the decline in risk provided by Federal crop insurance, which is an important consideration for policymakers.
Originality/value – This is the first paper to use an econometric model to analyse the relationship between federal
crop insurance and farm debt use decisions. This paper can inform future research on the Federal crop insurance
program and farm financial decisions.