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Abstract
Crop yield and revenue insurance products with coverage based on actual production history
(APH) yields dominate the U.S. Federal Crop Insurance Program. The APH yield, which plays a
critical role in determining the coverage offered to producers, is based on a small sample of
historical yields for the insured unit. The properties of this yield measure are critical in
determining the value of the insurance to producers. Sampling error in APH yields has the
potential to lead to over-insurance in some years and under-insurance in other years. Premiums,
which are in part determined by the ratio of the APH yield to the county reference yield, are also
affected by variations in APH yields. Congress has enacted two measures, yield substitution and
yield floors, that are intended to limit the degree to which sampling error can reduce the
insurance guarantee and producer welfare. We examine the impact of sampling error and
related policy provisions for Texas cotton, Kansas wheat, and Illinois corn. The analysis is
conducted using county level yield data from the National Agricultural Statistics Service and
individual insured-unit-level yield data obtained from the Risk Management Agency’s insurance
database. Our findings indicate that sampling error in APH yields has the potential to reduce
producer welfare and that the magnitude of this effect differs substantially across crops. The
yield substitution and yield floor provisions reduce the negative impact of sampling error but
also bias guarantees upward, leading to increased government cost of the insurance programs.