Implication of 2014 Farm Policies for Wheat Production

We develop a model to comprehensively analyze the effects of 2014 Farm Bill wheat policies---loan deficiency payments (LDP), price loss coverage (PLC), agriculture risk coverage-county (ARC-CO), individual revenue protection crop insurance (RP), and supplemental coverage option (SCO)---on input use, yield, certainty equivalent, optimal RP insurance coverage level, expected payments, and premiums. The comparative static results show the directional impact of the coupling, wealth, and insurance effects for each policy. We calibrate the model to a representative dryland wheat farm in Kansas. The simulation results show that the expected LDP payment is zero for 2014, RP causes input use and yield to decline, and ARC-CO, PLC, and SCO result in higher input use and yield. Thus, both the theoretical and empirical results provide evidence of moral hazard associated with RP and SCO insurance. If the farmer selects only RP insurance, then the optimal coverage level is 85%, but drop to 50% if SCO is added. Based on certainty equivalent analysis, the optimal policy combination is RP with ARC-CO. The results also provide evidence that farmers would opt for crop insurance programs even without premium subsidies.

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JEL Codes:
Q18; Q12; D24

 Record created 2017-04-01, last modified 2019-08-30

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