Three essays on farm policy and agricultural finance

Partially justified by the objectives of ensuring a safe and stable food supply and providing a resilient production environment, U.S. agricultural policy has been rather important for both consumers and producers. Agricultural policy, also known as farm policy, generally follows a 5-year legislative cycle of “Farm Bill” which governs broad range of agricultural and food program areas. Understanding how farm policy works and the impact under different farm bills helps agricultural sectors to manage their business more efficiently. It also provides useful information for policy makers to address relevant issues regarding agricultural and food systems in the future farm bills. These three essays therefore apply econometrics methods and simulation techniques to answer key issues on farm and risk management regarding commodity program and crop insurance programs under different farm bills. The first essay revisits the question regarding who really benefits from federal support government subsidies. While subsides are paid directly to farmers, landlords may capture a portion of the benefits through increased farmland rental rates. A panel fixed effect model is used with farm-level data from Illinois to estimate the incidence of government subsidies on cash rental rates. We also investigate how estimated incidence rates might vary under different government program designs and farm income environments. Consistent with previous work, the results suggest there is a positive relationship between cash rental rates and government payment levels. However, consistent with previous work in the area, the extent to which government payments are passed through to rental rates, or the level of incidence, varies across time and modeling specifications. Results imply that landowners may capture a greater portion of government payments during periods of higher farm income and when government payments levels are more certain. Asymmetric information and payment uncertainty are potential explanations for why only a share of government payments accrues to landowners. In the 2014 Farm Bill, new shallow loss area insurance coverage options with higher coverage protection were added. Starting with the 2021 crop year, a new supplemental area insurance program with even higher coverage option has been introduced as well. Since these area plans are triggered based on losses at county level, indemnities may not always match losses experienced at the farm-level, resulting in what is often referred to as basis risk. Therefore, to better understand potential impacts on farmers’ risk exposure under these new crop insurance programs, the second essay utilizes simulation techniques to build a stylized county-level crop revenue model to assess the basis risk and risk reduction of one of the recently introduced supplemental area plans – the Supplemental Coverage Option (SCO). The results show increasing the coverage level of the supplemental area plan reduces the likelihood of under-compensation (insufficient payments from area plans to cover farm-level losses), but increases the likelihood of over-compensation (indemnity payments from the area plan will be larger than what is needed to fully cover farm-level losses). We also find of the magnitude of basis risk associated with the supplemental area plan differs across regions. Supplemental area plans do have the potential to provide additional risk reduction; however, the level of risk reduction is inversely proportional to the level of basis risk. One concern which has been raised since the introduction of the supplemental area plans is whether farmers will make changes to their existing insurance coverage. Specifically, questions exist over whether farmers might choose to reduce, or “buy down” their individual coverage and purchase the new supplemental area plans to cover the band of coverage created by the reduction. Such behavior might result in inferior risk coverage for farmers (due to basis risk) that is more costly to taxpayer to deliver (due to the marginal differences in subsidy rates across the individual and area insurance plans). The third essay thus extends the second essay to examine whether there is empirical evidence of this buy down behavior. An endogenous switching regression approach is employed to address potential selection bias and unobserved factors in crop insurance enrollment decisions observed in the aggregate at the county level using data from the Risk Management Agency of the USDA. The results provide mixed evidence of buy down behaviors. We find a buy down effect of up to 4% on for insured corn acreage, but no evidence of any buy down effect for insured soybean acreage.

Name thesis:degree_name

Ph.D.

Level thesis:degree_level

Dissertation

Discipline thesis:degree_discipline

Agricultural & Applied Econ

Grantor

University of Illinois at Urbana-Champaign

Year dc:date

2022

Author dc:creator

• Tsay, Juo-Han

Contributors dc:contributor

• Paulson, Nicholas D
• Schnitkey, Gary Donald
• Janzen, Joe
• Kuethe, Todd

• agricultural policy
• agricultural finance
• risk management
• crop insurance
• cash rent

Statement dc:rights

• Copyright 2022 Juo-Han Tsay

Language dc:language

en, eng

Handle dc:identifier

https://hdl.handle.net/2142/116183

OAI record oai:identifier

https://www.ideals.illinois.edu/oai-pmh?verb=GetRecord&metadataPrefix=etdms&identifier=oai%3Awww.ideals.illinois.edu%3A2142%2F116183