J. Roy Black

Designing and Rating an Area Yield Crop Insurance Contract

This article documents the design and rate-making procedures used in the development of the Group Risk Plan (GRP)—the new federal crop insurance product that insures based on area yield. The authors of this article worked closely with personnel in the Federal Crop Insurance Corporation and others in developing methodological and practical constraints needed in implementing a workable area yield contract. GRP indemnity payments are made based on percentage shortfalls in actual county yields relative to a forecasted yield. Historical county yield data are used to develop forecasted yields and premium rates. Copyright 1997, Oxford University Press.

The Effects of Crop Yield Insurance Designs on Farmer Participation and Welfare

The performance of individual farm yield and area yield crop insurance programs is evaluated for a representative Iowa corn farm using numerical optimization of expected utility and simulation techniques. Several different contract design features are studied, including the nature of the yield index which triggers insurance payouts, alternative restrictions on coverage levels, and alternative pricing structures. Performance is evaluated in terms of impacts on farmer participation and welfare and is examined in a portfolio setting where futures and options are also available to farmers. The relative performance of different crop insurance designs is found to be particularly sensitive to restrictions on coverage levels, the size of premium loadings, and the degree to which individual farm yields are correlated with area yields. Copyright 1998, Oxford University Press.

Optimal Adoption Strategies for No-Till Technology in Michigan

No-till technology has been heavily promoted as a method for reducing soil erosion and production costs, but adoption has been slower than proponents expected. No-till technology excludes any pre-plant tillage and can reduce soil erosion by 80 to 90 percent compared to conventional tillage (Griffith, Mannering, and Box). The no-till system has also been promoted because it greatly reduces labor requirements, machinery operating costs, and machinery fixed costs in comparison to both conventional tillage and other conservation tillage systems. Furthermore, by conserving more soil moisture, the no-till system can provide crop yields that are equal to or greater than those from conventional tillage on well-drained soils in the U.S. corn belt (Mannering and Amemiya). Although the no-till system usually increases herbicide costs, most budget comparisons (e.g., Klemme; Siemens and Oschwald; Doster et al.) indicate that if crop yields for no-till are equal to or greater than those for conventional tillage, the no-till system provides higher net revenues. The United States Department of Agriculture predicted in 1974 that no-till would be used on 45 percent of U.S. planted cropland by the year 2000 (Phillips et al.). However, the proportion of acreage planted with no-till only increased from 1.7 percent in 1974 (Phillips et al.) to 3.3 percent in 1983, then to 4.4 percent in 1989 (United States Department of Agriculture). No-till adoption has accelerated since 1989, with the proportion of acreage planted with no-till increasing to 6.0 percent in 1990 and 9.9 percent in 1992 (United States Department of Agriculture). No-till adoption in Michigan has been retarded by the lack of a statistically significant increase in crop yields under no-till on common soil types (Hesterman, Pierce, and Rossman). Michigans relatively cool temperatures in May and June retard early crop growth, and surface crop residues further reduce soil temperatures. However, no-till crop yields on sandy soils in southern Michigan are approximately equal to crop yields for conventional tillage. Surface crop residues conserve soil moisture, which usually favors crop growth on sandy soils and compensates for reduced soil temperature. The proportion of acres planted with no-till in Michigan increased from 2.3 percent of planted acres in 1983 to 10.5 percent in 1990 (Conservation Technology Information Center). Previous economic analyses have suggested that adoption of conservation tillage is reduced by small acreage (Lee and Stewart 1983; Rahm and Huffman), limited education (Rahm and Huffman), and risk aversion (Mikesell, Williams, and Long; Weersink et al.). Other economic analyses have suggested that adjustment costs for the change from conventional tillage to conservation tillage may delay adoption. Adjustment costs include the cost of replacing current machinery with new machinery and learning how to use the new technology to obtain high crop yields as efficiently as possible. Epplin et al. found that optimal machinery replacement strategies would delay the adoption of a conservation tillage system for wheat production in Oklahoma if the conventional tillage machinery was more than three years old. Smith and Hallam found that the optimal strategy for common Iowa soils is to keep conventional tillage machinery until replacement is required and then purchase minimum tillage machinery. The association between limited acreage and education with non-adoption supports the Mark A. Krause is an Assistant Professor, North Dakota State University; and J. Roy Black is a Professor, Michigan State University. Financial support for this research was provided by the Michigan State Agricultural Experiment Station.

Some Evidence on Weather-Crop-Yield Interaction

The nature of crop yield variation can have significant effects on agricultural price stability. For instance, during periods when grain reserves are low, prices are determined largely by crop yields which, in the short run, are primarily determined by weather. The identification of a systematic relationship between weather and crop yields would have significant implications for agricultural policy. Thus, the purpose of this analysis is to test for the existence of nonrandom corn, soybean, and wheat yields by examining some relationships between climatological events and crop yields. Numerous attempts have been made to assess whether crop yields are random. Twenty-five years ago, Foote and Bean examined U.S. corn yields, finding no evidence of nonrandomness. Sharpies found that corn yields during the increasing half of both the single and the double sunspot cycle were not significantly different from yields during the remainder of the cycle. Luttrell and Gilbert investigated the alternative hypothesis that crop yields are either random, cyclical, or bunchy. Their statistical analysis showed little evidence of nonrandomness for the period 1866 to 1932. For the period after 1932, however, there was evidence of autocorrelation; this was attributed to the uneven adoption of hybrid seed and the uneven application rates of fertilizer.

Incorporating Environmentally Compliant Manure Nutrient Disposal Costs into Least-Cost Livestock Ration Formulation

Livestock rations are formulated to minimize feed cost subject to nutritional requirements for a target performance level, which ignores the potentially substantial cost of disposing of nutrients fed in excess of nutritional requirements. We incorporate nutrient disposal costs into a modified least-cost ration formulation model to arrive at a joint least-cost decision that minimizes the sum of feed and net nutrient disposal costs. The method is demonstrated with phosphorus disposal costs on a representative dairy farm. Herd size, land availability and proximity, crop rotation, and initial soil phosphorus content are shown to be important in determining phosphorus disposal costs.

Cooperatives and Capital Markets: The Case of Minnesota-Dakota Sugar Cooperatives

products. The remainder of the article considers an important implementation issue related to one of the alternatives being considered by the cooperatives. Segmenting of yield risk into systemic (spatially correlated) and independent components-a concept discussed in the Skees and Zeuli companion papers-is demonstrated. This example draws on information from focus groups with cooperative members and processing plant managers, yield data maintained by the cooperatives, and analyses of selected issues raised by the focus groups (Black, Black and Hu).

Upper Midwest dairy farm revenue variation and insurance implications.

Purpose - The purpose of this paper is to examine the sources and magnitude of variation in accrual adjusted gross farm revenue and farm revenue net of feed purchases on Michigan dairy farms representative of Upper Midwest dairy farms. The paper aims to assess whether adjusted gross revenue-type insurance instruments meet insurability conditions when applied to dairy farms. Design/methodology/approach - Accrual adjusted dairy farm revenue and revenue net of feed purchased from Michigan dairy farm panel data from 1995 through 2006 were detrended and summarized. Variance decomposition was used to identify sources of variation in adjusted gross revenue and adjusted gross revenue less feed purchases. In-sample insurance premiums were estimated and Monte Carlo simulations were used to adjust these premiums for out-of-sample considerations. Findings - Milk price variation was the largest source of variation while milk production per cow varied little. Farms with smaller herds and those with larger percentages of farm revenue from crop sales had higher relative revenue variability and would trigger a higher frequency of indemnities under a whole farm revenue insurance contract. Research limitations/implications - Because the data analyzed conclude in 2006, the volatility of the past couple of years is not reflected. Therefore, researchers are encouraged to test the proposed insurance feasibility further with more recent data. Practical implications - The paper addresses considerations for the development and commercialization of a feasible dairy revenue insurance instrument. Originality/value - This paper fulfils a need to understand magnitude and source of revenue variation on dairy farms and how insurance might mitigate negative consequences of this variation.

An examination of US consumer pet-related and veterinary service expenditures, 1980–2005

OBJECTIVE To evaluate US consumer expenditures for veterinary services, pets-pet supplies, and pet-related services. DESIGN Retrospective economic analysis. SAMPLE POPULATION US consumers from 1980 through 2005. PROCEDURES Descriptive statistics and probit regressions were calculated. RESULTS From 1980 to 2005, total inflation-adjusted expenditures on pet-related and veterinary services increased, as did the percentage of households with a pet-related expenditure. The percentage of households with veterinary service expenditures was fairly constant. Among households with a pet-related expenditure, the percentage purchasing veterinary services decreased. The probability for pet-related and veterinary service expenditures increased with income, education, and family size and was higher for household heads who were white, were married, owned their residence, and lived in a rural area. CONCLUSIONS AND CLINICAL RELEVANCE Overall spending on veterinary services increased substantially, providing no indication that successful practices should change strategy. Households that spent money on veterinary services increased their spending sufficiently to exceed the loss of income for veterinarians associated with the increasing proportion of pet-owning households that did not spend anything on veterinary services. Because the probability of veterinary service expenditures was strongly related to household income, caution is suggested in planning provision of veterinary services when incomes are constrained. Among households with pet-related expenditures, the decreasing percentage of households with veterinary service expenditures suggests a growing proportion of pet owners who are not having their veterinary service needs met. Because non-white households were less likely to purchase veterinary services, the veterinary profession cannot afford to delay efforts to enhance diversity and cultural competence.

Incentive compatibility in risk management of contagious livestock diseases

One of the most difficult challenges in designing mechanisms that address the risks posed by contagious livestock disease is the potential conflict between encouraging producer herd health management and biosecurity measures while maintaining incentives for early disclosure of suspected health problems. This chapter addresses the importance of the incentives present in the livestock production and animal health systems. When considering the design of policy and market instruments, the focus must be on incentive compatibility as a major determinant of the potential success or failure. Producers face multiple objectives in the course of managing their farms or ranches and must strike a balance between production, financial obligations and animal health. While this book is about systems that involve both the public and private sector for improving risk management and livestock disease management, a key to the success of designing such mechanisms must involve full recognition of the sometimes competing incentives that influence individual producer behaviour. The intent of this chapter is not to propose specific solutions to address incentive compatibility in livestock disease management, but rather to clearly emphasize the importance of incentives when designing animal health policy or risk management instruments. An underlying theme and concern is that improperly designed livestock insurance solutions could increase the disease risk problem for the entire sector. Livestock disease has great potential to cause widespread economic damages. If the individual producer incentives are not considered when designing regulations, offering government disaster payments or developing insurance products, the result could be a weakening of the animal health system that worsens the effect of an outbreak. This chapter focuses specifically on those diseases with the greatest potential to cause widespread or systemic losses. Animal diseases with the potential to cause a range of socioeconomic problems or public health consequences are classified by the Office International des Epizooties (OIE is also known as the World Organization for Animal Health) as either List A or List B diseases. Unless otherwise noted, all reference to animal disease in this chapter refers to List A diseases, where risk of transmission is irrespective of national borders. Included in this category are diseases such as Foot and Mouth Disease (FMD), Classical Swine Fever (CSF), Newcastle disease and highly-pathogenic avian influenza.

Utilizing Contingent Claims to Improve the Management of CAFOs

We propose a market-based approach to reducing the environmental risk posed by concentrated animal feeding operations (CAFOs). The dual problems of hidden information and hidden action faced by policymakers are considered alongside the competing incentives faced by the CAFO manager in a multiple principal-agent setting. A new approach that uses insurance-like contracts is introduced by use of the specific example of a swine operation with a lagoon-based manure management system. Index-based contingent claims contracts in tandem with third-party auditing and waste hauling options are introduced as a complement to regulatory frameworks designed to reduce negative externalities from production.