Does crop insurance attenuate farm financial risk?

Abstract

Purpose

Federally subsidized crop insurance aims to mitigate farm risks of crop producers. A body of literature has examined informational problems under this program. However, few studies empirically link crop insurance participation with farm financial performance. Most use county-level aggregates to argue that crop insurance participation is associated with increased farm financial debt. Using farm-level data, this study provides empirical evidence of crop insurance's effects on farm financial risk.

Design/methodology/approach

The impact of crop insurance on farm financial risks is assessed using farm-level data from Kansas. The sample consists of at least 1,600 farms each year from 2002 to 2015. Financial risks are measured using the probability of falling into the critical zone of five different financial ratios. The study uses two matching estimators to estimate the causal effects of crop insurance participation on farm financial risks. Several alternative empirical approaches account for unobserved heterogeneity and potential endogeneity.

Findings

Crop insurance participation has reduced the farm's likelihood of being in the critical liquidity risk by 8%. This result is robust across matching estimators and alternative specifications to account for unobserved heterogeneity and potential endogeneity.

Originality/value

This is one of the few studies to examine whether crop insurance reduces farm financial risks. This study provides empirical evidence of the extent to which crop insurance enrollment impacts farm financial risks. Findings suggest that crop insurance is critical to maintaining the financial well-being of crop producers, and significantly reduces the likelihood of producers being in a critical liquidity risk.

Citation

Regmi, M., Featherstone, A.M. and Tack, J. (2023), "Does crop insurance attenuate farm financial risk?", Agricultural Finance Review, Vol. 83 No. 4/5, pp. 635-654. https://doi.org/10.1108/AFR-01-2023-0003