• TABLE OF CONTENTS
HIDE
 Front Cover
 Title Page
 Acknowledgement
 Table of Contents
 List of Tables
 List of Figures
 Introduction
 Review of literature
 History of all-risk crop insur...
 Management concepts
 Procedure for the study
 Analysis of field survey resul...
 Supplemental studies and findi...
 Summary and conclusions






Group Title: Economic appraisal of all-risk crop insurance in North Dakota
Title: An economic appraisal of all-risk crop insurance in North Dakota
CITATION PAGE IMAGE ZOOMABLE PAGE TEXT
Full Citation
STANDARD VIEW MARC VIEW
Permanent Link: http://ufdc.ufl.edu/UF00055286/00001
 Material Information
Title: An economic appraisal of all-risk crop insurance in North Dakota
Physical Description: xi, 148 leaves : charts, maps ; 28 cm.
Language: English
Creator: Delvo, Herman W.
Publication Date: 1965
 Subjects
Subject: Crop insurance -- North Dakota   ( lcsh )
Genre: bibliography   ( marcgt )
non-fiction   ( marcgt )
 Notes
Thesis: Thesis (M.S.)--North Dakota State University, 1965.
Bibliography: Includes bibliographical references (leaves 147-148).
Statement of Responsibility: by Herman William Delvo.
General Note: Typescript (photocopy).
Funding: Electronic resources created as part of a prototype UF Institutional Repository and Faculty Papers project by the University of Florida.
 Record Information
Bibliographic ID: UF00055286
Volume ID: VID00001
Source Institution: University of Florida
Holding Location: University of Florida
Rights Management: All rights reserved by the source institution and holding location.
Resource Identifier: oclc - 10080384

Table of Contents
    Front Cover
        Front Cover
    Title Page
        Page i
        Page ii
    Acknowledgement
        Page iii
    Table of Contents
        Page iv
        Page v
        Page vi
    List of Tables
        Page vii
        Page viii
        Page ix
    List of Figures
        Page x
        Page xi
    Introduction
        Page 1
        Characteristics of the Great Plains
            Page 2
            Climate
                Page 2
                Page 3
            Soils
                Page 4
            Natural vegetation
                Page 4
        Crop variability
            Page 5
        Settlement
            Page 6
        Need for research on risk
            Page 7
            Great Plains
                Page 7
            Need for all risk crop insurance research
                Page 8
                Page 9
            North Dakota's need for research
                Page 10
            Objections
                Page 10
                Page 11
            General procedure
                Page 12
    Review of literature
        Page 13
        Page 14
        Page 15
        Page 16
        Page 17
        Page 18
    History of all-risk crop insurance
        Page 19
        National basis
            Page 19
            Page 20
        Experience of private insurance corporations
            Page 21
        Development of the federal crop insurance program
            Page 22
            Page 23
            Experience since 1948
                Page 24
                Page 25
                Page 26
                Page 27
            Causes of indemnities
                Page 28
                Page 29
                Page 30
            Description of FCI programs
                Page 31
                Page 32
        History of all-risk crop insurance in North Dakota
            Page 33
            Program from 1939-1947
                Page 33
                Page 34
            Program from 1948-1963
                Page 35
                Page 36
                Page 37
                Page 38
                Page 39
                Page 40
                All-risk protection
                    Page 41
                    Page 42
                    Page 43
                    Page 44
                    Page 45
                Average cost of all-risk crop insurance
                    Page 46
                    Page 47
    Management concepts
        Page 48
        Role and functions of management
            Page 48
            Page 49
            Page 50
        Risk and uncertainty
            Page 51
            Page 52
            Page 53
            Page 54
        Management strategies
            Page 55
            Extension of the Friedman-Savage analysis of the choices involving risk to agriculture
                Page 56
                Diminishing marginal utility and the purchase of insurance
                    Page 57
                    Page 58
                    Page 59
                    Page 60
                    Page 61
    Procedure for the study
        Page 62
        Index of risk
            Page 62
            Average yield per acre
                Page 62
            Estimating equation
                Page 63
            Standard error of estimate
                Page 64
                Page 65
            Partial index of risk
                Page 66
            Aggregate index of risk
                Page 66
        Risk areas
            Page 67
            Page 68
            Historical production data
                Page 69
            Indices of risk
                Page 69
                Page 70
        Field survey
            Page 71
            Page 72
            Page 73
    Analysis of field survey results
        Page 74
        General farm information
            Page 75
            Page 76
            Page 77
            Page 78
            Page 79
            Page 80
        Crop production
            Page 81
            Average yield and production expenses per acre
                Page 81
                Page 82
                Page 83
            Yield variability
                Page 84
                Page 85
            Natural hazards
                Page 86
                Page 87
        Livestock production
            Page 88
        Attitude of farmers concerning the all-risk crop insurance program
            Page 89
            Page 90
            Page 91
            Page 92
            Page 93
            Reasons for carrying and dropping all-risk crop insurance
                Page 94
            Indemnities
                Page 95
                Page 96
            Coverage of 1963 crop
                Page 97
                Page 98
            Multiple crop insurance
                Page 99
            Improvement of the all-risk crop insurance program
                Page 100
                Page 101
                Page 102
            Farmer's ranking of selected factors affecting participation in all-risk crop insurance
                Page 103
                Kendall's concordance coefficient (W)
                    Page 104
                    Page 105
                Sperman's rank difference analysis
                    Page 106
                    Page 107
                    Page 108
    Supplemental studies and findings
        Page 109
        All-risk crop insurance versus Hail Insurance
            Page 109
            Page 110
            Page 111
            Comparison of premiums
                Page 112
                Page 113
                Page 114
                Page 115
                Page 116
        Federal crop insurance coverage versus average production expenses
            Page 117
            Page 118
            Page 119
            Page 120
            Page 121
            Page 122
            Page 123
            Page 124
            Page 125
    Summary and conclusions
        Page 126
        Summary
            Page 126
            Page 127
            Page 128
        Conclusions
            Page 129
            Page 130
            Page 131
        Tables
            Page 132
            Page 133
            Page 134
            Page 135
            Page 136
            Page 137
            Page 138
            Page 139
            Page 140
            Page 141
            Page 142
            Page 143
            Page 144
            Page 145
        Bibliography
            Page 146
            Page 147
            Page 148
Full Text






Fopo



AN ECONOMIC APPRAISAL OF ALL-RISK CROP INSURANCE

IN NORTH DAKOTA



A Thesis
Submitted to the Graduate Faculty
of the:
North Dakota State University
of Agriculture and Applied Science





By

Herman William Delvo


In Partial Fulfillmeuntof the Requiretnents
for the Degree of
Master of Science


June, 1965


Fargo, North Dakota

















AN ECONOMIC APPRAISAL OF ALL-RISK CROP INSURANCE


IN NORTH DAKOTA



A Thesis
Submitted to the Graduate Faculty
of the
North Dakota State University
of Agriculture and Applied Science





By

Herman William Delvo


In Partial


Fulfillment of the Requirements
for the Degree of
Master of Science


June, 1965


Fargo, North Dakota






























This thesis is approved by:


Laurel D. Loftsgard, Advisor


(date)


Fred R. Taylor, Chairman
Department of Agricultural Economics


(date)














ACKNOWLEDGMENTS


Sincere gratitude is expressed to Dr. Fred R. Taylor and the entire

staff of the Department of Agricultural Economics for the assistance pro-

vided throughout my graduate study.

Special appreciation is expressed to Dr. Laurel D. Loftsgard, my

advisor, for his immediate supervision while conducting this study.

Sincere appreciation is also extended to Mr. Donald E. Anderson for

reviewing this manuscript and offering suggestions to improve this thesis.

Thanks are also extended to Dr. David E. Eustice for assistance with

the statistical analysis and to Mr. Donald E. Peterson for writing the

Index of Risk program for the computer.

Appreciation is extended to Mr. Harold G. Schonberger, State

Director, and North Dakota Federal Crop Insurance Corporation personnel for

their assistance in obtaining the data for this study.

This thesis is dedicated to my wife Paula for her understanding and

encouragement throughout my graduate studies.


H.W.D.











TABLE OF CONTENTS


CHAPTER PAGE

I. INTRODUCTION . . . . . .. 1

Characteristics of the Great Plains. . . 2

Climate. . . ....... .. 2
Soils. . . ........ . 4
Natural Vegetation . . . ... ... 4

Crop Variability . . . . ... 5
Settlement . . . . . . 6
Need for Research on Risk. . . . . 7

Great Plains . . . ... .. ... 7
Need for All-Risk Crop Insurance Research. .. . 8
North Dakota's Need for Research . . 10
Objectives . . . . ... 10
General Procedure. . . .. . ... 12

II. REVIEW OF LITERATURE . . . . 13

III. HISTORY OF ALL-RISK CROP INSURANCE . . . 19

National Basis . . . . .. .. 19
Experience of Private Insurance Corporations ....... 21
Development of the Federal Crop Insurance Program. .. 22

Experience Since 1948s . . .. . 24
Causes of Indemnities. ..... .. . ... 28
Description of FCI Programs. . . ...... 31

History of All-Risk Crop Insurance in North Dakota . 33

Program from 1939-1947 . . . ... 33
Program from 1948-1963 . . . . 35

All-Risk Protection. ... . . .. 46
Average Cost of All-Risk Crop Insurance. ....... ... 46

IV, MANAGEMENT CONCEPTS. . . ..... *. 48

Role and Functions of Management . . .. 48
Risk and Uncertainty . ..... . 51
Management Strategies. .................. 55













CHAPTER


Extension of the Friedman-Savage Analysis of
Choices Involving Risk to Agriculture. .


Diminishing Marginal Utility
of Insurance . .


and the Purchase


V. PROCEDURE FOR THE STUDY. .... . ... .

Index of Risk. . . . . . .


Average Yield Per Acre .
Estimating Equation. . .
Standard Error of Estimate .
Partial Index of Risk. ...
Aggregate Index of Risk .. .


Risk Areas . . . . . ..


Historical Production Data .
Indices of Risk ... . .


Field Survey . .. .


VI. ANALYSIS OF FIELD SURVEY RESULTS . ...


General Farm Information .
Crop Production. . .


Average Yield and Production Expenses Per Acre
Yield Variability. . . . .
Natural Hazards. . .. . . .


Livestock Production . . . . .
Attitudes of Farmers Concerning the All-Risk
Crop Insurance Program . . . . .

Reasons for Carrying and Dropping All-Risk Crop
Insurance. . . . . .
Indemnities. . . . . . .
Coverage for the 1963 Crop . . .
Multiple Crop Insurance. . . . ..
Improvement of the All-Risk Crop Insurance ....
Farmers' Ranking of Selected Factors Affecting
Participation in All-Risk Crop Insurance . .

Kendall's Concordance Coefficient (W)... . .
Sperman's Rank Difference Analysis . . .


PAGE


. ,


. .


. . .






. . . .

























CHAPTER

VII. SUPPLEMENTAL STUDIES AND FINDINGS. . . .

All-Risk Crop Insurance Versus Hail Insurance. ....

Comparison of Premiums . . .. . .

Federal Crop Insurance Coverage Versus Average
Production Expenses. . ... . .

VIII. SUMMARY AND CONCLUSIONS. . . . . .


Summary. . . .. .. ..
Conclusions. . ... ... .

APPENDIX .. .. . ...

BIBLIOGRAPHY ..... . . .


PAGE

109

109

112


117

126

126
129

132

146



















LIST OF TABLES


TABLE PAGE

1. Experience of FCIC Wheat-Yield Insurance for 1939, 1940,
and 1941. . . . . ... . .. 23

2. Loss Ratio, by Type of Program and Crop Year on a National
Basis, 1948-1963. . . .. . . 29

3. Actuarial Table for the 1947 Wheat Crop Insurance Program
for Golden Valley and Ramsey Counties in North Dakota 36

4. Price Selection Per Bushel by Crop for North Dakota, 1963 41

5. Protection Provided and Reserve Accumulated by the Federal
Crop Insurance Program in North Dakota, 1948-1963 .. 42

6. Indemnity As a Per Cent of the Liability in North Dakota,
by Crop and Year, for the Period 1948 to 1963 . .. 43

7. Loss Ratio in North Dakota, by Crop and Year, for the
Period 1948 to 1963 .. . . . . 45

8. Premiums As a Per Cent of the Liability in North Dakota, by
Crop and Year, for the Period 1948 to 1963. . 47

9. Physical and Economic Characteristics of Farms Included in
the Survey, by Risk Area. . .. . 76

10. Estimated 1962 Nonfarm and Gross Farm Income of Farms
Included in the Survey, by Risk Area. . . ... 79

11. Average Yield and Production Expenses for the Counties
Included in the Field Survey, by Crop . ... 82

12. Farmers' Responses to Question Concerning Their Usual
Yields and Production Expenses, by Risk Area. . ... 83

13. Farmers' Responses to Questions Concerning Yield Variability
of Crops, by Risk Area. . . . ... 85

14. Farmers' Rankings of Natural Hazards Which Affect Crop
Yields. .......... . . 86

15. Federal Crop Insurance Indemnities Paid to North Dakota
Farmers, by Crop and Cause of Loss, 1948 to 1963. 87


vii











TABLE


16. Farmers' Responses to Questions Concerning the Procedures
of the Federal Crop Insurance Program in North Dakota .

17. Number of Indemnities Received and Years of Participation
in Federal Crop Insurance, by Risk Area . . .

18. Coverage that Participators Had and Nonparticipators Would
Have Taken in 1963 .. . . . .

19. Comparison of Premiums for Multiple and Separate Crop
Insurance, in Barnes County, North Dakota, 1963 . .

20. Farmers' Responses to Alternative Insurance Programs. .

21. Concordance Coefficients for the Ranking of Factors
Affecting Participation in Federal Crop Insurance .

22. Level of Confidence in Accepting or Rejecting Null
Hypothesis for the Concordance Coefficients . .

23. Ranking of the Factors Affecting Participation in Federal
Crop Insurance, by Participators and Nonparticipators .


Appendix Tables


1. Dollar Coverages Per Acre With Associated
and Average Production Costs for Spring
fallow in North Dakota, by Counties and
Counties, 1963. . . .

2. Dollar Coverages Per Acre With Associated
and Average Production Costs for Spring
Continuous Cropping in North Dakota, by
Areas Within Counties, 1963 .

3. Dollar Coverages Per Acre With Associated
and Average Production Costs for Spring
Dakota by Applicable Counties and Areas
1963 . . . .


Bushel Guarantee
Wheat on Summer-
Areas Within


Bushel Guarantee
Wheat on
Counties and


Bushel
Barley
Within


4. Dollar Coverages Per Acre With Associated Bushel
and Average Production Costs for Flax in North
Applicable Counties and Areas Within Counties,


Guarantee
in North
Counties,


Guarantee
Dakota by
1963 .


viii


PAGE











TABLE


PAGE


5. Dollar Coverages Per Acre With Associated Bushel Guarantee
and Average Production Costs for Oats in North Dakota by
Applicable Counties and Areas Within Counties, 1963 144











LIST OF FIGURES


FIGURE PAGE

1. Various Natural Boundaries of the Great Plains. . 3

2. Average Proportion of Eligible Farmers Participating in the
All-Risk Crop Insurance Program in North Dakota, by
County, 1959 to 1961. . . . . ... 11

3. Number of Federal Crop Insurance Corporation County
Programs, 1948-1963. . . . ... 25

4. Premiums and Indemnities for All Programs on a National
Basis, 1948-1963. . . . ..... 27

5. Proportion of All FCI Indemnities Paid for Various Hazards,
1948-1963 . ........ . ... ... 30

6. Counties in Which Various Federal Crop Insurance Programs
Were Available in North Dakota, 1963. ........ 38

7. Management Situations Concerning Decisions and Actions. 50

8. Types of Economic Uncertainties . . .. 52
.-1
9. Utility Analysis of Choices Involving Risk Showing a
Preference for Certainty. .............. 58

10. Hypothetical Utility Curves for Two Individuals Showing a
Preference for Certainty. ..... . . 59

11. Graphic Illustration of the Way Insurance is Purchased. 61

12. Areas With Homogenous Risk in Crop Production and Associ-
ated Soils in North Dakota, 1963. . . . 68

13. Aggregate Index of Crop Production Risk in North Dakota, by
County, Based on Crop Yields from 1931 to 1963 Inclusive. 70

14. Partial Indices of Risk in North Dakota, by Crop and
County, Based on Crop Yields from 1931 to 1963 Inclusive. 72

15. Hail Insurance Rates for Wheat, Flax, and Oats in North
Dakota, by County, 1963 . . . 111













16. FCI Premiums for Wheat on Summerfallow in North Dakota
Expressed as a Per Cent of the Coverage, by County and
Areas Within Counties, 1963 . . . 113

17. FCI Premiums for Wheat Under a Continuous Cropping Practice
in North Dakota Expressed as a Per Cent of the Coverage,
by County and Areas Within Counties, 1963 . . 113

18. FCI Premiums for Flax in North Dakota Expressed as a Per
Cent of the Coverage, by County and Areas Within
Counties, 1963. . . . . 115

19. FCI Premiums for Oats in North Dakota Expressed as a Per
Cent of the Coverage, by County and Areas Within
Counties, 1963 .. . . . . 115

20. Hail Insurance Rates for Barley in Selected North Dakota
Counties, 1965. . .... . . 116

21. FCI Premiums for Barley in North Dakota Expressed as a Per
Cent of the Coverage, by County and Areas Within
Counties, 1963 ... .. . . .. . 116

22. Price Selection Per Bushel That Covers Average Production
Costs Per Acre for Spring Wheat on Summerfallow in North
Dakota, 1963. . . . . .. 118

23. Price Selection Per Bushel That Covers Average Production
Costs Per Acre for Spring Wheat Under Continuous Cropping
in North Dakota, 1963 . .. . . 119

24. Price Selection Per Bushel That Covers Average Production
Costs Per Acre for Spring Barley Under Continuous
Cropping in North Dakota, 1963. . . .. 120

25. Price Selection Per Bushel That Covers Average Production
Costs Per Acre for Spring Barley on Summerfallow in North
Dakota, 1963 ........ . . . 121

26. Price Selection.Per Bushel That Covers Average Production
Costs Per Acre for Flax in North Dakota, 1963 . 122

27. Price Selection Per Bushel That Covers Average Production
Costs Per Acre for Oats in North Dakota, 1963 . 123


FIGURE


PAGE











CHAPTER I


INTRODUCTION


The keynote of North Dakota and Great Plains agriculture is "vari-

ability." Both climate and soils vary considerably, even within small

areas. This condition gives rise to wide fluctuations in crop yields and,

subsequently, to variations in prices and farm income. The soils are

generally high in native fertility and respond readily to commercial

fertilizers. Of the climatic factors, precipitation is the most important.

It is light and extremely variable, which impedes or precludes the estab-

lishment of a stable agricultural economy.1

Through the years, Great Plains farmers have adopted new strategies

and precautions in their attempts to reduce production variability and

stabilize income. An operational strategy employed by many farmers is the

use of all-risk crop insurance provided by the Federal Crop Insurance

Corporation (FCIC). This dissertation is directed toward an analysis of

all-risk crop insurance for North Dakota farmers.

Before discussing all-risk crop insurance in North Dakota, a general

description of the Great Plains area including physical characteristics,

crop yield variability, and settlement is presented.


1The Future of the Great Plains, Report of the Great Plains Com-
mittee, United States Government Printing Office, Washington, D. C.,
December, 1936, p. 27.











Characteristics of the Great Plains2


The Great Plains comprises approximately a third of the land area

between the Mississippi River and the Rocky Mountains. It covers part of

10 states, including North Dakota, South Dakota, Nebraska, Kansas,

Oklahoma, Texas, New Mexico, Colorado, Wyoming, and Montana, as shown in

Figure 1.

The Rocky Mountains form the western.boundary,of the Great Plains.

However, there is no clear-cut line which defines the eastern boundary.

It can be approximately designated in terms of:

1. Climate (20-inch rainfall line)

2. Soils (chernozems in the north and the reddish-chestnuts
in the south)

3. Natural vegetation (demarkation between short and tall
grasses).


Climate


The average annual precipitation is generally less than 20 inches.

It varies from 10 to 12 inches in the western part to 30 inches in the

east and it may occur as light showers or heavy thunderstorms. Even within

small geographic areas the amount of precipitation received varies consider-

ably. Temperature variations of over 100 degrees between the summer

maximum and winter minimums are common. Prevailing winds are generally

westerly, inclining to the north in the winter and south in the summer.

The average velocity is about 15 miles per hour.


2Ibid., pp. 23-36.











Characteristics of the Great Plains2


The Great Plains comprises approximately a third of the land area

between the Mississippi River and the Rocky Mountains. It covers part of

10 states, including North Dakota, South Dakota, Nebraska, Kansas,

Oklahoma, Texas, New Mexico, Colorado, Wyoming, and Montana, as shown in

Figure 1.

The Rocky Mountains form the western.boundary,of the Great Plains.

However, there is no clear-cut line which defines the eastern boundary.

It can be approximately designated in terms of:

1. Climate (20-inch rainfall line)

2. Soils (chernozems in the north and the reddish-chestnuts
in the south)

3. Natural vegetation (demarkation between short and tall
grasses).


Climate


The average annual precipitation is generally less than 20 inches.

It varies from 10 to 12 inches in the western part to 30 inches in the

east and it may occur as light showers or heavy thunderstorms. Even within

small geographic areas the amount of precipitation received varies consider-

ably. Temperature variations of over 100 degrees between the summer

maximum and winter minimums are common. Prevailing winds are generally

westerly, inclining to the north in the winter and south in the summer.

The average velocity is about 15 miles per hour.


2Ibid., pp. 23-36.























S.. \
S..
1.~ I,
5--. -
.0* T~ h* ~ 0
5-


C N C S O 1 *
WEST BOUNDARY OF
PEDALFERS (HUMID SOILS)
, ;I ,
i ,/ w


-----
: i =. '


U I j o o .
/ I o. .s








BOUNDARY OF GREAT PLAINS REGION
AS CONSIDERED IN THIS REPORT
" ". TALL GRASS EAST OF LINE
SHORT GRASS WEST OF LINE


S/ i A\ /-----
I \ iA ....




BOUNDARY OF THE GREAT PLAINS REGION.,
AS CONSIDERED IN THIS REPORT .:.~,- "





BOUNDARY OF THE GREAT PLAINS i : .-
PHYSIOGRAPHIC PROVINCE /





*lAFTER Erwv M. N Amm Ah T U1S SoS WrS.IRAAI W COiMiW rr O Tre -

Figure 1. Various Natural Boundaries of the Great Plains

Source: The Future of the Great Plains, Report of the Great Plains
Committee, United States Government Printing Office,
Washington, D.C., 1936.











Soils


The Great Plains contain three Great Soil Groups. They are the

chernozem, chestnut and reddish-chestnut, and brown and reddish-brown.

The soil, even within the Great Soil Groups, varies considerably in its

ability to resist erosion and capacity to hold and release water to plants.

Generally, the soils of the Great Plains are of suitable texture and are

inherently fertile. However, texture, structure, depth, and slope can

vary considerably within a field, creating a problem as to which tillage

method should be used and what crops to plant. The corresponding result

is that crops are sometimes planted on land not considered !ide&l"'!for

orop-pt6duction.


Natural Vegetation


Grasses are the native vegetation of the Great Plains. As one

moves from east to west the grasses become shorter. There is no definite

dividing line between the tall, medium, and short grasses. The grasses

prevailing at any time in an area are dependent on the amount of precipi-

tation received over a period of years. However, the grasses are more

resistant to drought and produce seeds in a short growing season toward

the western part of the area. As farmers settled the Great Plains they

replaced the native grasses with cereal grains. The cereal grains used

in the more humid areas of the country were not able to withstand the

drought conditions of the Great Plains. Before crop production could be

expanded in the Great Plains, new varieties of cereal grains had to be

developed that would survive on a limited amount of moisture and mature











Soils


The Great Plains contain three Great Soil Groups. They are the

chernozem, chestnut and reddish-chestnut, and brown and reddish-brown.

The soil, even within the Great Soil Groups, varies considerably in its

ability to resist erosion and capacity to hold and release water to plants.

Generally, the soils of the Great Plains are of suitable texture and are

inherently fertile. However, texture, structure, depth, and slope can

vary considerably within a field, creating a problem as to which tillage

method should be used and what crops to plant. The corresponding result

is that crops are sometimes planted on land not considered !ide&l"'!for

orop-pt6duction.


Natural Vegetation


Grasses are the native vegetation of the Great Plains. As one

moves from east to west the grasses become shorter. There is no definite

dividing line between the tall, medium, and short grasses. The grasses

prevailing at any time in an area are dependent on the amount of precipi-

tation received over a period of years. However, the grasses are more

resistant to drought and produce seeds in a short growing season toward

the western part of the area. As farmers settled the Great Plains they

replaced the native grasses with cereal grains. The cereal grains used

in the more humid areas of the country were not able to withstand the

drought conditions of the Great Plains. Before crop production could be

expanded in the Great Plains, new varieties of cereal grains had to be

developed that would survive on a limited amount of moisture and mature







5


in a short growing season.


Crop Variability


Rainfall is one of the most important factors affecting crop yields

in the Great Plains. The amount, distribution, and intensity of precipi-

tation varies considerably. The timeliness of rains during the growing

season often determines if the crop survives or fails.

The precipitation received in an area not only affects the average

yield per acre but also the magnitude of yield variations among years.

For example, a comparison of wheat yields in North Dakota and Illinois for

the period 1930-1963 reveals that the average yield per acre was 12.6 and

21.9 bushels, respectively.3 But the difference of 9.3 bushels in average

yield gives no indication of variability in wheat yields between the two

states. By determining the coefficient of variation, the relative vari-

ation in yields is found. The coefficient of variation was 46.5 per cent

for North Dakota and 32.6 per cent in Illinois. This indicates that

average annual yields may approach zero in North Dakota while in Illinois

they generally are above 15.0 bushels per acre. Because the Illinois

farmer is generally assured of some return, he can employ his resources

more fully as compared to North Dakota where more reserves have to be

accumulated to meet expenses in years of low crop yields.

The variation in crop yields has secondary effects on commodity

prices and farm income. The demand for cereal grains is highly inelastic.


3Tweeten, Luther G., Great Plains Agriculture--A Review of Economic
Problems and Research, Department of Agricultural Economics, Oklahoma
State University, Stillwater, Oklahoma, January, 1965.











As the supply of a commodity changes because of variations in yields,

prices will increase or decrease rapidly. This results in wide fluctu-

ation in price and farm income from year to year.


Settlement4


The history of the development of the Great Plains is important in

understanding the attitudes of its inhabitants. Prior to 1860 the inhab-

itants of the Great Plains were primarily Indians and buffaloes.

Railroads, which penetrated the Plains in 1860, and the Homestead

Act of 1862 were the two major forces in the settlement of the Plains.

The first agriculture of the Plains was ranching. Grass was plentiful and

the cattlemen regarded the carrying capacity of the range to be unlimited.

A boom developed in the cattle industry about 1800 and lasted until about

1890. It was characterized by the ownership of large herds by companies

generally financed with European capital. Overgrazing became a problem

and the carrying capacity of the range decreased. An unusually severe

winter in 1886-1887 followed by a prolonged drought which lasted from

1886 to 1895 contributed to the decline of the cattle industry.

Homesteaders had already begun entering the Great Plains, and by

about 1895 relatively small operations under individual ownership had re-

placed most of the large cattle ranches. Both foreign and domestic

markets for agricultural commodities were favorable, therefore production

expanded rapidly.




4The Future of the Great Plains, op. cit., pp. 38Q42.











Precipitation had a potent influence in the settlement of the Great

Plains. There was a large influx of settlers into the Great Plains during

the period of the early,1900's to about 1915 when precipitation was

especially favorable. But during the drought and depression of the 1930's,

when crop yields and farm incomes were low, there was a considerable out-

migration of people.

In the 1940's growing conditions improved and product prices rose

due to market conditions stimulated by World War II. Agriculture boomed

and the Plains were once again the bread basket of the nation. During the

last 25 years there have been droughts, but none as severe or long as the

preceding ones.


Need for Research on Risk


Great Plains


The extreme variability of weather factors results in crop yield

and income fluctuations. This condition exemplifies the need for research

on risk and uncertainty in the Great Plains.

High priority was given to a regional study of problems involved in

operating dryland farms in the Great Plains by theResearch Committee of

the Great Plains Agricultural Council in 1958.5 A Great Plains Research

Technical Committee (GP-2) was established at this time to study the risk

involved in dryland farming.

Before undertaking research related to strategies in the



5Management Strategies in Great Plains Farming, Great Plains
Council Publication No. 19, University of Nebraska College of Agriculture
and the Agricultural Experiment Station, Lincoln, Nebraska, August, 1961.











Precipitation had a potent influence in the settlement of the Great

Plains. There was a large influx of settlers into the Great Plains during

the period of the early,1900's to about 1915 when precipitation was

especially favorable. But during the drought and depression of the 1930's,

when crop yields and farm incomes were low, there was a considerable out-

migration of people.

In the 1940's growing conditions improved and product prices rose

due to market conditions stimulated by World War II. Agriculture boomed

and the Plains were once again the bread basket of the nation. During the

last 25 years there have been droughts, but none as severe or long as the

preceding ones.


Need for Research on Risk


Great Plains


The extreme variability of weather factors results in crop yield

and income fluctuations. This condition exemplifies the need for research

on risk and uncertainty in the Great Plains.

High priority was given to a regional study of problems involved in

operating dryland farms in the Great Plains by theResearch Committee of

the Great Plains Agricultural Council in 1958.5 A Great Plains Research

Technical Committee (GP-2) was established at this time to study the risk

involved in dryland farming.

Before undertaking research related to strategies in the



5Management Strategies in Great Plains Farming, Great Plains
Council Publication No. 19, University of Nebraska College of Agriculture
and the Agricultural Experiment Station, Lincoln, Nebraska, August, 1961.











organization and operation of Great Plains farms and ranches, a workshop

was held to

1. Define more clearly the problem areas that should be
studied

2. Present research techniques that might be useful

3. Stimulate thinking among the committee membership as
to analyses of remedial measures.

At this workshop, Bailey stated:

Problems of farming in the Great Plains are widely recog-
nized, but their implications to economic research are seldom
discussed in any truly definitive way. This neglect may arise
because economists have believed that traditional research
approaches would suffice.6

He further stated that the objective of Plains farming may be one of

survival and capital accumulation. To achieve this objective, maximum

advantage must be made of good years to minimize the effects of poor years.

The research conducted by GP-2 generally focused on the problem of

year-to-year variability in production and income, and strategies that

could be employed to reduce this variability. The strategies studied

included reserves, credit, crop insurance, flexible livestock programs,

and others.


Need for All-Risk Crop Insurance Research7


From these initial studies of GP-2, crop insurance emerged as a

separate study area. Little research had been done to appraise the role



6Ibid., p. 6.

7Crop Insurance in the Great Plains, Great Plains Regional Research
Project GP-8, March, 1962. (Mimeographed)











of crop insurance in Great Plains farming although all-risk crop insurance

has been available in many areas of the Great Plains since 1939. Conse-

quently, studies were deemed necessary to determine:

1. The adequacy of all-risk crop insurance in areas
covered

2. The need for insurance in areas not covered

3. Avenues for expansion, contraction, and improvement
of the program.

In 1962 a Great Plains Research Technical Committee (GP-8), in

cooperation with the Federal Crop Insurance Corporation, undertook a

regional project to ascertain the economic basis of all-risk crop insur-

ance and to evaluate the adequacies of the current operational services

of the Federal Crop Insurance Corporation.

The specific objectives of the regional project were:

1. To describe and evaluate the background upon which
the all-risk crop insurance program is based

2. To determine effects of present crop insurance on
level and stability of farm income and financial
structure

3. To ascertain "demand" for crop insurance by farmers
and organizational factors affecting demand

4. To appraise different crop insurance arrangements in
combination with alternative farm programs

5. To assess the public interest in crop insurance on
the basis of its effects on the general economy and
local economies.

This dissertation focuses on objectives 2 and 3 of the regional research

project.











North Dakota's Need for Research


All-risk crop insurance has been available to North Dakota farmers

since 1939. Participation in the program has varied considerably from

year to year and from county to county. Figure 2 shows the average pro-

portion of eligible farmers participating in the all-risk crop insurance

program for the three-year period from 1959 to 1961. Participation ranged

from a low of 7 per cent in Emmons County to a high of 67 per cent in

Steele County.

From the data in Figure 2, general areas of uniform participation

can not be outlined and there is no obvious reason for relatively low

participation in the western part of the state and relatively high partic-

ipation in the eastern part.


Objectives


The general purposes of this study are to determine if there are

definite areas of production risk in North Dakota and to identify farmers'

opinions on types of coverage desired, knowledge of insurance, and how

they fit it into their farm operation.

The specific objectives of this study are:

1. To delineate the state into at least three areas of
homogeneous variation in crop production

2. To ascertain "demand" for crop insurance by farmers

3. To determine organizational and institutional
factors affecting farmers' use of crop insurance.











North Dakota's Need for Research


All-risk crop insurance has been available to North Dakota farmers

since 1939. Participation in the program has varied considerably from

year to year and from county to county. Figure 2 shows the average pro-

portion of eligible farmers participating in the all-risk crop insurance

program for the three-year period from 1959 to 1961. Participation ranged

from a low of 7 per cent in Emmons County to a high of 67 per cent in

Steele County.

From the data in Figure 2, general areas of uniform participation

can not be outlined and there is no obvious reason for relatively low

participation in the western part of the state and relatively high partic-

ipation in the eastern part.


Objectives


The general purposes of this study are to determine if there are

definite areas of production risk in North Dakota and to identify farmers'

opinions on types of coverage desired, knowledge of insurance, and how

they fit it into their farm operation.

The specific objectives of this study are:

1. To delineate the state into at least three areas of
homogeneous variation in crop production

2. To ascertain "demand" for crop insurance by farmers

3. To determine organizational and institutional
factors affecting farmers' use of crop insurance.






















8% DuMcLean Sheridan Wells y 12%i
27% 212
Dunn 33% 12% ostr Griggs Steele Trail
Foster
11% Mercer \ 21% 12% 67% 33%
18%
Iden Billings Burleigh Kidder Stutsman
lley Included Iliver Barnes Cass
with 22% 23% 21% 47% 66% 25%
8% Stark -,--r------- i
8% Countyark Stark Morton
County

17% 22%
1 7%_ Grant |
_J Slope Hettinger Emmons Logan LaMoure Ransom
13% 14% 14% 13% 32% 37%

woman Adams LSioux 7. McIntosh Dickey Sargent

16% 14% 20% 16% 22% 27%


Figure 2. Average Proportion of Eligible Farmers Participating in the All-Risk Crop Insurance Program
in North Dakota, by County, 1959 to 1961

Source: North Dakota FCIC Office, Bismarck, North Dakota








12


General Procedure


To attain the objectives of this study, a "risk index" for crop

production was established for each county and a personal interview survey

was conducted with farmers who

1. Were presently participating in the program

2. Had participated in the program but dropped out.

A more detailed description of the procedures employed in the study are

given in Chapter V.











CHAPTER II


REVIEW OF LITERATURE


Farmers in the Great Plains generally face highly variable incomes

because of changing technology and the uncertainty of future yields, prices,

and institutional arrangements. One method of reducing the variability of

farm income is through the Federal Crop Insurance program which has been

operative for 25 years.

Several studies have been conducted which analyze the all-risk crop

insurance program; however, most of these studies are concerned with the

program on a national basis. Other studies involved different approaches

to the problem of providing a sound insurance program and strategies other

than insurance that can be employed to reduce income variability.

Pfeffer contributed significantly to the understanding of insurance

by defining the necessary and sufficient criteria for an insurance program.

He deemed it essential that an insurance program should be:

:1. A device, mechanism, technique, or principle

2. Designed to reduce the degree of uncertainty of the
insured

3. A means for transfer of particular risks to the
insurer.

From these elements he developed the following generic definition for

insurance:

Insurance is a device for the reduction of the uncertainty
of one party, called the insured, through the transfer of par-
ticular risks to another party, called the insurer, who offers











a restoration, at least in part, of economic loss suffered by
the insured.1

Pfeffer also stated that the "productivity of insurance arises from

its tendency to reduce some of the uncertainty surrounding economic

activity and may be translated into institutional terms quite readily."2

It makes more accurate planning feasible and enables the entrepreneur to

reduce the volume of nonproductive assets held for contingencies.

Clendenin3 stated in 1942 that the general outline of the under-

writing plan for all-risk crop insurance was sound with the fractional

coverage' and with premiums being practical and workable. However, he

noted that many insureds preferred a 90 or 100 per cent coverage, even if

it costs more. Some of his suggestions for improving the program included:

1. A schedule-rating plan for fields and farming practices

2. The reduction of premiums or payment of dividends to
farmers with superior loss records

3. The improvement of the sales effort, especially in
hazardous areas

4. A plan for three- or five-year contracts.

Sanderson5 stated that the principal causes for the adverse selec-

tion of risks and large losses during the first four years that the


Ipfeffer, Irving, Insurance and Economic Theory, Richard D. Irwin,
Inc., Homewood, Illinois, 1956, p. 53.

2Ibid.

3Clendenin, J. C., "Federal Crop Insurance in Operation," Wheat
Studies of the Food Research Institute, Vol. XVIII, Stanford University,
Stanford, California, September, 1941 to May, 1942.
4The farmer could select a coverage equal to either 50 or 75 per
cent of the average yield.

5Sanderson, Fred H., "A Specific-Risk Scheme for Wheat Crop
Insurance," Journal of Farm Economics, Vol. XXV, No. 4, November, 1943.











all-risk program was operative were:

1. Absence of satisfactory yield records for individual
farms

2. Averaging of premium rates which discriminated against
farms with low yield variability, thereby discouraging
participating of such farms

3. Selling insurance freely in the Great Plains when soil
moisture was low but only limited sales when moisture
conditions indicated a good crop

4. The assumption that the crop received "normal care"
although the insured may save inputs and neglect the
crop when the prospects of a poor yield became evident.

To eliminate the need for yield records and the moral hazard, Sanderson

proposed a crop insurance based on weather-yield relationships. The

program was based on preseasonal precipitation and June and July average

maximum temperatures.

In 1948, when the all-risk crop insurance program was reduced to

an experimental basis, Halcrow6 considered three types or forms of crop

insurance. They were:

1. Individual farm yield

2. Area-yield insurance

3. Weather-yield insurance.

Halcrow concluded that a program based on individual farm yields was

unworkable because of the adverse selection of risk. Farmers with rela-

tively good yield expectations compared to their insured yield would

minimize the purchase of insurance, while those with relatively poor

yield expectations would tend to purchase insurance with greater



6Halcrow, Harold G., Theory of Crop Insurance, Unpublished Ph. D.
Dissertation, Department of Economics, University of Chicago, Chicago,
Illinois, 1948.











frequency. He further stated that area-yield insurance could work success-

fully if the average yield of the area could be determined accurately and

areas delineated so that there is a high positive correlation between crop

conditions faced by the individual farmer and those faced by all farmers

in the area. The weather-yield insurance would be unaffected by changing

economic, technical, or technological factors which may influence the

general trend of yields. However, when correlating weather and yield,

important factors may be omitted from the formula and otherfactors may

receive improper weight. This type of insurance would be most easily

adapted to areas in which one or two weather factors, such as precipi-

tation and temperature, are generally limiting and highly significant in

determining crop yields.

Botts7 proposed an insurance plan where any carryover of the crop

from one year, for sale in a subsequent year when the crop was short,

would provide a partial substitute for crop insurance. In this way,

premiums would be greatly reduced. He also suggested a long-term contract

with a variable-premium plan. The farmer would pay most of his premiums

in the high-yield years when they would be least burdensome; in the low or

no-yield years little or no premiums would be paid.

Thair,8 in studying techniques of stabilizing farm income against

crop yield fluctuations in North Dakota, considered the following measures



7Botts, Ralph R., "Federal Crop Insurance Tied to Bushel Quota Farm
Program," Journal of Farm Economics, Vol. XLIV, No. 3, August, 1962.

8Thair, Philip J., Stabilizing Farm Income Against Crop Yield
Fluctuations, Bulletin No. 362, Agricultural Experiment Station, North
Dakota Agricultural College, Fargo, North Dakota, 1950.











for spreading risk:

1. Crop yield insurance

2. Emergency credit

3. Maintenance of reserves including grain storage and
cash reserves.

The programs varied in their stabilizing effects. Crop insurance removed

all negative net business incomes; however, in some cases it increased the

number of years in which net income was insufficient to cover the minimum

living allowance although it reduced the severity of these years. The best

method of stabilizing net income was found to be crop insurance used simul-

taneously with a modest savings program.

Rodewald9 found that farmers in Montana considered drought and hail

as the most important natural hazards. Farmers preferred to use stored

grain to compensate for lack of income from low yields. Generally, cash,

stock, and bonds were ranked second and crop insurance third.

Thair10 studied all-risk crop insurance in North Dakota and found

that, within.a given area, there is a tendency for the more vulnerable

farmers to subscribe to crop insurance. However, no evidence was uncovered

to show that high-risk area farmers participate in greater numbers than

those in an area of lower risk. Instead, the critical factor seemed to be

the premium rates charged. He stated that as risk or vulnerability

increases, so does the tendency to try to protect oneself; but, as


9Rodewald, Gordon, Jr., Crop Insurance in Montana, Circular 235,
Montana State College, Bozeman, Montana, November, 1961.

10Thair, Philip J., Meeting the Impact of Crop Yield Risks in Great
Plains Farming, Bulletin No. 392, Agricultural Experiment Station, North
Dakota Agricultural College, Fargo, North Dakota, 1954.








18


insurance premium rates increase, so does the tendency to resort to other

types of security practices. Thair suggested that possibilities for wider

spreading of the risk need to be investigated in order to reduce premium

rates in areas of higher risk to a point where they do not loom as high

in relation to the farmer's budget.











CHAPTER III


HISTORY OF ALL-RISK CROP INSURANCE


National Basis


With the modern methods of farming, farmers must make a major capi-

tal investment to produce a crop. The cash outlay for such items as ferti-

lizer, seed, fuel and oil, weed spray, etc. is high. Many farmers haven't

accumulated adequate reserves and must borrow to meet these expenses. If

the crop materializes, the farmer is able to repay his loan and, in some

cases, accumulate a cash reserve for future years. However, if the crop

fails, he is unable to repay the loan and can exhaust his credit in a short

time, leaving him without a means of financing future operations. Crop

insurance improves the farmer's credit position because he can offer it as

security and use it to repay the loan if the crop fails. Even if a farmer

has adequate reserves to meet expenses, he risks the loss of these

reserves if the crop fails. By using crop insurance to protect his invest-

ment, he is also protecting his accumulated reserves.1

Crop insurance not only protects the investment in the crop and

reserves but also stabilizes the farmers' income. Crop insurance is a

device that spreads the losses over many persons exposed to the same risk.2



1Rowe, William H., Federal Crop Insurance--A Description, PA-408,
Federal Crop Insurance Corporation, United States Department of Agriculture,
Washington, D. C., October, 1959, p. 9.

2Ibid., p. 9.











CHAPTER III


HISTORY OF ALL-RISK CROP INSURANCE


National Basis


With the modern methods of farming, farmers must make a major capi-

tal investment to produce a crop. The cash outlay for such items as ferti-

lizer, seed, fuel and oil, weed spray, etc. is high. Many farmers haven't

accumulated adequate reserves and must borrow to meet these expenses. If

the crop materializes, the farmer is able to repay his loan and, in some

cases, accumulate a cash reserve for future years. However, if the crop

fails, he is unable to repay the loan and can exhaust his credit in a short

time, leaving him without a means of financing future operations. Crop

insurance improves the farmer's credit position because he can offer it as

security and use it to repay the loan if the crop fails. Even if a farmer

has adequate reserves to meet expenses, he risks the loss of these

reserves if the crop fails. By using crop insurance to protect his invest-

ment, he is also protecting his accumulated reserves.1

Crop insurance not only protects the investment in the crop and

reserves but also stabilizes the farmers' income. Crop insurance is a

device that spreads the losses over many persons exposed to the same risk.2



1Rowe, William H., Federal Crop Insurance--A Description, PA-408,
Federal Crop Insurance Corporation, United States Department of Agriculture,
Washington, D. C., October, 1959, p. 9.

2Ibid., p. 9.











It also spreads the losses over many areas and over many years. The indi-

vidual farmer can substitute a regular annual premium cost for irregular

losses.

During the prolonged drought of the 1930's, farmers suffered severe

financial losses. By 1938, the federal government passed the Federal Crop

Insurance Act which established the Federal Crop Insurance Corporation with

a capital stock of 100 million dollars. At the outset, the Corporation

was designed to insure wheat producers against unavoidable production

losses resulting from adverse weather conditions, disease, insect infes-

tation and other hazards. Participation in the all-risk crop insurance

program was entirely voluntary.3 The Act directed the Corporation to fix

premiums at rates sufficient to cover claims for crop losses and to estab-

lish a reasonable reserve against unforeseen losses. The premiums were

not set sufficiently high to cover operating and administrative expenses

because the Act specified that these costs were to be borne by the federal

government.

The Federal Crop Insurance Act contains the following declaration

of purpose:

It is the purpose of this title to promote the national
welfare by improving the economic stability of agriculture
through a sound system of crop insurance and providing the
means for research and experience helpful in devising and
establishing such insurance.4




3United States Department of Agriculture, Federal Crop Insurance
Manual, Section 1, Federal Crop Insurance Corporation, Washington, D. C.,
June, 1960, p. 2.

41bid., p. 2.










Experiences of Private Insurance Corporations


Prior to the establishment of the Federal Crop Insurance Corpora-

tion, the only crop protection provided by private companies was against

hail damage and, in some areas, fire damage. Several private companies

attempted to provide all-risk coverage but the end result was generally a

financial loss to the company.5

The earliest known attempt to write an all-risk insurance policy

was by the Realty Revenue Guaranty Company of Minneapolis in 1899.6 Other

attempts were made in 1917, 1920, 1931, and 1937.7 The failure of these


5Clendenin, J. C., "Federal Crop Insurance Operation," Wheat
Studies of the Food Research Institute, Vol. XVIII, Stanford University,
Stanford, California, September, 1941-May, 1942, pp. 275-277.

6Ibid., pp. 275-277. The company agreed to purchase the entire
crop at a specific sum per acre. In effect, it was insuring against both
subnormal yields and declining prices. The farmer paid a premium of 5 per
cent and agreed to care for his crop in a husbandlike manner. The experi-
ence of the company is not definitely known.

7Ibid., pp. 275-277. Two companies, one in Montana and the other
in Pennsylvania, attempted to write all-risk crop insurance. The Montana
policy guaranteed $7.00 per acre on all small grains. Fixed prices were
used to eliminate the price risk. The Pennsylvania policy was written in
the spring wheat section of North Dakota. Coverage was $7.00 per acre and
a premium of 10 per cent was charged. Both companies suffered heavy
losses because a considerable proportion of the coverage was written late
in the season when crop failure was apparent.
In 1920, several companies entered the field of all-risk crop insur-
ance. The most extensive coverage was written by the Hartford Fire Insur-
ance Company. Their risk was well diversified geographically; however,
losses occurred in each area. Total premiums were about $800,000 and
losses about 2.5 million dollars. The policy attempted to insure the total
cost of production with an average premium of about 5.75 per cent. It also
guaranteed the price of the crop at the time the policy was issued.
The Agricultural Protective Mutual Insurance Company provided all-
risk crop insurance in Kansas in 1931 and 1932. Premiums ranged from 5
per cent to about 13 per cent. The limit on any single risk was $2,000.
Again, price as well as yield was insured. The drastic decline in grain
prices in 1931 and 1932 resulted in heavy losses to the company.
The Sowers Plan Crop Insurance Mutual Insurance Company operated in










early ventures is generally attributed to four factors:8

1. Lack of adequate actuarial data

2. Adverse selection, both of individual risks and because
of late season sales of insurance

3. Insurance of dollar values as well as physical yield

4. Inadequate geographic diversification.


Development of the Federal Crop Insurance Program9


Since its inception in 1938, the Federal Crop Insurance Program has

undergone several important changes.

Wheat, on a national basis, was the only crop insured during 1939,

1940, and 1941. The volume of business was satisfactory but heavy losses

were incurred, as shown in Table 1. The average loss ratio for this

period was 1.54. In other words, for each bushel collected in premiums

about 1.5 bushels were paid out in losses.

In 1941, the Act was amended to include the 1942 cotton crop as

well as wheat. Losses remained heavy and the program was suspended when

Congress did not provide funds for insurance on the crops planted in 1944.

The program was reinstated for wheat and cotton in 1945 and extended to

include flax on a national basis and other commodities on an experimental

basis. The financial experience for wheat improved greatly and for flax,



Kansas from May, 1937, to September, 1938. This policy also covered
selling price as well as the hazards that affect yield.

8Ibid., pp. 276-277.

9United States Department of Agriculture, "Federal Crop Insurance
Act," as amended, Agricultural Handbook No. 242, Agricultural Stabilization
and Conservation Service, Washington, D. C., January. 1964, pp. 229-239.











corn, and tobacco it was quite satisfactory. However, heavy losses were

experienced on cotton in 1945, 1946, and 1947. From a financial stand-

point, 1947 was the first successful year for the overall program because

premiums exceeded indemnities by 8.5 million dollars. However, during

the first eight years that the program was in effect indemnities exceeded

premiums by about 71.3 million dollars.



TABLE 1. EXPERIENCE OF FCIC WHEAT-YIELD INSURANCE FOR 1939,.1940, AND 1941

Number of Number of Premiums Loss claims
Crop farms loss claims collected paid Loss
year insured paid (bushels) (bushels) ratio

1939 165,777 55,912 6,684,215 10,163,127 1.52
1940 361,586 112,726 13,806,143 22,832,112 1.65
1941c 391,874 130,064 13,223,855 18,796,191 1.42

All 919,237 298,702 33,724,213 51,791,430 1.54

aPremiums and loss claims were expressed in bushels rather than
dollar values.

bLoss ratio = Loss claims premiums.

CPreliminary data.

Source: Clendenin, J. C., "Federal Crop Insurance in Operation," Wheat
Studies of the Food Research Institute, Vol. XVIII,.Stanford
University, Stanford, California, September, 1941-May, 1942.



During 1947, a number of basic changes were made in the nature and

scope of the program. The most important changes were that:

1. Crop insurance was placed entirely on an experimental
basis by restricting the number of commodities for
which the Corporation could write insurance and the











number of counties in which insurance could be offered.10

2. The level of insurance that could be provided was limited
to the general cost of producing the insured crop.

This limited and experimental program went into effect in 1948 with only

375 county programs compared to about 2,400 county programs in 1947.

In 1953, the Act was amended to permit continued expansion by

authorizing insurance in 100 additional counties each year. The Corpo-

ration was authorized in 1956 to consider certain costs as nonadministra-

tive and use part of the premium income for administrative expenses.ll An

amendment in 1959 provided that insurance for any commodity need not be

provided in any county in which the Board determined that the income

derived from it was an unimportant part of the agricultural income of that

county.


Experience Since 1948


The experience under the limited and experimental approach has been

generally favorable. By 1963, insurance was offered in nearly a third of

the nation's agricultural counties. However, a better measure of the

growth of the program is the number of county programs,12 as shown in

Figure 3.



10The amendment limited insurance in 1948 to not more than seven
agricultural commodities (including wheat, cotton, flax, corn, and tobacco)
and to not more than three additional agricultural commodities in succeeding
years. However, other commodities could be included under multiple crop
insurance.

11Prior to this time Congress had appropriated all monies for
operating and administrative expenses.

12A county has a program for each crop insured in the county.










Number of
county programs
2400






2000


1600






1200


?IJu I-


n e0
F" O


0
"-4


cc
00


MC
Coi


00 I 00
cc(X


'-I


0
In

-I


I L E ___ L~__ E I I I


48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63


Figure 3. Number of Federal Crop Insurance Corporation County Programs, 1948-1963


Source: Based on data from North Dakota FCIC Office, Bismarck, North Dakota.


00
r-
t'
en



m











The number of county programs increased sixfold between 1948 and

1963. The most rapid growth has occurred since 1958 with the number of

county programs almost doubling in the six-year period from 1958 to 1963.

The major emphasis in the program in the last few years has been on

reviewing the protection provided and to bring it more in line with

current production costs.13 The program has been expanded as rapidly as

possible by offering insurance on additional crops in counties already

having an insurance program and to new counties and crops. In both 1962

and 1963 the maximum program expansion permitted by legislation, 100 new

counties and three new crops, was utilized.

During the last 16 years, 1948-1963, total premiums have exceeded

total indemnities by about 19.2 million dollars, as shown in Figure 4.

Heavy losses were incurred from 1953 fhrpugh 1956. But the experience has

been generally favorable since 1957.

As stated previously, the Federal Crop Insurance Act directs the

Corporation to "establish as expeditiously as possible a reasonable

reserve against unforseen losses." The reserve of 19.2 million dollars

may,seem like a substantial amount. However, the liability in 1963 alone

was about 497 million dollars. The present reserve is about 4 per cent of

the annual liability, while the present goal of FCIC is to establish a

reserve of about 10 per cent of the liability.14


13United States Department of Agriculture, Annual Report 1963,
Federal Crop Insurance Corporation, Washington, D. C., April, 1964, pp. 12-
13.

14Moore, Jerry M., Economic Analysis of Crop Insurance in Eastern
Colorado, Unpublished M. S. Thesis, Colorado State University, Fort
Collins, Colorado, 1964, p. 12.







United States Department of Agriculture
Federal Crop Insurance Corporation

PREMIUMS AND INDEMNITIES

Crop Years 1948-1963


THOUSANDS OF DOLLARS

ALL PROGRAMS


30,000 I--
20, -- 5- -I-



10,000 .- --






1948'49 '50 '51 '52 '53 '54 '55 '56 '57 '58 '59 '60 '61 '62 '63
THE 1963 CROP YEAR PREMIUMS AND INDEMNITIES ARE BASED ON JANUARY 3, 1964 ESTIMATES.
PREPARED JANUARY 1964.
Figure 4. Premiums and Indemnities for All Programs on a National Basis, 1948-1963











As the program is expanded via new counties and more crops, more

risk is involved. Therefore, as the liability of the Corporation increases

the chance of losing its reserve also increases.

Table 2 shows the loss ratio for each crop by year for the period

1948-1963. The overall loss ratio of .94 for all programs during this

period indicates that for each $1.00 of premiums collected, $.94 was paid

out in indemnities.

Examination of Table 2 reveals that of the crops insured since 1948,

the combined crop, corn, and bean programs are operating at a loss.

Several of the new programs added since 1948 have experienced heavy losses,

namely citrus in 1957 and 1962, barley in 1961, peaches in 1962, raisins in

1963, peas in 1962, potatoes in 1962 and 1963, and cherries in 1963.

The loss ratio of .82 in 1963 allowed the reserve to be increased

by about 5.5 million dollars. This one year accounted for about 30 per

cent of the reserve of approximately 19.2 million dollars since 1948. If

the loss ratio had been 1.63 in 1963 instead of .82, the entire reserve

would have been needed to meet indemnities. It is highly unlikely that a

loss as large as this would occur in any one year, but a series of years

such as experienced during the period 1953-1956 would practically eliminate

the reserve.


Causes of Indemnities


Since the all-risk crop insurance program insures crops against all

natural hazards, the causes of indemnities have been many and varied, as

shown in Figure 5. Drought is the main cause of loss and accounts for

about 39 per cent of the indemnities. Excess moisture has accounted for










United States Department of Agriculture


FEDERAL CROP INSURANCE CORPORATION


LOSS RATIOS 1948 1963
Program CROP YEAR
Program I
1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 '48-63
Wheat .58 1.45 .52 1.06 .85 1.25 1.42 1.26 1.09 .60 .16 .68 .23 1.09 .38 .95 .90
Cotton .43 1.97 2.81 .82 .44 1.05 .56 .84 .67 .54 .25 .45 .52 1.38 1.24 .74 .96
Combined Crop .06 .16 .94 1.65 2.33 .91 1.50 1.42 1.28 .83 .36 1.70 .27 1.23 .76 .45 1.23
Tobacco .43 .66 .61 .49 .79 1.90 .89 .40 .28 .34 .19 .38 .35 .29 .79 .71 .62
Corn .17 .16 1.26 2.38 .25 .17 .56 1.47 3.35 .46 .56 .87 1.45 .23 1.52 .41 1.02
Flax .51 .62 .42 .49 .79 .95 .77 .77 .54 2.46 .45 1.64 .47 1.27 .65 .79 .80
Bean .29 .64 1.84 3.14 .55 .62 1.60 .66 .96 1.03 .32 .91 .59 .54 2.03 .61 1.08
Citrus .04 .03 .22 7.25 .15 .24 2.11 2.36 9.18 .90 2.64
Soybean .73 .74 .65 .36 .44 .56 .54 .67 .97 .71
Barley .39 .35 .39 1.08 .69 1.53 .81 1.05 .93
'each- i .. .50 .77 1.13 .76 .63 1.81 1.03 1.22
Grain Sorghum .27 .28 .70 .39 .78 .72
Oat .99 .65 1.26 .47 .60 .67
Rice __58 1.03 .64 .16 .53
Raisin .01 3.44 1.39
Pea 3.08 .53 1.25
Peanut .35 .83 .71
Potato 2.17 2.04 2.07
Apples .34 .34
Cherries 4.77 4.77
Tomatoes .43 .43
All Programs .53 1.32 .91 1.12 .97 1.15 1.24 1.14 1.26 .69 .26 .77 .58 .89 1.10 .82 94

THE 1963 CROP YEAR PREMIUMS AND INDEMNITIES ARE BASED ON JANUARY 3, 1964 ESTIMATES.
PREPARED JANUARY 1964.

Table 2. Loss Ratio, by Type of Program and Crop Year on a National Basis, 1948-1963





















































Figure 5. Proportion of All FCI Indemnities Paid for Various
Hazards, 1948-1963

Source: Based on data from North Dakota FCIC Office, Bismarck,
North Dakota.











about 14 per cent while losses from hail, insects, and freeze have each

been about 10 per cent.


Description of FCI Program15


Federal all-risk crop insurance is available to any person who has

an interest in an insurable crop. The coverage is limited to the indi-

vidual's share in the crop. This applies to rented land with the coverage

and premium being prorated in the same proportion as the lease. For example,

if the coverage were 10.0 bushels per acre, a tenant renting on a 50-50

crop share lease would receive a guarantee of 5.0 bushels per acre. The

landlord would also be guaranteed 5.0 bushels per acre. The protection is

provided and losses are settled by insurance units. An insurance unit is

defined as (1) all insurable acreage of a crop in a county in which one

person has the entire interest at the time of planting, or (2) all insurable

acreage of a crop in which two or more persons have the entire interest at

the time of planting, excluding any other acreage of the crop in the county

in which such persons together do not have the entire interest. The second

part means that if a tenant has three landlords he would have three separate

insurance units.

The coverage per acre varies widely throughout the country. The

coverage is developed on a county basis and is based, in part, upon the

Department of Agriculture statistics on long-time average yields and

various sources regarding the usual costs of producing a crop in the

county. The Federal Crop Insurance Act sets two general upper limits:


15Rowe, op. cit., pp. 16-24.











1. That the coverage should not exceed the investment in
the crop

2. That it shall not exceed 75 per cent of the average
yield in the county.

To convert the bushel coverage per acre to a dollar amount, it is multi-

plied by a fixed price. The fixed price eliminates insuring against price

changes.

The premium is the amount that the farmer pays for the protection

provided. The amount paid depends on the level of coverage selected by

the farmer. However, if a farmer has three or more consecutive years with-

out a loss, the premium is reduced by 5 per cent after three years and 5

per cent for each successive year up to a total of 25 per cent for seven

years of good experience. On wheat, the premium is reduced by 50 per cent

when the accumulated balance of premiums over indemnities exceeds the

liability. When applicable, this reduction takes the place of the "good

experience" reduction just described.

Closing dates are established for each type of insurance after

which no new applications will be accepted for that year. These closing

dates are considerably in advance of the actual planting date. This

procedure eliminates some of the adverse selection of risks that private

companies experienced.

Once a farmer has insured a crop there are certain things he must

do. The insurance period begins at the time of planting and continues

until the crop is harvested. An acreage report is filed as soon as

possible after planting. This report shows the location, number of acres,

and the farmer's share of the crop. If a loss occurs and the acreage











report hasn't been filed, no damages can be collected. If the crop is

damaged early in the season and it is practical to plant a substitute crop,

the farmer must do so; if he doesn't, the acreage won't be insured.

The all-risk crop insurance contract is a continuous contract. Once

the farmer has obtained a policy it remains in effect until cancelled by

the farmer or the Corporation. Crops may be added or deleted from the

basic policy from year to year.

All-risk crop insurance, in addition to providing protection, is a

means of obtaining credit. The insurance contract contains a provision

whereby the insured may make an assignment to a creditor. If a loss

occurs, the indemnity for the loss is generally paid by joint check to the

farmer and the creditor who has the assignment.


History of All-Risk Crop Insurance
in North Dakota16


Program from 1939-1947


Federal all-risk crop insurance has been available to North Dakota

farmers since 1939. Wheat was the first crop insured. Flax was added in

1945. An insurance program was offered in a county if the minimum require-

ment of 200 insurance units or a third of the farms producing the insured

crop were insured, whichever was smaller.

From 1939 to 1943 the type of insurance program offered was called

Yield Insurance. The coverage was determined on an individual farm basis

using its long-time average yield. The farmer could insure either 50 or


16Interview with North Dakota Federal Crop Insurance Personnel.











report hasn't been filed, no damages can be collected. If the crop is

damaged early in the season and it is practical to plant a substitute crop,

the farmer must do so; if he doesn't, the acreage won't be insured.

The all-risk crop insurance contract is a continuous contract. Once

the farmer has obtained a policy it remains in effect until cancelled by

the farmer or the Corporation. Crops may be added or deleted from the

basic policy from year to year.

All-risk crop insurance, in addition to providing protection, is a

means of obtaining credit. The insurance contract contains a provision

whereby the insured may make an assignment to a creditor. If a loss

occurs, the indemnity for the loss is generally paid by joint check to the

farmer and the creditor who has the assignment.


History of All-Risk Crop Insurance
in North Dakota16


Program from 1939-1947


Federal all-risk crop insurance has been available to North Dakota

farmers since 1939. Wheat was the first crop insured. Flax was added in

1945. An insurance program was offered in a county if the minimum require-

ment of 200 insurance units or a third of the farms producing the insured

crop were insured, whichever was smaller.

From 1939 to 1943 the type of insurance program offered was called

Yield Insurance. The coverage was determined on an individual farm basis

using its long-time average yield. The farmer could insure either 50 or


16Interview with North Dakota Federal Crop Insurance Personnel.











75 per cent of this average yield. The insurance contracts were annual

contracts requiring the farmer to make application for protection each

year. The closing date for accepting applications was late in the spring

and, in some cases, applications were accepted up until planting time.

Although the investment in the crop increased during the season, the

coverage remained constant.

Premium rates and indemnities were expressed in bushels. However,

the farmer had the option of paying or receiving either wheat or its cash

equivalent. After his premium was determined, the farmer could deliver

the wheat to FCIC or he could pay cash based on the market price at that

time.

If a farmer was eligible for an indemnity, he received an indem-

nity certificate redeemable in cash or a warehouse receipt for wheat.

The amount that the farmer received was based on the market price at the

time the indemnity certificate was surrendered or the warehouse receipt

sold. The market price changed continually during the year so the farmer

would attempt to pay his premium when the market price was low and collect

any indemnities when the market price was high.

Because different prices were used for the premium and indemnity

payment, the Corporation had to enter into a hedging operation to protect

itself against price changes. Also, storage problems were encountered

when wheat was offered for premium payments. In addition to normal

administrative expenses and the payment of indemnities, losses could occur

in the hedging operation and the physicalodetertiration of stored grain.

In 1944, Congress suspended the all-risk crop insurance program.

When the program was reinstated in 1945, several changes were made. The










amount of coverage provided increased during the crop year to reflect the

costs of additional operations as the crop matured. The annual contract

was replaced by a three-year contract. This contract reduced the time

involved in servicing a contract but created problems when a farmer wanted

to cancel the contract.

In 1947 an Experimental Area Insurance program was offered in

Golden Valley and Ramsey counties. Within these counties two areas of

similar risk were delineated with three separate coverages available in

each area, as shown in Table 3. The coverage was based on the county

average yield rather than on an individual farm basis. Both areas within

each county had the same premium. In Golden Valley County separate cover-

ages were provided within each area by type of farming practice employed.

Also, a premium reduction, not to exceed 20 per cent, was given when large

acreages were insured.

The experience of the program in North Dakota from 1939 to 1947

was relatively favorable. The loss ratio in these years was .35 for wheat

and .36 for flax. On a state basis, indemnities exceeded premiums in

only two years, 1939 for wheat and 1946 for flax. Because of this "good"

experience, a reserve of about 6.9 million dollars was accumulated during

this period for North Dakota compared to an overall loss on a national

basis of about 71.3 million dollars.


Program from 1948-1963


In 1948 when the all-risk crop insurance program was limited to an

experimental approach, the number of counties in which it was available

was restricted to 20 for wheat and 17 for flax. Coverage was based on











TABLE 3. ACTUARIAL TABLE FOR THE 1947 WHEAT CROP INSURANCE PROGRAM FOR
GOLDEN VALLEY AND RAMSEY COUNTIES IN NORTH DAKOTA


Specified level of insurance
Level A Level B Level C
(bushels)

GOLDEN VALLEY COUNTY


Coverage group number and practice:
1 Summerfallow
Continuous cropping

2 Summerfallow
Continuous cropping


Premium rate area number
and practice:a
1 Summerfallow
Continuous cropping


Part A: Coverage per acre


3.9
2.0

5.0
3.1


5.8
3.0

7.5
4.6


7.8
4.0

10.0
6.2


Part B: Uniform area premium
rate per acre"
.5 .8 1.4
.5 .8 1.4


RAMSEY COUNTY


Coverage group number:


Part A: Coverage per acre


4.0
4.8


Premium rate area number:a


6.0
7.3


8.0
9.7


Part B: Uniform area premium
rate per acre


aBoth areas within each county had the same premium.

bThe amount of premium for the insurance unit shall be reduced
by the number of whole bushels determined by multiplying the amount of
premium otherwise computed for the insurance unit by the product
(rounded to the nearest hundredth) obtained by multiplying the number
of acres insured on the insurance unit by .0002, provided that this
reduction shall not exceed 20 per cent of the amount of premium other-
wise computed for the insurance unit.

Source: North Dakota FCIC Office, Bismarck, North Dakota.











the county average yield with areas of similar risk being established

within each county. Some land was declared uninsurable if the risks

involved in crop production were considered too great. In addition,

producers who were known to be high risks because of their farming oper-

ations, etc. were placed on ineligible lists and were not permitted to

purchase insurance.

During this period, the premiums and indemnities were expressed in

bushels. However, in the four counties of Grand Forks, Mercer, Pierce,

and Sargent,.a Monetary Insurance program was offered. It was similar to

the Yield Insurance program except that a fixed price rather than market

price was used in determining the premiums and indemnities. Because the

effects of changing prices were eliminated, this program was offered at a

lower premium.

The presently operative Commodity Insurance program was initiated

in 1949. It was basically the same as the Monetary Insurance program

with a fixed price based on the Commodity Credit Corporation loan price.

This procedure stabilized the price for the year but the price changed

each year depending on the loan price.

During the 16 years from 1948 to 1963, the number of county insur-

ance programs was increased from 37 to 162. Wheat insurance was available

in all counties,17 as shown in Figure 6a. Flax insurance, shown in Figure

6b, was expanded in 1956 and 1959 and now is available in 34 counties. In

1956, barley insurance was made available in Cass, Pembina, and Traill



17Billings County is included with Stark County for insurance
purposes.

























a. Wheat Insurance


c. Barley Insurance


d. Oats Insurance


e. Combined Crop Insurance


Figure 6. Counties in Which Various Federal Crop Insurance Programs
Were Available in North Dakota, 1963


b. Flax Insurance










counties. The major expansion in barley insurance has occurred since 1959.

Oats insurance was first made available in 1959 and expanded in 1962 and

1963. Figures 6c and 6d show the counties in which insurance for barley

and oats was available in 1963.

The insurance programs for wheat and flax were cancelled in Barnes,

Ransom, and Sargent counties in 1950. Substituted for these programs was

a combined crop insurance program covering wheat, barley, flax, corn, and

oats. By 1953, combined crop insurance had been expanded to nine counties

as shown in Figure 6e. It differed from the separate programs in that

both premiums and indemnities were based on the total coverage of the

crops insured. Because this plan diversified the risk to the Corporation,

the premiums were considerably below those of the separate insurance

contracts. Although the premium was low, farmers became dissatisfied with

the program. They often would experience a failure on one crop but the

production of the other crops would be sufficient to meet the total cover-

age and no indemnity would be received. By 1959, separate contracts were

again made available in addition to the combined crop contract.

Corn insurance was offered in Richland County in 1950, 1951, and

1952. In 1953, when the combined crop insurance program was introduced,

separate contracts for corn were cancelled. However, in 1962 they were

reinstated.

Soybean insurance was initiated in Cass, Richland, and Traill

counties in 1962.

In some counties, different coverages and premiums were established

in 1959 for wheat grown on summerfallow versus a continuous cropping

practice. In 1962 this type of coverage was extended to barley insurance











in the northwestern counties.

Two important features were added to the crop insurance program in

1963. They were the "bushel increase" for harvesting and the "price

selection per bushel." The bushel guarantee per acre, as shown on the

contract, is the pre-harvest coverage. If the crop is harvested, the

bushel guarantee is increased by the following amounts to cover the

harvesting costs:

Crop Bushel increase
Wheat 1.5
Barley 2.0
Flax .7
Oats 3.0
Rye 1.5
Corn 3.0
Soybeans 1.5

The price selection per bushel allows the farmer to select the

amount of coverage needed to meet his operating expenses. There are three

prices that the farmer can choose from for each crop as shown in Table 4.

The price he selects multiplied by the bushel guarantee per acre gives the

dollar coverage per acre. The absolute amount of the premium increases

with the price selection per bushel, but when the premium is expressed as

a per cent of the coverage it remains approximately constant for all

selections.










TABLE 4. PRICE SELECTIONS PER BUSHEL BY CROP FOR NORTH DAKOTA, 1963

Crop Price selections per bushel

Wheat $1.50 $2.00 $2.50
Barley .75 1.00 1.25
Flax 2.25 2.75 3.25
Oats .40 .60 .80
Rye .75 1.00 1.25
Corn .80 1.00 1.40
Soybeans 1.50 2.00 2.50


Source: Based on data from North Dakota FCIC Office, Bismarck, North
Dakota.



All-Risk Protection

About 635.7 million dollars of protection has been provided to North

Dakota farmers by the FCIC during the last 16 years, as shown in Table 5.

The liability increased rapidly during the early 1950's when the wheat crop

was damaged by rust. Participation declined quite rapidly after rust

resistant varieties of wheat became available and increased again after the

relatively severe drought of 1961.

The accumulated reserve at the end of the year shows the amount that

premiums have exceeded indemnities. During the first four years, as shown

in Table 5, a reserve of about 6.3 million dollars was established. How-

ever, during the next three years indemnities exceeded premiums and the

reserve was used up and a loss of about 1.9 million dollars occurred. By

1960, the reserve had been built up to about 7.6 million dollars but the

drought in 1961 reduced the reserve to about 3.4 million dollars. The

reserve of about 7.0 million dollars in 1963 accounts for about 36 per

cent of the national reserve of about 19.2 million dollars.










TABLE 5. PROTECTION PROVIDED AND RESERVE ACCUMULATED BY THE FEDERAL
CROP INSURANCE PROGRAM IN NORTH DAKOTA, 1948-1963


Accumulated reserve
Year Liability Premium Indemnity at end of the year

1948 $ 14,916,104 $ 1,613,416 $ 281,797 $ 1,331,619
1949 19,628,206 1,773,038 1,256,052 1,848,605
1950 30,962,715 2,366,817 543,708 3,671,714
1951 42,779,576 3,199,690 590,340 6,281,064
1952 47,532,405 3,141,749 5,521,181 3,901,632
1953 82,561,044 5,512,569 6,581,391 2,832,810
1954 68,460,022 4,708,535 9,441,014 -1,899,669
1955 49,513,598 4,135,754 1,719,167 516,918
1956 40,568,602 3,480,762 1,911,012 2,086,668
1957 36,728,581 3,108,776 1,578,219 3,617,225
1958 31,188,377 2,488,521 418,157 5,687,589
1959 33,058,833 2,567,703 2,271,431 5,983,861
1960 28,868,988 2,187,558 553,791 7,617,628
1961 31,848,970 2,653,220 6,812,723 3,458,125
1962 33,042,126 3,020,701 946,979 5,531,847
1963 44,074,645 3,337,157 1,906,343 6,962,661

Total $635,732,792 $49,295,966 $42,333,305


Source: Based on data from North
Dakota.


Dakota FCIC Office, Bismarck, North


The size of reserve that should be maintained is difficult to

determine. When several "bad" years come in succession, participation

increases. The result is an increasing liability and an increasing prob-

ability of indemnities occurring. Table 6 shows the indemnity expressed

as a per cent of the liability. For all programs in North Dakota from

1948 to 1963, about 6.7 per cent of the liability has been paid out.

The corn insurance program has suffered the largest total loss,

with about 23 per cent of the total liability being indemnified. This

loss was caused mainly by excess moisture in 1950 and 1962 and drought

in 1951. The combined crop insurance program has incurred the least loss





















TABLE 6. INDEMNITY AS A PER CENT OF THE LIABILITY IN NORTH DAKOTA, BY CROP AND YEAR, FOR THE PERIOD 1948 TO 1963


Crop years
Crop 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 48-63

Wheat 1.5 6.8 1.3 1.6 10.5 10.6 20.5 2.3 6.3 2.5 1.2 6.6 1.6 26.6 1.3 4.2 7.5
Flax 3.3 3.0 2.4 2.7 7.5 5.7 4.8 5.6 3.9 25.0 5.5 20.5 6.4 29.4 6.7 9.5 8.3
Combined crop 2.6 .3 14.0 3.8 6.1 4.7 2.7 3.6 .3 4.2 1.1 9.8 4.5 2.3 4.7
Barley 3.9 5.2 7.7 13.0 5.6 24.7 5.3 4.9 8.7
Oats 10.8 8.5 .3 13.1 7.2 25.2 2.7 7.6 8.5
Corn 29.2 33.7 .1.3 36.8 6.4 22.7
Soybeans 26.2 10.0 11.8

All programs 1.9 6.4 1.8 1.4 11.6 8.0 13.8 3.5 4.7 4.3 1.3 6.9 1.9 21.4 2.9 4.3 6.7


Source: Based on data from North Dakota FCIC Office, Bismarck, North Dakota.











because many crops are insured under one contract which diversifies the

risk to the Corporation.

Closer examination of Table 6 reveals that not all crops are

affected by the same hazards. Losses on wheat were high in 1952, 1953,

and 1954 due to rust. Flax losses were light until 1957 when about 25 per

cent of the assumed liability was paid out, caused primarily by drought and

frost. During 1959, flax, barley, and oats were damaged by drought.

The loss incurred in 1961 from drought affected all of the crops

insured with about 20 per cent of the annual liability indemnified. The

combined crop insurance program sustained the smallest loss (about 10 per

cent) due primarily to the diversification of risk and because most of

the counties that have this type of program are in southeastern North

Dakota where the effects of the drought were less severe.

The loss ratio for all programs in North Dakota of .86, shown in

Table 7, compares favorably with the loss ratio for the national program

of .94 for the period 1948 to 1963. This loss ratio means that for each

$1.00 that North Dakota farmers paid in premiums, $.86 was returned as

indemnities and $.14 has gone for the establishment of the reserve.

Corn and soybeans have the largest loss ratio. This doesn't indi-

cate that these crops are more susceptible to natural hazards. These

programs have been offered for only a limited number of years and, in

these particular years, heavy losses occurred. If corn insurance had been

available from 1953 to 1961 when growing conditions were generally favor-

able, the loss ratio undoubtedly would have been much lower.





















TABLE 7. LOSS RATIO IN NORTH DAKOTA, BY CROP AND YEAR, FOR THE PERIOD 1948 TO 1963


Crop years
Crop 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 48-63

Wheat .15 .79 .15 .18 1.36 1.37 2.45 .22 .62 .24 .13 .74 .19 2.92 .14 .57 .85
Flax .26 .24 .23 .28 .96 .60 .41 .47 .33 2.07 .48 1.70 .52 2.23 .48 .79 .72
Combined crop .57 .07 2.94 .82 1.40 .88 .46 .64 .06 .90 .25 1.87 .84 .46 .95
Barley .42 .61 .75 1.13 .48 1.88 .42 .46 .75
Oats .82 .72 .02 1.10 .63 1.68 .21 .68 .70
Corn 5.45 4.66 .12 3.85 .61 2.80
Soybeans 3.90 1.31 1.56

All programs .17 .71 .18 .18 1.76 1.19 2.01 .42 .55 .51 .16 .88 .25 2.57 .31 .57 .86


Source: Based on data from North Dakota FCIC Office, Bismarck, North Dakota.











Of the programs that have been available for some time, combined

crop has the largest loss ratio of .95. It was noted in Table 6 that

combined crop insurance has the lowest indemnity payments expressed as

a per cent of the liability. But the reason for a high loss ratio is

that premiums are also low, being about 4.9 per cent of the liability,

as shown in Table 8.


Average Cost of All-Risk Crop Insurance

The average cost to farmers of the various all-risk crop insurance

programs is shown in Table 8, by expressing the premium as a per cent of

the liability. For the period 1948 to 1963, the average cost for all

programs was about 7.8 per cent. In,other words, the average cost to

North Dakota farmers was $7.80 for each $100.00 of protection provided.

The combined crop program has the lowest premium and oats the

highest. The premium rate gives an indication of the amount of risk

involved in the production of each crop on a state basis. Within the

state,,the cost of protection increases from east to west. For example,

the premium for insuring wheat on summerfallow varies from about $5.00

per $100.00 of protection in the east to about $20.00 per $100.00 of

protection in the west.

An examination of the rates for all-risk crop insurance from year

to year indicates that changes have been made in the premium to reflect

the experience of each program. The premium for all-risk insurance on

wheat has been reduced about 3 per cent since 1948. Minor rate changes

have occurred in the other all-risk insurance programs with the premiums

for flax and oats decreasing and those for combined crop, barley, corn,

and soybeans increasing.





















TABLE 8. PREMIUMS AS A PER CENT OF THE LIABILITY IN NORTH DAKOTA, BY CROP AND YEAR, FOR THE PERIOD 1948 TO 1963


Crop Years
Crop 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 48-63

Wheat 10.5 8.6 8.7 8.7 7.7 7.8 8.3 10.3 10.2 10.0 9.4 8.9 8.7 9.1 9.6 7.4 8.8
Flax 12.8 12.8 10.5 9.7 7.8 9.5 11.8 12.0 11.8 12.1 11.6 12.1 12.3 13.2 13.8 12.0 11.6
Combined crop 4.5 4.5 4.7 4.6 4.4 5.4 5.9 5.6 5.1 4.6 4.4 5.2 5.3 5.1 4.9
Barley 9.2 8.5 10.3 11.5 11.7 13.2 12.9 10.8 11.5
Oats 13.3 11.9 10.6 11.9 11.5 15.0 12.9 11.2 12.1
Corn 5.5 7.2 11.0 9.6 10.5 8.1
Soybeans 6.7 7.6 7.5

All programs 10.8 9.0 7.6 7.5 6.6 6.7 6.9 8.4 8.6 8.5 8.0 7.8 7.6 8.3 9.1 7.6 7.8


Source: Based on data from North Dakota FCIC Office, Bismarck, North Dakota.











CHAPTER IV


MANAGEMENT CONCEPTS


Since income variability is the chief characteristic of agriculture

in the Great Plains, it is necessary to consider how it affects the deci-

sions of farmers. When farmers are deciding on which crops to plant, how

much fertilizer to use, or whether to expand or contract the size of live-

stock enterprises, they are faced with imperfect knowledge. A basic cause

of imperfect knowledge or uncertainty is variability.1 Its unpredictability

influences the outcome of farmers' decisions.

In determining the farmer's role in farm firm decisions and how he

defines and combats "variability," three areas are considered. First, the

role and functions of management; second, definitions for -risk and

uncertainty; and third, strategies used to reduce or eliminate variability.


Role and Functions of Management


The role of the individual farm manager can be properly divided

into the phases of organization and operation. Organization refers to

the manner in which scarce resources are allocated to alternative uses.

On the other hand, operation is concerned with the daily and short-run

tactics employed to insure economic survival. In both phases, management

must operate in a framework of uncertainty.



1Hedges, Trimble R., Farm Management Decisions, Prentice-Hall, Inc.,
Englewood Cliffs, New Jersey, 1963, p. 577.

48











CHAPTER IV


MANAGEMENT CONCEPTS


Since income variability is the chief characteristic of agriculture

in the Great Plains, it is necessary to consider how it affects the deci-

sions of farmers. When farmers are deciding on which crops to plant, how

much fertilizer to use, or whether to expand or contract the size of live-

stock enterprises, they are faced with imperfect knowledge. A basic cause

of imperfect knowledge or uncertainty is variability.1 Its unpredictability

influences the outcome of farmers' decisions.

In determining the farmer's role in farm firm decisions and how he

defines and combats "variability," three areas are considered. First, the

role and functions of management; second, definitions for -risk and

uncertainty; and third, strategies used to reduce or eliminate variability.


Role and Functions of Management


The role of the individual farm manager can be properly divided

into the phases of organization and operation. Organization refers to

the manner in which scarce resources are allocated to alternative uses.

On the other hand, operation is concerned with the daily and short-run

tactics employed to insure economic survival. In both phases, management

must operate in a framework of uncertainty.



1Hedges, Trimble R., Farm Management Decisions, Prentice-Hall, Inc.,
Englewood Cliffs, New Jersey, 1963, p. 577.

48











When dealing with uncertainty, the farmer may employ certain steps

to minimize its effects. This process can be categorized as the following

functions:

1. Recognition of the problem

2. Observation of relevant facts

3. Analysis and specification of alternatives

4. Choice of alternatives (decision making)

5. Taking action

6. Bearing responsibility for the action taken.2

A diagram of the procedure that farmers, acting as managers, may take in

solving a problem is shown in Figure 7.

Once the problem is defined the farmer may be faced with a flexible

or inflexible situation. If the situation is inflexible, he is forced

into making a decision without being able to secure additional information.

He may make a negative decision and take no action or make a positive

decision and take action.

In a flexible situation, more time is available to secure addi-

tional information for making an informed decision. However, the farmer

may decide that he has sufficient information and make his decision without

collecting more data. Another alternative is complete inaction. Here the

farmer avoids making a decision because he does not have sufficient infor-

mation and is not willing to obtain it. The third alternative in a

flexible situation is to make a decision to learn. Here data is collected,



2Vincent, Warren H., Economics and Management in Agriculture,
Prentice-Hall, Inc., Englewood Cliffs, New Jersey, 1962, p. 11.

















No flexibility exists;
involuntary decision
results


Flexibility exists
permitting a
voluntary decision


Sequential


Negative decision;
no action taken


Positive decision;
action taken


Figure 7. Management Situations Concerning Decisions and Actions

Source: Vincent, Warren H., Economics and Management in Agriculture,
Prentice-Hall, Inc., Englewood Cliffs, New Jersey, 1962,
p. 20.











its relevancy determined, and solutions prepared. All the solutions may

be rejected (negative decision) or one may be selected and put into oper-

ation (positive decision).

The farmer will make his decision and take action only when

uncertainty is reduced to a point either where he is willing and able to

bear the consequences or where he is able to transfer them to others.

His ability to transfer uncertainty depends on whether or not it can be

classified as a risk.


Risk and Uncertainty


Most farmers use the terms risk and uncertainty interchangeably.

However, there is considerable difference between them. The criteria

used to differentiate between risk and uncertaintyis "probability."

Uncertainty occurs when the probability of an outcome cannot be estab-

lished in an empirical or quantitative sense. Risk, on the other hand,

refers to outcomes which are measurable in an empirical or quantitative

manner.3

Generally, risks are insurable and uncertainties are not. The

chart in Figure 8 shows which uncertainties are important, the conditions

under which they originate, whether or not a probability can be calculated,

the types of risks, and whether or not they are insurable.4




3Heady, Earl O., Economics of Agricultural Production and Resource
Use, Prentice-Hall, Inc., Englewood Cliffs, New Jersey, 1960, pp. 440-443.

4Denenberg, Herbert C., and others, Risk and Insurance, Prentice-
Hall, Inc., Englewood Cliffs, New Jersey, 1964, pp. 25-32.











ECONOMIC UNCERTAINTIES


Figure 8. Types of Economic Uncertainties

Source: "Risk and Insurance," Prentice-Hall, Inc., Englewood
Cliffs, New Jersey, 1964.











Uncertainties may be either economic or noneconomic. Economic

uncertainties are the most important to farmers and occur when a possible

event or series of events could result in a financial loss or gain. Non-

economic uncertainties include other unknowns such as a successful

marriage, permanency of friendship, etc.

Not all economic uncertainties are important because the possible

financial gain or loss might be small. Therefore, to be important, the

uncertainty must be significant. The significance of an uncertainty is

determined by the relationship between the amount at stake and the finan-

cial position of the individual. An example would be the loss of a cow;

to a large rancher this loss would be insignificant, while to a large

family having only one cow and depending on it for their milk supply, the

loss would be highly significant.

The position that an uncertainty holds in an analysis depends on

whether static or dynamic conditions are being considered. Static con-

ditions are generally associated with values existing at a point in time,

whereas dynamic conditions are associated with values that change over

time. To determine if an uncertainty originates under static or dynamic

conditions, three general areas are considered. First, static losses

occur when property is physically destroyed, whereas dynamic losses or

gains result from the normal functioning of the economy. Second, static

losses affect only a few individuals, while dynamic losses affect many.

Third, static losses tend to happen with some degree of regularity over

time, whereas dynamic losses are more eratic.

If the probability of an outcome can be calculated with some degree

of confidence, an uncertainty can be reduced to a risk. Generally, static











losses can be reduced to a risk. For dynamic losses there is no clear

dividing line between whether it can be reduced to a risk or if it remains

an uncertainty. If one uncertainty can be grouped with other similar un-

certainties and a probability statement formed, it may be reduced to a

risk. Thus, a farmer is not able to determine if his barn will burn

because it's an uncertainty. But if all the barns in the county are con-

sidered, the probable number that will burn in any one year can be pre-

dicted with a high degree of reliability and thereby becomes a risk.

Risks, those uncertainties for which a probability statement can

be made, can be divided into two general areas:

1. Pure and speculative

2. Particular and fundamental.

Pure risks hold the prospect of a loss or no loss, while a specu-

lative risk holds forth the promise of gain or the chance of loss. A pure

risk results from the destruction of property and originates in static

conditions. A speculative risk originates in dynamic conditions and is

generally brought about by changes in the price level.

The second classification of risk is the differentiation between

particular and fundamental risks. Fundamental risks arise from losses

that cover a wide area and affect many individuals such as floods, droughts,

insects, etc. Particular risks are localized in that they may affect only

an individual, such as a barn burning down. Risks may shift between classi-

fications as changes take place in knowledge, technology, etc. Particular

risks are generally insurable. Fundamental risks are insurable if the

probability can be calculated and an acceptable confidence limit estab-

lished.











From the foregoing discussion it is seen that there is no absolute

statement that can be made as to which future events are risk or uncer-

tainties, or whether they can be insured.

Generally, farmers are faced with five kinds of uncertainty.5 They

are:

1. Technical or yield

2. Price

3. Human

4. Institutional

5. Technological.

The first two, technical and price uncertainty, can be measured in a

quantitative sense and thereby reduced to a risk. The others can be

measured only in a subjective sense and are not classified as a risk.

Price uncertainty has its roots in yield or technical uncertainty

and is generally uninsurable. However, farmers may employ certain tech-

niques such as advance contracting to reduce or eliminate it. Yield

uncertainty can be attacked by various management strategies such as

purchasing all-risk crop insurance.


Management Strategies


Various strategies are employed by farmers to eliminate the possi-

bility of a financial loss, or at least to minimize its effects. The

strategies employed may be classified as formal or informal.




5Hedges, op. cit., pp. 577-578.











Formal strategies are given the name "insurance." Here the farmer

is certain of a small loss in the form of a premium to cover the possi-

bility of suffering a large financial loss. Types of insurance available

to most farmers include: all-risk crop, hail, life, fire and wind, lia-

bility and health.

The types of informal strategies employed by farmers take the form

of diversification (flexibility), advance contracts, leasing, excessive

investments, and liquidity (self-insurance). The premium paid is not a

specific sum but takes the form of reduced income. Whether a formal or

informal strategy is employed, it results in a cost to the firm.


Extension of the Friedman-Savage Analysis of
Choices Involving Risk to Agriculture6


Farmers are continually confronted with situations involving risk.

Previously, it was stated that some risks were insurable while others were

not. The question then concerns why some individuals purchase insurance

while others don't. Part of the answer is in the relationship between

the premium and the financial loss which might occur and the risk aversion

of the individual concerned.

A farmer has control of assets which he employs to earn income and

thereby increase his wealth. Most individuals fear the loss of this

earning power and take action to maintain it in the presence of risk and

uncertainty. The concepts of the utility analysis of Friedman and Savage



6Friedman, Milton, and Savage, L. J., "The Utility Analysis of
Choices Involving Risk," The Journal of Political Economy, Vol. LVI, No. 4,
August, 1948, pp. 279-304.










partially explains why some farmers buy insurance while others don't.


Diminishing Marginal Utility and the Purchase of Insurance

When an individual purchases insurance, the importance he attaches

to losses in assets or income must increase at an increasing rate. In

other words, the marginal utility of increasing assets or income diminishes.

In this analysis, the assumption is made that the goal of most individuals

is the maximization of utility or satisfaction.

In Figure 9 the utility curve bd represents the individual's moral

expectations, where each additional unit of income yields less and less

utility. The mathematical utility curve is represented by the line ac

which assumes that each unit of income yields equal utility. The average

utility is shown by U and the average income by I.

Prior to purchasing insurance an individual stands a chance P

(0 to 1.0) of receiving income 12 or a chance (1-P) of not losing his

present income Il. The individual can attain his goal of maximizing aver-

age utility U with an income Ic. It is noted that the average income I

is greater than income Ic and would yield the individual a greater utility

than the average utility. However, the average income I is based on a

probability and is not a certainty.

An individual in search of certainty will purchase insurance if

the expected utility of a certain income, based on his moral expectations,

is equal to or greater than the utility of the average income, based on a

mathematical expectation. In Figure 9, for a guaranteed income of Ic the

expected utility is the same as the average utility U, and an individual

7i and I are mathematical computations of the expected utility and
income.











would be willing to purchase insurance. The premium the individual is

willing to pay for certainty is the difference between the average income

and the certain income, or the premium = I Ic.

If the guaranteed income is less than Ic, the expected utility is

less than the average utility and insurance would not be purchased. The

premiums would be prohibitive. If the guaranteed income is greater than

I, an individual would be paid for accepting certainty although he is

willing to pay for it. This sounds unreasonable and probably would never

happen because an insurance company would not guarantee an individual an

income higher than the average income.







u 1---------------- ...-d











I I
4-W









12 Ic I Il

Income or assets

Figure 9. Utility Analysis of Choices Involving
Risk Showing a Preference for Certainty.











Because the concept of utility is subjective, not all individuals

will have the same shaped utility curve for a given asset. Also, the

shape of an individual's utility curve may change as he gains experience

and knowledge. Figure 10 shows the hypothetical utility curves for two

individuals. Both individuals are faced with the same mathematical prob-

ability for obtaining either income II or income 12. An individual with a

utility curve represented by bd would be willing to pay a premium T Ia

to be certain of receiving income Ia. On the other hand, one with a

utility curve represented by ef would be willing to pay a premium of only

I Ib to be guaranteed a higher income of Ib. This indicates that it is

not the amount of income or asset involved that determines whether or not

.insurance is purchased but rather the shape of the individual's utility

curve and the amount of premium charged by the insurance company.



f
ui
.............- -






i2 -




e I



'2 Ia Ib I 11

Income or Assets

Figure 10. Hypothetical Utility Curves for Two
Individuals Showing a Preference for Certainty.











Up to this point, the purchase of insurance has been discussed in

terms of the premium an individual is willing to pay to be guaranteed a

certain income. However, the usual practice is for an insurance company

to use a mathematical "probability" to determine what income it can safely

guarantee the insured. The premium is then set so it covers indemnities,

administration, and profits. This is represented graphically in Figure 11.

The income guaranteed by the insurance company is represented by the line

Ic and the average income by T. The insurance company will guarantee

income Ic if a premium I Ic is paid. Those individuals whose expected

utility curve intersects the average utility line (u) to the left of Ic

would be willing to purchase insurance, because the premium charged by

the insurance company is less than what they are willing to pay. Those

individuals whose expected utility curve intersects the average utility

line (uu) between Ic and I would be willing to purchase insurance but the

premium charged by the insurance company is prohibitive. From this

analysis it is seen that no matter what the guaranteed income and premium

charged,.there always will be some individuals who will not purchase

insurance. The insurance company should therefore determine its premiums

and coverages in a judicious manner and present the corresponding logic

as to the rational inherent in insurance participation.








61

















a




12 Ic I I1

Income or Assets

Figure 11. Graphic Illustration of the
Way Insurance is Purchased.
Way Insurance is Purchased.











CHAPTER V


PROCEDURE FOR THE STUDY


Index of Risk


An aggregate index of risk was formulated as a basis for delineating

the :state into areas with homogenous risk in crop production. This basis

involved a relative measure of variation in yields of major crops in each

county. To obtain the aggregate index of risk, a program was written for

the IBM 1620 computer. Within the program there were several intermediate

steps, namely:

1. Calculating the average annual yield per acre for the
major crops

2. Establishing an estimating equation

3. Computing the standard error of estimate

4. Determining a partial index of risk.


Average Yield Per Acre


Historical production data for the major crops grown in North

Dakota for the period 1931 to 1963 were used in establishing the aggregate

index of risk. The crops included were wheat, barley, flax, oats, and rye.

These crops were used because sufficient data were available and they are

grown in all counties.

To determine the average yield per acre, total production was

divided by the number of acres planted. There were two reasons for using











CHAPTER V


PROCEDURE FOR THE STUDY


Index of Risk


An aggregate index of risk was formulated as a basis for delineating

the :state into areas with homogenous risk in crop production. This basis

involved a relative measure of variation in yields of major crops in each

county. To obtain the aggregate index of risk, a program was written for

the IBM 1620 computer. Within the program there were several intermediate

steps, namely:

1. Calculating the average annual yield per acre for the
major crops

2. Establishing an estimating equation

3. Computing the standard error of estimate

4. Determining a partial index of risk.


Average Yield Per Acre


Historical production data for the major crops grown in North

Dakota for the period 1931 to 1963 were used in establishing the aggregate

index of risk. The crops included were wheat, barley, flax, oats, and rye.

These crops were used because sufficient data were available and they are

grown in all counties.

To determine the average yield per acre, total production was

divided by the number of acres planted. There were two reasons for using











CHAPTER V


PROCEDURE FOR THE STUDY


Index of Risk


An aggregate index of risk was formulated as a basis for delineating

the :state into areas with homogenous risk in crop production. This basis

involved a relative measure of variation in yields of major crops in each

county. To obtain the aggregate index of risk, a program was written for

the IBM 1620 computer. Within the program there were several intermediate

steps, namely:

1. Calculating the average annual yield per acre for the
major crops

2. Establishing an estimating equation

3. Computing the standard error of estimate

4. Determining a partial index of risk.


Average Yield Per Acre


Historical production data for the major crops grown in North

Dakota for the period 1931 to 1963 were used in establishing the aggregate

index of risk. The crops included were wheat, barley, flax, oats, and rye.

These crops were used because sufficient data were available and they are

grown in all counties.

To determine the average yield per acre, total production was

divided by the number of acres planted. There were two reasons for using











planted instead of harvested acres. One reason is that indemnities paid

by the Federal Crop Insurance Corporation are based on planted acres and

total production.and, secondly, there is greater variation in the average

yield per planted acre which gives a better measure of relative variation

for comparison of risks.


Estimating Equation


The estimating equation used to establish a trend line for each

crop was of the general form Y1 = a + bX2.

Where: Y1 = the dependent variable and is the average
yield per acre estimated by the equation

X2 = the independent variable and is the year
being considered

a = the mean yield for the period being con-
sidered

b = the estimate of the annual change in yield
associated with time.

The "b" may be either a positive or negative number. If it is

positive, average yields are increasing, and if negative average yields

are decreasing.

Since it would be illogical to multiply by the value of the year

such as 1947, the years were coded by the program as follows:

(a) When an odd number of years was considered, the middle
year was assigned the value of zero and years to the
left were assigned values of -1, -2, -3, etc., and the
ones to the right were given corresponding values of
+1, +2,.+3, etc. Example: Year X2 = code

1945 -2
1946 -1
1947 0
1948 +1
1949 +2











(b) When an even number of years was considered, the value
of zero was placed between the two middle years. The
years to the left of zero were given values of -1, -3,
-5, etc., and to the right +1,.+3, +5, etc.
Example: Year X2 = code
1946 -3
1947 -1
0
1948 +1
1949 +3

To determine the values for "a" and "b" in the estimating equation,

the following normal equations were used:

I. ZYI = Na12 + bl2ZX2
2
II. ZYIX2 = al2ZX2 + bl2ZX2

where YI is the average yield per acre, X2 is the coded value of the year

and N is the number of years being considered. The ZX2 = 0, so equations

I and II are reduced to:
ZY1
III. a12 = N
ZY1X2
IV. b12 = --
X2

The "b" values in each of the equations were positive indicating

that average yields have increased during the 33-year period considered.

The estimating equations were not tested for significance because they

were used only to obtain the aggregate index of risk and not used to esti-

made future yields.


Standard Error of Estimate


To determine what proportion of the yields tend to deviate from

the estimates by more than a certain amount, the standard error of esti-

mate was computed for each estimating equation.











An intermediate step necessary in computing the standard error of

estimate was determination of the unexplained variation which is that part

of the total deviation which remains after the general relationship of

yield over time has been accounted for.

The formula used for obtaining the unexplained variation was of the

general form:

2= Zy1 z9
1 2.2 2 2
2
Where: Zyl = the total variation and is the sum of the
deviations between the actual yield and the
mean yield
A2
YI = the explained variation and is that part of
the total deviation which is explained by
the increase in yields over time which
accounts for new technology. It is the sum
of the deviations between the computed yield
and the meanyield
2
y1.2 = the unexplained variation and is the sum of
the deviations between the actual and computed
yields.

The standard error of estimate for each crop was computed by using

the following formula:

Z31.2
S1.2 = N-2

The standard error of estimate was multiplied by 1.96 standard

deviations to establish the 95 per cent confidence limit. That is, the

values computed show the range above and below the trend line within which

the yields would be expected to fall 95 per cent of the time, if the dis-

tribution is normal.











Partial Index of Risk


The partial index of risk for each crop expresses the standard

error of estimate as a percentage of the mean. The formula used was:

R standard error of estimate x 1.96 standard deviations
PIR = x 100
average yield

The partial index of risk expressed the magnitude of the variation

relative to the size of the average yield. This is, two counties may have

the same standard error of estimate of say 6.0, but have average wheat

yields of 10.0 and 15.0 bushels per acre. In the first case, the partial

index of risk would be 60 per cent, and in the second case 40 per cent.

A small value for the partial index of risk indicates that, on a

relative basis, yield is fairly stable compared to a large value which

would indicate wide variations in yield from year to year. It also is

possible for the per cent value to be larger than 100. This means that

yields range from zero to more than twice the average.


Aggregate Index of Risk


The aggregate index of risk gives a relative measure of the amount

of risk associated with the production of five crops in each county. It

serves as a basis for comparing the risk associated in crop production

among counties and for delineating homogenous risk areas.

In the aggregate index of risk, the importance of each crop is

taken into consideration. The partial index of risk for each crop is

weighted by the average number of acres planted to the crop. The

general formula used was as follows:











Partial Index of Risk


The partial index of risk for each crop expresses the standard

error of estimate as a percentage of the mean. The formula used was:

R standard error of estimate x 1.96 standard deviations
PIR = x 100
average yield

The partial index of risk expressed the magnitude of the variation

relative to the size of the average yield. This is, two counties may have

the same standard error of estimate of say 6.0, but have average wheat

yields of 10.0 and 15.0 bushels per acre. In the first case, the partial

index of risk would be 60 per cent, and in the second case 40 per cent.

A small value for the partial index of risk indicates that, on a

relative basis, yield is fairly stable compared to a large value which

would indicate wide variations in yield from year to year. It also is

possible for the per cent value to be larger than 100. This means that

yields range from zero to more than twice the average.


Aggregate Index of Risk


The aggregate index of risk gives a relative measure of the amount

of risk associated with the production of five crops in each county. It

serves as a basis for comparing the risk associated in crop production

among counties and for delineating homogenous risk areas.

In the aggregate index of risk, the importance of each crop is

taken into consideration. The partial index of risk for each crop is

weighted by the average number of acres planted to the crop. The

general formula used was as follows:












AIR = ZPIR for each crop x average acres planted to that crop
total acres of all crops


Risk Areas


The aggregate index of risk was used to delineate the state into

three areas with homogenous risk in crop production, as shown in Figure 12.

The three areas are:

1. Low risk--high yields and low variation for all crops

2. Medium risk--medium yields and medium variation:for
all crops

3. High risk--low yields and high variation for all crops.

The glacial lake plains comprise a major portion of the low-risk

area. The area is nearly level to undulating. The soils are predominately

clay soils of the glacial lake plains and very limy soils of the subhumid

grasslands. The average annual precipitation is about 18 inches per year.

The chernozem soils are predominant in the medium-risk area. The

area is nearly level to gently rolling. These soils were developed under

subhumid grassland conditions and have a thick black surface layer. Pre-

cipitation averages about 15 inches in the northwest to about 18 inches in

the southeast.

In the high-risk area, chestnut soils are predominant. These soils

developed under semiarid grassland conditions. They are nearly level to

gently rolling with a thick dark brown surface layer. The average annual

precipitation is about 15 inches per year.













::: : i.: ::4i::;.::.; ;..... .::.. ::. ........ . ... O



ii.!iiiiiiiiiiiiiiiii^iiiiii ::::i!i~iiii: iii iiiiiiiii:i" I "..
* :*:' :;:. ^.-...-: :" !!^ ^ '" ^ ;i : : ;::::::.::.:::::::; ::::::::::::::::*: : "













I: TRj
... .. iiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiii






MS -.;,, . R.-.SK

:: :: :.;'I ..... .,...: .. ;- -..-... :. .. ".,: :..)


...... .....
f: .,'


,-.,~.5.


BARNES | CASS



::' : : :*: .*i:::.:'^ *: ; l


.**- : .:*:.: :::*.***'.******


.*.. . .. ..


.-., o1
* x- ..'
*5* *J"
,,t5 **5J'.~ ?
.5.5~: r.
S. .


Prdominately Chestnut Soils Pedoinately Chernozem SoilsSoil of the Glcil ke Plain

Figure 12. Areas with Homogenous Risk in Crop Production and Associated Soils in North Dakota, 1963Plains
Figure 12. Areas with Homogenous Risk in Crop Production and Associated Soils in North Dakota, 1963











Historical Production Data


As stated previously, historical production data for the major crops

raised in North Dakota were the basis for determining the aggregate index

of risk. The 33-year period of 1931 to 1963 was used to analyze the trends

and variations in crop yields. Even with this rather large number of years,

it was recognized that the time period may be inadequate to establish the

probability of the occurrence of such events as drought, flooding, frosts,

disease, and insect infestations. Life insurance companies, for example,

have over 100 years of data for determining their actuarial tables. How-

ever, the time period used in this study included the only consecutive

number of years for which complete data for all of the crops were avail-

able.

The general trend for crop yields since the 1930's has been upward.

Several factors have contributed to this upward trend. They are high

annual precipitation, improved seeds, fertilizer, control of weeds,

insects, diseases, and improved farming practices, including timeliness

of operation. Government programs also have contributed to higher yields

by requiring:farmers to leave land idle, which conserves moisture for the

next year's crop.


Indices of Risk


The aggregate index of risk for each county is shown in Figure 13.

These risk indices ranged from 39 per cent in Traill County to 128 per

cent in Sioux County. Within each risk area the aggregate index of risk

ranged from:











Historical Production Data


As stated previously, historical production data for the major crops

raised in North Dakota were the basis for determining the aggregate index

of risk. The 33-year period of 1931 to 1963 was used to analyze the trends

and variations in crop yields. Even with this rather large number of years,

it was recognized that the time period may be inadequate to establish the

probability of the occurrence of such events as drought, flooding, frosts,

disease, and insect infestations. Life insurance companies, for example,

have over 100 years of data for determining their actuarial tables. How-

ever, the time period used in this study included the only consecutive

number of years for which complete data for all of the crops were avail-

able.

The general trend for crop yields since the 1930's has been upward.

Several factors have contributed to this upward trend. They are high

annual precipitation, improved seeds, fertilizer, control of weeds,

insects, diseases, and improved farming practices, including timeliness

of operation. Government programs also have contributed to higher yields

by requiring:farmers to leave land idle, which conserves moisture for the

next year's crop.


Indices of Risk


The aggregate index of risk for each county is shown in Figure 13.

These risk indices ranged from 39 per cent in Traill County to 128 per

cent in Sioux County. Within each risk area the aggregate index of risk

ranged from:















105% Ward 88%
100% 85% Benson 68% 46%
88%


67% 45%


Dunn 91% 78% 7 Griggs Steele Traill
Foster
108% Mc 7 65% 56% 39%

Billings 98% Burleigh Kidder Stutsman
Oliver Barnes Cass
126% 94%
16 9%--- 100% 102% L 77% 67% L 45%
Stark Morton
101% 106%

lope Hettinger Emmons Logan LaMoure Ransom RJ

5% 100% 103% 93% 81% 73%
S---109%
Adams | /Sioux McIntosh Dickey Sargent

8% 114% 128% \ 94% 86% 77%


Figure 13. Aggregate Index of Crop Production Risk in North Dakota, by County, Based on Crop Yields
from 1931 to 1963 Inclusive











1. Thirty-nine to 46 per cent in the low-risk area

2. Fifty-six to 90 per cent in the medium-risk area

3. Ninety-one to 128 per cent in the high-risk area.

To determine which counties to include in the various risk areas,

natural breaks in the indices were used. Between the low- and medium-risk

area there was a spread of about 10 per cent. However,.between the medium-

and high-risk areas there was no major break in the aggregate index of

risk. In this case, the partial indices of risk for each crop, as shown

in Figure 14, were used as a guide to establish the boundaries between

these two areas.

Closer examination of the partial indices of risk reveals that

variation in yields increases from east to west for all crops. Also,

wheat production varies the least in most counties. Rye and flax are

generally the most variable crops in the eastern and western half of the

state, respectively.

It is important to remember that the index of risk only explains

the crop variability in the last 33 years. The risk boundaries established

for this study may change in the future as new technology is developed and

adopted by farmers.


Field Survey


Using the risk areas as a basis, the representative counties to be

studied were selected. An attempt was made to get different types of

farming systems so their influence on crop insurance could be determined.

The counties selected and the predominant type of farming represented in
























a. Partial Index of Risk for Wheat


c. Partial Index of Risk for Oats


d. Partial Index of Risk for Flax


e. Partial Index of Risk for Rye

Figure 14. Partial Indices of Risk in North Dakota, by Crop and County,
Based on Crop Yields from 1931 to 1963 Inclusive











each risk area were as follows:

1. Low-risk area:

Cass County--small grain and specialty crops.
Traill County--small grain and specialty crops.

2. Medium-risk area:

Barnes County--small grainand livestock, also
multiple crop insurance was available.
Bottineau County--small grains.

3. High-risk area:

Stark County--wheat-fallow crop system with live-
stock.
Williams County--wheat-fallow crop system.

In determining the farmers to be contacted, two categories were

used. These were:

1. Participants--those farmers who had federal crop
insurance during the period 1960 to 1962

2. Nonparticipants--those farmers who have had federal
crop insurance but dropped it within the period
1960 to 1962.

A random sample of farmers was drawn from data available in the

county Federal Crop Insurance Corporation files. There was a total of

198 schedules taken, or approximately 66 schedules in each of the three

risk areas. The schedules were about evenly divided between participants

and nonparticipants.











CHAPTER VI


ANALYSIS OF FIELD SURVEY RESULTS


A field survey was conducted to determine farmers' opinions con-

cerning various aspects of the all-risk crop insurance program. The main

objectives of the survey were:

1. To obtain data on the physical and economic character-
istics of farms for determination of any differences
in farm organization within each risk area and between
risk areas that would give an insight into the need of
insurance by farmers

2. To obtain farmers' attitudes concerning all-risk crop
insurance in an attempt to partially explain the
reasons for carrying or not carrying insurance

3. To obtain farmers' suggestions for improving the all-
risk crop insurance program.

For discussion purposes, the information obtained from the question-

naire is divided into the following areas:

1. General farm information

2. Crop production

3. Livestock information

4. Attitudes of farmers concerning the all-risk crop
insurance program.

Throughout this chapter those farmers presently carrying all-risk

crop insurance are called "participators" and their responses to questions

contained in the tables are designated by the letter "P". Those farmers

not carrying all-risk crop insurance are called "nonparticipators" and

their responses to questions in the tables are designated by the letters

"NP".











There were a total of 198 usable schedules obtained. However,

there were cases where some farmers did not answer a particular question.

These exceptions are noted in the analysis that follows.


General Farm Information


The physical and economic characteristics of the farms operated by

the participators and nonparticipators are shown by risk area in Table 9.

It is generally thought that younger farmers and tenants are the

ones who require crop insurance to stabilize income and accumulate capital.

However, the data in Table 9 indicate that the participators are slightly

older than the nonparticipators, with the average age for all risk areas

being 49 and 46 years, respectively. The youngest age group was the non-

participators in the medium-risk area who had an average age of 44 years,

and the oldest group was the participators in the low-risk area who had

an average age of 50 years.

The proportion of part-owners was about the same for both cate-

gories; however, among the nonparticipators there was a higher percent-

age of tenants, while among participators there were relatively more owner-

operators. This was especially true in the low- and medium-risk areas.

In the high-risk area, about 17 per cent of the participators were tenants,

while there were no tenants among the nonparticipators.

The participators in the low- and medium-risk areas operated about

50 acres more cropland than the nonparticipators. However, in the high-

risk area the nonparticipators operated about 180 acres more cropland

than the participators. This observation infers that in the high-risk

area farmers substituted cropland for insurance.









TABLE 9. PHYSICAL AND ECONOMIC CHARACTERISTICS OF FARMS INCLUDED IN THE SURVEY, BY RISK AREA


Low-risk area Medium-risk area High-risk area All risk areas
Item Unit P NP P NP P NP P NP


Number of farmers
Average age
Average cropland operated
Average net worth

Tenurea
Tenant (0-20%)
Part-owner (21-80%)
Owner-operator (81-100%)
Financial factors
Average annual operating
expense
Average annual family
living expenses
Average annual debt
payment
Total average expenses


32 101


Years
Acres
Dollars


Per Cent
Per Cent
Per Cent


577 530 778 728 550
69,332 43,074 62,659 48,574 49,629


732


639


666


58,761 60,126 49,996


Dollars 8,150 8,240b 6,992 6,105 6,331 6,323b


Dollars 3,573 3,793b


Dollars 1279b
Dollars 13,002


1 543b
13,576


7,107


6,850


2,961 2,797 2,280 2,881b 2,907 3,139


917
10,870


1,634
10,536


950
9,561


1,882b
11,086


1,023
11,037


1,697
11,686


Debt payments
Farmers having
debt payments
Average annual
debt payment


Per Cent


Dollars 1,952 2,012 1,834 2,137 1,584 3,070 1,782 2,359


aTenure is based on the percentage of land that was owned
indicated in parentheses following each tenure classification.

bone farmer did not respond.


by the operator.


This percentage range is











In all risk areas, the land operated by the nonparticipators was

not composed of contiguous units to the extent of that operated by the

participators. Generally, the nonparticipators felt that with their land

spread out, the chance of a total loss occurring on all the acreage was

reduced to a point that they were willing to assume the risk. In.other

words, the nonparticipators substituted spatial diversification for all-

risk crop insurance.

The differences in net worth between the categories in each risk

area is in part explained by the differences in size of farm and the per

cent of tenants. That is, the more land that a farmer owns the greater

is his net worth. Generally, the tenants operated smaller acreages than

the part-owners and the owner-operators. Other factors contributing to

the differences in net worth are the amount of machinery investment, the

inventory of grain and feed reserves, and the magnitude of nonfarm in-

vestments.

The average minimum yearly gross income needed to cover annual

operating expenses, family living, and annual debt payment was about

$11,000 for the participators and about $11,700 for the nonparticipators.

In the low- and medium-risk areas there was little difference in average

total expenses between the participators and the nonparticipators. How-

ever, in the high-risk area the difference in average total expenses

between the participators and nonparticipators was about $1,500. Closer

examination of the expense data for the high-risk area reveals that the

average annual operating expenses were about the same for both categories

although there was a difference of about 180 acres in cropland operated.




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