AN ECONOMIC APPRAISAL OF. ALL-RISK CROP INS URANCE
IN NORTH DAKOTA
Submitted to the Graduate Faculty of the.
North Dakota State University
of Agricufture and Applied Science
Herman William Delvo
In Partial Futl1 Ument' of thei"M .ditften-ts
for. the 'Degree of Master of Scieace
Fargo, North Dakota
AN ECONOMIC APPRAISAL OF ALL-RISK CROP INSURANCE
IN NORTH DAKOTA
Submitted to the Graduate Faculty
North Dakota State University of Agriculture and Applied Science
Herman William Delvo
Fulfillment-of the Requirements for the Degree of Master of Science
Fargo, North Dakota
This thesis is approved by:
Laurel D. Loftsgard, Advisor
Fred R. Taylor, Chairman Department of Agricultural Economics
Sincere gratitude is expressed to Dr. Fred R. Taylor and the entire staff of the Department of Agricultural Economics for the assistance provided 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.
TABLE OF CONTENTS
I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . I
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 . . . . . . . . . . . . . . . 0 . . . 7
Need for All-Risk Crop Insurance Research . . . . . . . . 8 North Dakota's Need for Research . . . . . . . . . . . . 10
Objectives . . . . . . . . . . . . . . . . . . . . . . . 10
General Procedure . . . . . . . . . . . I . . . . . . . . . 12
II. REVIEW OF LITERATURE . . . . . . . . . . . . . . . . . . . 13
III. HISTORY.OF ALL-RISK CROP INSURANCE . . . . . . . . . . . .19
National Basis . . . . . 0 . . . . . . . . . . . . . . . . 19
Experience of Private Insurance Corporations . . . . . . . 21 Development of the Federal Crop Insurance Program . . . o . 22
Experience Since 1948* . . . . . . . . . o . . . . . . o 24
Causes of Indemnities . . . . . . . . . . . . . . 28
Description of FCI Programs. . . o . . . . . . . 31
History of All-Risk Crop Insurance in North Dakota 33
Program from 1939-1947 . . . . . . . . . . . . . . . . 33
Program from 1948-1963 . . . . . . . . . . . . . . . o 35
All-Risk Protection. . o . . 0 . . 0 . . . . . . 0 46
Average Cost of All-Risk Crop Insurance. o. . . . o 0 46
IV, MANAGEMENT CONCEPTS. o . . _ . o . . . o , o * # * 48
Role and Functions of Management . . . . . . . . . . o . 48
Risk and Uncertainty . . . . . . o . . . o . 0 . 0 . . 0 51
Management Strategies. . o . # . o . o o . . . . . 55
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 . . . . . . . . .
ï¿½ ï¿½ , e , O
ï¿½ ï¿½ ï¿½ ï¿½ ï¿½ ï¿½ ï¿½ ï¿½
. . . . . . . . . . . .
PAGE 109 109
112 117 126 126 129 132
'VII. SUPPLEMENTAL STUDIES AND FINDINGS . . . . . . . . . . . . .
All-Risk Crop1nsurance Versus Hail Insurance . . . . . . 0
Comparison of Premiums . . . . . . . . . . . . . . . .
Federal Crop Insurance Coverage Versus Average
Production Expenses . . . . . . . . . . . . . . . . . . .
VIII. SUMMARY AND CONCLUSIONS . . . . . . . . . . . . . . . . . .
Summary . . . . . . . . . . . . . . . . . .
Conclusions . . . . . . . . . . . . . . . . .
.BIBLIOGRAPHY . . . . . . . . . . . . . . . .
LIST OF TABLES
1. Experience of FCIC Wheat-Yield Insurance for 1939,'1940,
and 1941 . . . . . . . . . . . . . . . . . . . . . . . . . 23
2. Loss Ratio, by Type of Program and CropYear 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 1,963 . . . . . . 43
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. . . . o . . . . . . . . o . . . 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 . . . I . . . . . . . 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
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 . . . . . . . . . 0 . 19. Comparison of Premiums for Multiple and Separate Crop
Insurance, in Barnes County, North Dakota, 1963 . . .
2. Farmers' Responses to Alternative InsurancePrograms . . 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
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 SummerAreas 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 . .
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
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. . . . . . . . . . . . . . . . . .o . o 27
5. Proportion of All FCI Indemnities Paid for Various Hazards,
1948-1963. o . . . o. . . . . .- 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
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 Associated-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 . . . . . . . . . . . 1
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 SpringWheat Under Continuous Cropping
in North Dakota, 1963 . . . . . a . . 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 SelectionPer 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
The keynote of North Dakota and Great Plains agriculture is "1variability." 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 establishment 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 Committee, 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 formthe western boundaryof 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
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 considerably. 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.
21bid., pp. 23-36.
S. \ S.
.0* T~ h* ~ 0
WEST BOUNDARY OF PEDALFERS (HUMID SOILS)
- .- . . . - --"
U I, o o o I I .'jI.
/ I 1 ,. . .
I1. . -- . """" --!* '
/ /. . TALL GRASS EAST OF LINE
. SHORT GRASS WEST OF LINE
! k"/ , " . . . .
BOUNDARY OF GREAT PLAINS REGION
AS CONSIDERED IN THIS REPORT .* "
BOUNDARY OF THE GREAT PLAINS I i: A
A AFTER ALNN N FEA W IerA t(869 PlWVSIORAA0w comwrrlr 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.
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 'Ude&l"' .for .-prop,.pt6duction.
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 precipitation 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 droughty 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
in a short growing season.
Rainfall is one of the most important factors affecting crop yields in the Great Plains. The amount, distribution, and intensity of precipitation 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 variation 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 fluctuation in price and farm income from year to year.
The history of the development of the Great Plains is important in understanding the attitudes of its inhabitants. Prior to 1860 the inhabitants 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 replaced 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 outmigration 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. Duringithe last 25 years there have been droughts, but none as severe or long as the preceding ones.
Need for Research on Risk
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
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 recognized, 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 suff ice.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
61bid., 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. Consequently, studies were deemed necessary to determine:
1. The adequacy of all-risk crop insurance in areas
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 insurance 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 a.11-risk crop insurance program is based
2. To determine effects of present crop insurance on
level and stability of farm income and financial
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
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 proportion 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 participation in the eastern part.
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%D un Mc ea 27% Sheridan ells Wer Griggs Steele Traill
117. Mercer -' 21% 12% 67% 33%,
Ide n iBillngs 8 . Burleigh Kidder iStutsma ]
llIey I Included Olivr Ba ne Cass 625
with i 22% 23% 21% 47% 66%25
8 % S t a r k S t r ort on
J FSlope [Hettinger Emons, Logan 32%ur Rasom]
13% 14% 14% 1373% 7
w 16% IAd as S oui7.Mclnt shDickey Srgent
1%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
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.
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
3. A means for transfer of particular risks to the
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 particular risks to another party, called the insurer, who offers
a restoration, at least in part, of economic loss suffered by
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 underwriting 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
4. A plan for three- or five-year contracts.
Sanderson5 stated that the principal causes for the adverse selection 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.
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
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 whenthe 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 relatively 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 successfully 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 other factors may receive improper weight. This type of insurance would be most easily adapted to areas in which oneor two weather factors, such as precipitation 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 redut.ed. 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
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 simultaneously 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.
Thairl0 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 seen~ed 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.
lOThair, 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.
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.
HISTORY OF ALL-RISK CROP INSURANCE
With the modern methods of farming, farmers must make a major capital investment to produce a crop. The cash outlay for such items as fertilizer, 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 investment, 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
IRowe, 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.
21bid., p. 9.
It also spreads the losses over many areas and over many years. The individual 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 infestation 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 establish 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 Corporation, 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
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.
6 'Ibid., 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 experience of the company is not definitely known.
' Ibid., 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 insurance. The most extensive coverage was writtenby the Hartford Fire Insurance 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 allrisk 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.
81bid., 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., Januaryl, 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 standpoint, 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 a paida Lossb
year insured paid (bushels) (bushels) ratios
1939 165,777 55,912 6,684,215 10,163,127 1.52
1940 361,586 112,726 13,806,143 2282121.65
14c 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.
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 Corporation was authorized in 1956 to consider certain costs as nonadministrative 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.
1OThe 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.
llPrior 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
-I 1 0 00 00
ILIE~______ L ______ I I I 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.
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. 1213.
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 DOLLARSALL PROGRAMS
NN N N
19,48',49 '50 '51 '52 '53 '54 '55 '56 '57 '58 '59 '60 '61 '6 2 '6 3
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
LOSS RATIOS 1948 - 7963
Program CROP YEAR
1948 1949 11950 1951 11952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1-48-63 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 .62 1 .42 .49 1 .79 .95 .77 .77 .54 2.46 .45 1.64 .47 1.27 .65 .79 .80
Bean .29 .64 1.84 3.14 1 .55 .62 1.60 .66 .96 1.03 .32 .91 .59 .54 2.03 .61 1.08
Citrus .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
leach .50 .77 1.13 .76 .63 1.81 1.03 1.22
Grain Sor-ghum 1 .27 .28 .70 .39 .78 .72
Oat 1 .99 .65 1.26 .47 .60 .67
Rice 1 1 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
TP 71 e7s- .34 .34
Tomatoes .43 .43
All Programs 1 1. 12 7 1 1.15 1.24 1 1.14 1 1.26 .69 .26 .77 .58 .89 1.10 .82 94
THE 7963 CROP YEAR PREMIUMS AND INDEMNITIES ARE BASED ON JANUARY 3, 7964 ESTIMATES.
PREPARED JANUARY 1964.
Table 2. Loss Ratio,, by Type of Program and Crop Year on a National Basis, 1948-1963
United States Department of Agriculture
FEDERAL CROP INSURANCE CORPORATION
Figure 5. Proportion of All FCI Indemnities Paid for Various Hazards, 1948-1963
Source: Based on data from North Dakota FCIC Office, Bismarck,
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 individual'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 leasewould 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
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 multiplied 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. HoweverP if a farmer has three or more consecutive-years without 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 crops 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 substitutecrop, 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 Dakotal6
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 requirement 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 usingits long-time average yield. The farmer could insure either 50 or
161nterview 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 FOIC or he could pay cash based on the market price at that time.
If a farmer was eligible for an indemnity, he received an indemnity 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 physicalodeteribration 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 coverages 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 theseyears 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
GOLDEN VALLEY COUNTY
Coverage group number and practice:
Premium rate area number and practice:a
Part A: Coverage per acre
Part B: Uniform area premiumm
rate per acre u
.5 .8 1.4
.5 .8 1.4
Coverage group number:
Part A: Coverage per acre
Premium rate area number:a
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 otherwise 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 operations, 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 insurance 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.
b. Flax Insurance
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
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 coverage 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 crops harvested, the bushel guarantee is increased by,,the following amounts to cover the harvesting costs:
crop Bushel increase
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 crops 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
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. However, during the next three-years indemnities exceeded premiums and the reserve was used up and a loss of a-bout 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
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 832P810
4,708,535 9s441,014 -1:899,669
1955 49s513,598 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 29567,703 2,271$431 5 983s861
1960 28,868,988 2,187,558 553s791 7:617$628
1961 31,848,970 2s653,220 6sMsM 3,458$125
1962 33,042,126 39020,701 9469979 5,531,847
1963 44,074s645 3,337,157 1,906,343 63,962,661
Total $635,732,792 $49,295,966 $42$333,305
Source: Based on data from North
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 probability 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 1948 1949 1950 1951 1952 -1953 11954 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 3.0 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 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 i29.2 33.7 .1.3 36.8, 6.4 22.7
Soybeans 26.2 10.0 11.8
All programs 6.4 1.8 J.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 primarilyto 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 indicate 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 corninsurance had been available from 1953 to 1961 when growing conditions were generally favorable, 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 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 FOIC.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 highloss 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 APER CENT OF THE LIABILITY IN NORTH DAKOTA,, BY CROP AND YEAR, FOR THE PERIOD 1948 TO 1963
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 0.4 8.9 8.7 9.1 9.6 7.4 8.8
Flax 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.
Since income variability is the chief characteristic of agriculture in the Great Plains, it is necessary to consider how it affects the decisions 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 livestock enterprises, they are faced with imperfect knowledge. A basic cause of imperfect knowledge or uncertainty is variability.I 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 eliminatevariability.
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.
iHedges, Trimble R., Farm Management Decisions, Prentice-Hall, Inc., Englewood Cliffs, New Jersey, 1963, p. 577.
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 additional 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 information 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
Flexibility exists permitting a voluntary decision
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,
its relevancy determined, and solutions prepared. All the solutions may be rejected (negative decision) or one may be selected and put into operation (positive decision).
The farmer will make his decisioniand 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 betweenrisk and uncertainty is "probability." Uncertainty occurs when the probability of an outcome cannot be established 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 0., 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, PrenticeHall, Inc., Englewood Cliffs, New Jersey, 1964, pp. 25-32.
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. Noneconomic 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 financial 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 conditions 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 uncertainties 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 considered, the probable number that will burn in any one year can be predicted 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 speculative 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 classifications 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 established.
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 uncertainties, 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 techniques 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.
Various strategies are employed by farmers to eliminate the possibility of a financial loss, or at least to minimize its effects. The strategies employed may be classified as formal or informal.
5Hedges, .2p 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 possibility of suffering a large financial loss. Types of insurance available to most farmers include: all-risk crop, hail, life, fire and wind, liability 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.7
Prior to purchasing insurance an individual stands a chance P (0 to 1.0) of receiving income 12 or a chance (l-P) of not losing his present income II. The individual can attain his goal of inaximizing average utility U with an income Ic. It is noted that the average income 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
7U and T 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.
4~) _ _____ ____12 'c 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 probability for obtaining either income II or income 12. An individual with a utility curve represented by bd would be-willing to pay a premium 7 - 'a 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.
uI . . .
12 Ia Ib I I,
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. Theiincome guaranteed by theinsurance company is represented by the line 'Icand 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 utilitylline (d) 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 u) between Ic and Y 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.
12 Ic Y I1
Income or Assets
Figure 11. Graphic Illustration of the
Way Insurance is Purchased.
PROCEDURE FOR THE STUDY
Index of Risk
An aggregate index of risk was formulated as a basis for delineating t e 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
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 grownin 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 productionand, secondly, there is greater variation in the average yield per planted acre which gives a better measure of relative variation for comparison of risks.
The estimating equation used to establish a trend line for each crop was of the general form YI = a + bX2.
Where: Y, = 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 considered
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
(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
To determine the values for "a" and "b" in the estimating equation, the following normal equations were used: I. ZYl = Na12 + bl2ZX2
II. ZYIX2 r al2ZX2 + bl2ZX2 where ,Y 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: ZYI
III. a12 = N
IV. b12 =--2 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 estimade 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 estimate 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:
Ef zy1 - z 1
Where: yl = the total variation and is the sum of the deviations between the actual yield and the mean yield
Zyl = the explained variation and is that part of the total deviationwhich 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
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:
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 distribution 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:
PIR- =standard error of estimate x1.96 standard deviations 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 yieldsrange from zero to more than twice theaverage.
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
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
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. Precipitation 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.
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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. However, the time period used in this study included the only consecutive number of years for which complete data for all of the crops were available.
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 par cent in Traill County to 128 per cent in Sioux County. Within each riskarea the aggregate index of risk ranged from:
105%7[ Ward 88%
100% L 85% Benson 68% 46%
McKenzie 83% _Nelson Grand Forks
99% Mc ean Sherlian[ Wells [i:4= 1
I D u n n 9 2 1 8 % - -4 G r i g S t e e l e T r a i l l
10 8 % M er 8cer 75 % 6 % 5 6% 3 9 7,
i i l i g 9 8 % ur l e g K i d d e r I S t u .t s m a n 11
1 2 6 9 4%-- - 1 0 0 % 1 0 2 % 7 7 % . 6 7 %4 5
fark Morton I u
0 1% -G an 10 6% I
llope Hettnger ' Emmons. Logan aMoure Ransom RJ
5% I 100% 103 -%/. Emm 93% 81% 73%
I~~ ~ C-l. 1 09%
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 mediumand 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.
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 farmingrepresented in
a. Partial Index of Risk for Wheat
d. Partial Index of Risk for Flax
c. Partial Index of Risk for Oats
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 grain and livestock, also
multiple crop insurance was available.
Bottineau County--small grains.
3. High-risk area:
Stark County--wheat-fallow crop system with livestock.
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.
ANALYSIS OF FIELD SURVEY RESULTS
A field surveywas conducted to determine farmers' opinions concerning 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 characteristics 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 allrisk crop insurance program.
For discussion purposes, the information obtained from the questionnaire 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
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 nonparticipators 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 categories; however, among the nonparticipators there was a higher percentage of tenants, while among participators there were relatively more owneroperators. 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 highrisk 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
Part-owner (21-80%) Owner-operator (8-100%)
Average annual operating
Average annual family
Total average expenses
Years Acres Dollars
Per Cent Per Cent Per Cent
577 530 778 728 550
69,332 43,074 62,659 48,574 49,629
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 1,279b Dollars 13,002
1 543b 13,576
2,961 2,797 2,280 2,881b 2,907 3,139
debt payments Average annual debt payment
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 allrisk 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 investments.
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. However, 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.
This situation can be explained by differences in resource-use and efficiency. One reason why the nonparticipators had higher average total expenses in the high-riskarea was because of higher average annual family living expenses and debt payment.
For all-risk areas, the average annual debt payment for the nonparticipators was about $700 higher than for the participators. About 72 per cent of the nonparticipators had annual debt payments compared to about 58 per cent of the participators. Closer examination of the data on debt payments in Table 9 reveals that in the low- and medium-risk areas there was little differencein the average annual debt payment of participators and nonparticipators. However, in the high-risk area the average annual debt payment of the participators was lower than the nonparticipators by about $1,500. This comparison indicates that as the average annual debt payment increases, other expenses are reduced and farmers place greater importance on repaying the debt than protecting their investment in the crop.
About 38 per cent of the nonparticipators had nonfarm income compared to 30 per cent for the participators as shown in Table 10. The participators in the low-risk area and nonparticipators in the high-risk area had the highest average nonfarm income of about $3,300. About 47 per cent of the nonparticipators in the medium-risk area had nonfarm income, but their average nonfarm income was the lowest of any group at about $1,000 per year.
The average gross farm income of the nonparticipators in 1962 tended to be lower than that of the participators. About 33 per cent of the participators and 38 per cent of the nonparticipators had gross farm incomes between $5,000 and $9,999, while 37 per cent of the participators and 36
TABLE 10. ESTIMATED 1962 NONFARM AND GROSS FARM INCOME 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
Per cent having
nonfarm income Per Cent 23 29 36 47 29 38 30 ,38
Average nonfarm income Dollars 3,286 1,442 1,350 987 1,425 .3,375 1,827 1,892
Gross farm income in 1962
$ 50-2,499 Per Cent 3 19 3 0 9 4 5 7
2,500-4,999 Per Cent 7 3 0 3 .9 10 5 5
5,000-9,999 Per Cent 23 42 30 35 42 42 33 40
10,000-19,999 Per Cent 33 29 47 50 28 32 36 38
20,000-39,999 Per Cent 27 7 17 12 9 6 17 8
40,000 and over Per Cent 7 0 3 0 3 6 4 2
per cent of the nonparticipators had gross farm incomes between $10,000 and $19,999. Of those with gross farm incomes over $20,000, twenty-one per cent were participators and 8 per cent nonparticipators. On the other hand, 12 per cent of the nonparticipators and 10 per cent of the participators had less than $5,000 gross income. The difference in the gross income between the participators and nonparticipators is in part explained by land ownership. As stated previously, there were more tenants among the nonparticipators and more owner-operators among the participators. This indicates that, of the total output produced on farms operated by nonparticipators, more goes to the landlord; while on farms operated by participators, more of the output is credited to the operator.
Examination of Tables 9 and 10 reveals that in the low- and mediumrisk areas, the participators operated more acres, owned more of their land, had lower minimum yearly expenses and annual debt payment, and higher nonfarm income and gross farm income than the nonparticipators. This seems to indicate that in the low- and medium-risk areas, as the farmers acquired more assets they were willing to purchase insurance to protect their assets against unforeseen hazards. On the other hand, those farmers not carrying all-risk crop insurance tended to avert risk through spatial diversification and the transfer of part of the risk to the landlord.
In the high-risk area, the nonparticipators had larger farms,
higher minimum yearly expenses and annual debt payment, and more nonfarm income and gross farm income as compared to the participators. In the high-risk area, the nonparticipators generally relied on self-insurance through land ownership; reserves of cash, grain and feed; nonfarm income;
and spatial diversification to avert risk.
Federal Crop Insurance is designed to protect the farmer's investment in his crops. The basis for determining indemnities is the bushel guarantee acre. A general statement often made is that the bushel guarantee is too low and that it doesn't cover operating expenses.
Average Yield and Production
Expenses Per Acre
To determine the adequacy of the bushel guarantee provided by allrisk :crop insurance in covering the investment in the crop, the farmers interviewed were asked to specify their usual yield and production expenses per acre. Their answers were compared to previously determined average yields and production expenses as shown in Table 11. The farmers' responses to questions on yield and production expenses were then compared to these average data and correspondingly classified as being above average, average, or below average and analyzed by crop and risk area as shown in Table 12.
The data in Table 12 reveals that there were no major differences in the proportion of farmers among the risk areas that had above average, average, or below average yields and production expenses. In other words, no significant conclusions can be made from these data regarding differences between participators and nonparticipators, or among risk areas.
TABLE 11. AVERAGE YIELD AND PRODUCTION EXPENSES FOR THE COUNTIES INCLUDED
IN THE FIELD SURVEY, BY CROP
Crop Traill Barnes Bottineau Stark Williams
Average yield per acre (bushels)
Wheat on summerfallow 29 24 22 17 16
Wheat under a continuous
cropping practice 24 16 14 13 12
Barley 28 23 21 18 19
Oats 42 34 28 27 25
Flax 9 8 6 5 5
Average production costs per acrea
Wheat on summerfallow $14.75 $12.05 $12.15 $11.10 $11.45
Wheat under a continuous
cropping practice 17.60 14.25 13.55 12.55 13.20
Barley 16.20 12.70 12.35 10.30 10.55
Oats 15.00 11.45 11.60 9.55 9.80
Flax 14.45 12.40 11.10 9.45 10.00
Summerfallow 6.15 5.40 4.30 2.50 3.00
aThe cost of crop insurance labor is not included.
and the return to land and operator
Source: Loftsgard, Laurel D., and Sobering, Fred D., Crop Costs and
Returns, Circulars FM-63-1, 2, 4, 5, and 7, Cooperative Extension
Service and Agricultural Experiment Station, North Dakota State
University, Fargo, North Dakota, March, 1963.
TABLE 12. FARMERS' RESPONSES TO QUESTION CONCERNING THEIR USUAL YIELDS AND PRODUCTION EXPENSES, BY RISK AREA
Crops & Low-risk area Medium-risk area High-risk area All risk areas
cost P NP P NP P NP P NP
classes Ylds. Costs Ylds. Costs Ylds. CssYlds. Costs Ylds. Costs Ylds.'Costs Ylds. Costs Ylds. Costs
(Per cent of farmers responding)
Wheat on SF:
Above ave. 62 28 43 .39 46 35 33 29 71 34 72 42 60 33 49 36
Average 17 55 25 25 31 47 32 47 20 46 25 39 23 49 28 38
Below ave. 21 17 32 36 23 .18 35 24 9 20 .3 19 17 18 23 26
Wheat on CC:
Above ave. 67 40 30 100
Average .30 30
Below ave. 33 100 .30 40
100 75 67 33 90 30 45 25
25 33 17 10 40 20
50 10 60 15 55
Above ave. 79 11 79 24 85 22 93 23 83 28 79 34 82 20 84 27
Average 7 .30 11 28 12 28 7 30 14 31 17 33 11 30 11 30
Below ave. 14 59 10 48 3 50 47 3 41 4 33 7 50 5 43
Above ave. 81 15 71 33 86 20 84 .13 71 21 80 29 79 19 79 24
Average 41 17 21 5 30 3 30 25 50 12 46 11 41 10 32
Below ave. 19 44 12 46 9 50 13 57 4 29 8 25 10 40 11 44
Above ave. 85 31 56 44 68 19 59 18 100 33 75 50 79 26 58 34
Average 15 38 .33 15 27 29 32 36 67 25 19 36 32 23
Below ave. 31 11 41 5 52 9 46 50 2 38 10 43
Summerfallow: Above ave. Average Below ave.
Generally, it is assumed that when yields are low and costs are
high individuals have a greater tendency to purchase insurance. However, in comparing the average yields and costs for all crops of the participators and nonparticipators, it is noted that the participators generally had above average yields while a higher percentage of the nonparticipators had above average costs. This observation infers that, as production costs increase and yields decrease, the all-risk crop insurance premium is one of the first items eliminated in an attempt to reduce expenses and increase income. However, there is incomplete evidence to support this inference.
A subjective estimate of crop yield variability was determined by recording farmers' answers to questions on yield variability. Farmers were asked which of their crops had the greatest yield variability and which crop had the least. An alternate question was if all their crops had about the same yield variability.
The answers to these questions were analyzed by crop and risk area as shownin Table 13. Both participators and nonparticipators indicated that barley yields varied the most and wheat yields the least. Barley.is generally planted under a continuous cropping practice making it more vulnerable to drought. Also, it is more affected than other crops by hot winds which prevail during the summer months.
TABLE 13. FARMERS' RESPONSES TO QUESTIONS CONCERNING YIELD VARIABILITY
OF CROPS, BY RISK AREA
Yield Risk areas
variability Low Medium High All areas
by crops P NP P NP P NP P NP
(Number of times mentioned)
Most variable crop:
Barley 12 13 18 14 15 18 45 45
Oats 1 4 1 5 3 4 5 13
Flax 15 13 11 8 1 1 27 22
Wheat 1 2 1 1 2 4 3
Least variable crop:
Wheat 16 19 24 16 16 21 56 56
Oats 5 2 5 5 3 3 13 10
Barley 1 4 1 4 2
Flax 4 1 2 1 6
All crops vary the same 3 2 3 9 15 7 21 18
Flax was the second most variable crop when all areas were considered, and the most variable crop in the low-risk area. Generally, farmers plant wheat and barley early in the spring and on land "best suited" for crop production because these are the major cash crops in North Dakota. Frequently, flax is planted later in the spring, either as a companion crop for grasses or a substitute crop. The flax seedling is weaker than that of other grains. It may have more difficulty in emerging because hard rains often cause the soil to crust. Also, yields can be lowered by heat and drought during the flowering stage and by early frost before the plant matures in the fall.
Wheat yields vary theleast in all areas. Generally, wheat is seeded early and on summerfallow, making it less susceptible to drought and hot winds. Also, the varieties of wheat presently used by farmers
are rust resistant.
In the high-risk area, about half of the participators and a fourth of the nonparticipators indicated that all crops varied about the same as far as yield was concerned. Those farmers indicating that all crops varied the same usually indicated that drought would affect large areas as compared to hail and other hazards which generally affect only one field or a relatively small area.
In response to questions concerning natural hazards, both the participators and nonparticipators in all risk areas indicated that drought was the most important natural hazard that affected crop yields as shown in Table 14. In the low-risk area, the second most important hazard was excess moisture, which was mentioned 13 times by participators and 16 times by nonparticipators. Hail was the second most important hazard in the medium- and high-risk areas. Insects were mentioned as the third most important hazard in all risk areas.
TABLE 14. FARMERS' RANKINGS OF NATURAL HAZARDS WHICH AFFECT CROP YIELDS Risk areas
Natural Low Medium High All areas
hazards P NP P NP P NP P NP
(Number of times mentioned)
Drought 26 25 36 28 29 24 91 77
Hail 6 6 14 12 16 23 36 41
Heat 6 8 6 11 12 9 24 28
Insects 7 1 11 12 12 12 30 25
Disease 3 4 4 4 11 4
Other a 18 26 6 10 5 7 29 43
alncludes excess moisture.
The importance of hazards, as enumerated by the farmers, conforms quite closely to the experience of the Federal Crop Insurance Corporation in North Dakota, as shown in Table 15. Drought has been the major cause of losses for wheat, flax, barley, and oats versus excess moisture for soybeans and corn. The second most important cause of losses has been hail for wheat, barley, oats, and soybeans, while for flax it has been excess moisture. An important cause of wheat loss was rust in 1953 and 1954 when about 9.5 million dollars in indemnities were paid. There is no breakdown of the causes of losses for the combined crop insurance program; however, because a majority of the counties having this type of protection are in southeastern North Dakota, the losses were most likely from drought, hail, and excess moisture.
TABLE 15. FEDERAL CROP INSURANCE INDEMNITIES PAID TO NORTH DAKOTA
FARMERS, BY CROP AND CAUSE OF LOSS, 1948 TO 1963
Crop Indemnities Drought Hail moisture Disease Other
(Dollars) (Per Cent)
Wheat $28,221,558 35 16 3 35 11
Flax 2,953,079 47 8 20 4 21
Barley 1,175,926 43 20 15 1 21
Oats 166,578 48 26 9 17
Soybeans 62,640 1 9 90
Combined cropa 9,665,326
aBreakdown by cause of loss was not available.
To determine the effects of livestock enterprises on participation in the Federal Crop Insurance program, farmers were asked to specify the usual size of their livestock enterprises and their reasons for having livestock. About 66 per cent of the participators indicated that livestock did not stabilize farm income, while about 65 per cent of the Ronparticipators said that livestock tended to stabilize farm income.
The various livestock enterprisesI were combined on an animal unit2 basis for comparison of livestock numbers on different farms. About 73 per cent of the nonparticipators and 69 per cent of the participators had livestock enterprises with their average number of units being 37 and 41, respectively. Generally, the number of farms with livestock and livestock units per farm increased from east to west. An exception was in the lowrisk area where the participators had an average of 51 livestock units (mainly beef feeders) per farm which was the largest number for any group.
Of the farmers having livestock, the reasons given by 63 per cent of the participators and 76 per cent of the nonparticipators for having livestock was to stabilize farm income. If these same individuals could have stabilized their farm income without having livestock, about 49 per cent of the nonparticipators and 34 per cent of the participators said that they would not have livestock enterprises.
lSupplementary enterprises were not included.
2One animal unit equals .9 milk cows, .8 beef cows, .7 cattle on feed, .64 all other cattle, .20 hogs on feed, .15 stock sheep, .074 sheep and lambs on feed.