Masters Theses

Date of Award

5-2019

Degree Type

Thesis

Degree Name

Master of Science

Major

Agricultural and Resource Economics

Major Professor

Christopher N. Boyer

Committee Members

S. Aaron Smith, Andrew P. Griffith, Andrew Muhammad

Abstract

Federal crop insurance programs have a prevented planting provision that can protect producers from financial losses and risk associated with delayed planting, but growing concerns about moral hazard in this provision has recently led to prevented planting coverage factor reductions. However, little is known about the likelihood of moral hazard in prevented planting and how this provision change impacts this possibility. The objective of this study was to find the prevented planting option a profit-maximizing and risk-averse corn or cotton producer would prefer. We also determine the likelihood of ex-post moral hazard. If a producer claims prevented planting, they have three planting options to consider, or the producer can take the full prevented planting indemnity payment. History shows that over 99% of the time, producers are choosing the full prevented planting payment. If a producer chooses the full prevented planting indemnity payment over a more profitable planting option, that is considered ex-post moral hazard. Net returns for the prevented planting options were calculated using enterprise budgets, and simulations were conducted to compare the distribution of net returns. We examined how a corn and cotton producer’s optimal decision would change according to insurance policy, insurance coverage, and prevented planting coverage factor. A profit-maximizing, risk-neutral corn and cotton producer with revenue protection (RP) or yield protection (YP) would choose a 35% prevented planting indemnity payment for the first crop and plant uninsured soybeans at almost all insurance coverage levels. Only a cotton producer with 80% YP would choose the full prevented planting indemnity payment. A producer with higher insurance coverage was found to have a higher probability of ex-post moral hazard. We found as a producer’s risk aversion level increases, abandoning the crop for the full prevented planting indemnity payment was preferred. Also, with the reduced prevented planting coverage factor, a producer would need to be more risk averse to switch their decision to the full prevented planting indemnity payment option. Reductions in the prevented planting coverage factors will likely reduce ex-post moral hazard for profit-maximizing and risk-averse producers.

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