County-Farm Loss Basis: Evidence from Illinois and Kansas Farm Management Data07/22/2016
Area insurance, including county insurance, is championed, particularly by economists, for several reasons including lower administrative cost and a lower potential for cheating. However, payments by area insurance can cover more or less than a farm’s loss. This so-called area-farm loss basis risk has emerged as a topic of interest. Basis risk is usually examined for a single or only a few years due to availability of data. This study takes a longer term perspective. A long term perspective is desirable because it allows over and under coverage for a given year to be averaged over time. In this study, each farm has reported complete data including yield for the same crop in all or all but one year from 1973 through 2012 to farm management programs in the important crop production states of Illinois and Kansas. Even over 35 years, the county-farm loss basis is found to vary widely across the farm observations. This study also finds that caution is in order when using the county-farm correlation to decide between county and individual farm insurance.