| It has been observed that there is a general lack of interest on the part of U.S. farmers in Federal Crop Insurance Corporation (F.C.I.C.) program. In an attempt to provide some explanation of farmers' attitudes towards the program, this study examines the impact of crop diversification, yield risks, price risks, and alternative crop insurance plans on farm income variability. The MOTAD (Minimization of Total Absolute Deviation) model was used to analyze the tradeoffs between expected income and variability of income under alternative risk management strategies. In addition, the interaction of financial risk and crop insurance, and the payoffs of the FCIC's program and the private hail insurance were examined.;It is concluded that F.C.I.C needs to increase their area yield estimates and/or expand the availability of the I.Y.C. option. In addition, they should consider increasing coverage levels in low risk areas such as the Eastern Cornbelt.;The analysis was performed for a "typical" cash grain farm in Wood County, Northwestern Ohio, using experimental yield data for three selected crops, corn, soybeans, and wheat. It was found that farmers can diversify crops to reduce gross margin variability. Yield variability and price variability were found to be important components in gross margin variability. However, price variability appears to be relatively less important than yield variability. The F.C.I.C.'s area yield coverage was found to reduce gross margin, but it had no effect on the variability of gross margins. The individual yield certification (I.Y.C.) option provides more stability than crop diversification. Further, crop insurance based on individual yields was found to be self-sustaining in the long run for coverage levels up to 75 percent for soybeans, and 80 percent for corn and wheat. Crop insurance was found to have little impact on cash flow problems, but the program is found to be potentially more attractive to highly indebted farmers. Private hail insurance was found to be better than the F.C.I.C.'s area yield coverage plans, even at the 80 percent coverage level. |
