U.S. Cotton Acreage Response Due to Subsidized Crop Insurance

Abstract

U.S. farm policy has undergone a series of premium subsidy increases since 1994 to make crop insurance more affordable to farmers. Previous research shows that subsidized crop insurance may cause farmers to shift or expand production to take advantage of crop insurance subsidies. This study models the acreage response of U.S. cotton to subsidized crop insurance using simultaneous insurance participation and acreage response equations. Results of panel data analyses from 1995 to 2005 suggest that increasing benefits from insurance, such as the per unit subsidy of production, encourages participation and thereby encourages cotton production. In addition, counties with very poor yields are relatively more responsive in terms of insurance participation and acreage to changes in price expectations. Empirical evidence implies that crop insurance policies may be shifting the regional comparative advantage of production from high yield and quality acres to low yield and low quality areas, resulting in economic inefficiencies.