The Effect of Increased Producer Participation

The most recent five year period has produced very good results for the MPCI program, as seen in Chart 1. The same five year period has seen much greater producer participation in the program than in earlier years. One interpretation of these results is that the increased participation has brought lower risk producers into the program, reducing the adverse selection and improving the experience. The issue to be addressed here is whether this conclusion is justified. The approach to be taken will be to examine whether farming risk and insurance risk have diminished in recent years.

Chart 18 shows countrywide yields for Corn from 1980 through 1997. The years 1983, 1988, and 1993 all show abnormally low yields relative to the preceding and subsequent years. The long term trend in corn yields is +1.7% per year. The chart also includes the fitted yield curves. The second exhibit, Chart 19, shows the absolute value of the residuals from the first regression. If farming were becoming less risky, yields might be expected to follow the long term trend line on Chart 18 more closely than in the past. As a result, the absolute value of the residuals on Chart 19 should decline over time. A fitted trend line is included on this chart to show that the data does not have a strong downward trend. The absolute residuals in the final three years are below the trend line, but this is also true for the first three years as well as for the period from 1989 through 1991. Also, the t statistic for the slope of the fitted line is not statistically significant at the 95% confidence level. That is, the fitted line is essentially flat. This analysis does not support the conclusion that farming risk is less than in past years.