Price Analysis, Risk Assessment, and Insurance for Organic Crops

Ariel Singerman, Chad E. Hart, Sergio H. Lence
August 2011  [11-PB 6]

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Suggested citation:

Singerman, A., C.E. Hart, and S.H. Lence. 2011. "Price Analysis, Risk Assessment, and Insurance for Organic Crops." Policy brief 11-PB 6. Center for Agricultural and Rural Development, Iowa State University.

Executive Summary

In recent years, the organic sector has grown steadily and significantly. However, little economic research has been performed on risk management in organic agriculture, likely because of the lack of available data. This lack of data may also be why the creation of the current crop insurance policy for organic farmers has been so ad hoc.

The Agricultural Risk Protection Act of 2000 recognized organic farming as a “good farming practice,” making federal crop insurance coverage available for organic crops, and taking into account the idiosyncrasies of the organic production system. In addition to the production risks covered for conventional producers, organic farmers who sign up for coverage are compensated for production losses from damage due to insects, disease, and/or weeds. However, the incorporation of organic production into the crop insurance rating structure has been limited. Organic producers are charged an arbitrary 5% premium surcharge over conventional crop insurance. The actuarial fairness of this premium is, at least, questionable. In addition, in the case of crop failure, organic farmers receive compensation based on the prices of conventionally produced crops. Thus, price premiums that organic producers are able to obtain in the market are not compensated for under the current insurance policy structure.

The Food, Conservation and Energy Act of 2008, which amends part of the Federal Crop Insurance Act, was written to investigate some of these claims, requiring the U.S. Department of Agriculture to examine the currently offered federal crop insurance coverage for organic crops as described in the organic policy provisions of the Act (Title XII). Such provisions established the need to review, among other things, the underwriting risk and loss experience of organic crops; determine whether significant, consistent, or systematic variations in loss history exist between organic and nonorganic production; and modify the coverage for organic crops in accordance with the results.

Here we present the major findings of three analyses we performed on key elements of the insurance of organic crops—prices, yields, and revenue—in an effort to contribute to the design of an organic crop insurance policy that covers organic producers according to their idiosyncratic risks.

Keywords: crop insurance, organic agriculture.