ADAPTATION TO CLIMATE CHANGE WITH CROP INSURANCE: CASE OF THE US FEDERAL CROP INSURANCE (1990-2015)

Abstract

The central question of studies of economic impacts of climate change is adaptation of economic agents. In US agricultural market, it is not known if and how farmers are making decisions to manage risks from climate change with current tools available. How farmers allocate their resources to manage risk under changing risk level of production is not well understood in empirical setting. In this study, I identify the effects of weather shocks on the United States federal crop insurance demand, using crop insurance data, corn production data, weather data, and climate opinion data. The data spans every county in the US from 1990 to 2015. I find that farmers on the eastern side of the 100th meridian line in the US start adapting to climate change by enrolling more corn farmland into crop insurance programs following the period of heat shocks. More specifically, a 1,000-unit of increase in extreme degree days the share of insured land ratio of the next year by 0.02 on average. The results are however observed only in the second period (2003-2015) of the data for the counties in states on the eastern side of the 100th meridian line in the US. One hypothesis that I proposed in this study is that the underlying risk attitude has changed due to changing beliefs about climate distributions. I test the hypothesis of production risk attitude, denoted in this study as proportion of population who believed in global warming to be one explanatory variable with cross-sectional data from the year 2014, regressing it on changes in insured land ratio. I find that the higher share of population who believe in global warming in a county is correlated with higher changes in insured land ratio. This confirms our hypothesis that farmers start adapting to climate change using crop insurance, however, only starting in the second period of the study. The paper contributes to the literature on economic impacts of climate change and crop insurance demand.