Crop Insurance, Fertilizer Use and Crop Yields

Crop insurance is an important aspect of US agricultural policy. While crop insurance generally changes the risk profile of crop production, it also creates an incentive for farmers to be indifferent about loss under imperfect information (Cornaggia, 2013; Phillips, 2017). In this study, we determine whether crop insurance impacts fertilizer use and crop yields. We examined this in the context of the Federal Crop Reform Insurance Act of 1994, which mandated basic crop insurance for all US farmers. Understanding fertilizer use and yields is important because they constitute some of the key farm inputs and outputs that are associated with food security, water and air quality, and climate change. Prior studies find that crop insurance affects crop acreage, chemical input, water resources and output. These studies suggest that a rise in crop insurance leads to increase in crop acreage, chemical input, water irrigation, yield risk and sensitivity to drought (Goodwin, Vandeveer & Deal, 2004; Deryugina & Konar, 2017; Yu, Smith & Sumner, 2018; Connor & Katchova, 2020). A few other studies examine the effects of crop insurance on fertilizer use. Using the maximum likelihood approach, the findings from these studies are inconsistent. While some studies find that fertilizer use drops with a rise in crop insurance (Smith and Goodwin, 1996), others indicate that the intensity of fertilizer use increases with a rise in crop insurance (Chang & Mishra, 2012). In contrast to these previous works, we exploit the 1994 Crop Insurance Act to investigate the impact of crop insurance on fertilizer use and crop yields. We use differences-in-differences coupled with panel data on county crop insurance rates, yields, and fertilizer use. Our estimation strategy compares counties with below-median pre-1994 crop insurance rates to counties with above median pre-1994 crop insurance rates. We employ data on corn, cotton and soybean yield and fertilizer use for a panel of US counties. We find that while the 1994 Crop Insurance Act does not have any significant impact on crop yields, it accounts for a significant increase in fertilizer use. This finding suggests excessive utilization of fertilizer for farming activities. Such overutilization of fertilizer might have harmful health effects to farmers and the general public at large via polluted air and water.