De-Risking Agriculture: The Basic Economics of Crop Insurance Versus Sensor-Driven Informatics

Vincent H. Smith, Philip G. Pardey, Alison B. Joglekar and Bryan C. Runck

No 356830, Staff Papers from University of Minnesota, Department of Applied Economics

Abstract: Governments and donors frequently subsidize crop insurance to mitigate agricultural risks from weather and pests. This approach is costly, with taxpayers funding significant subsidies that often benefit financial services providers more than farmers. Efforts to reduce program costs by triggering payments on area-wide or related indexing schemes are impeded by basis risk—compensating unaffected farmers while failing to pay some farmers whose crops failed. Access to accurate weather data is crucial for addressing basis risk and properly aligning indemnity pools with actual crop failures across regions and seasons. We argue that investing in timely, locally relevant weather data collection, access, and associated informatic services offers greater potential returns than subsidizing conventional crop insurance. These investments yield both immediate and long-term benefits through enhanced informatics products that help farmers prevent or minimize crop losses as their current and future seasons unfold. Over time, these informatics also help better align research and seed system development with variable cropping environments. Moreover, unlike insurance, well-calibrated crop informatic products not only reduce risk (by potentially lowering crop yield and profit variability), they can also increase farm productivity (thereby increasing crop output or profits) and thus enhance farm families’ economic well-being over the long-term.

Keywords: Climate Change; Crop Production/Industries; Risk and Uncertainty (search for similar items in EconPapers)
Pages: 48
Date: 2025-05-13
New Economics Papers: this item is included in nep-agr and nep-env
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Persistent link: https://EconPapers.repec.org/RePEc:ags:umaesp:356830

DOI: 10.22004/ag.econ.356830

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