Implications of the Federal Crop Insurance Program on Water Sustainability in the United States Prasenjit Ghosh, Ruiqing Miao, and Emir Malikov (Auburn University) Prepared for the 2019 ASSA Annual Meeting, Atlanta, GA January 5, 2019

Govt. outlay $7.7 billion annually Motivation Crop insurance program covers more than 80% of cropland and about 130 crops Govt. outlay $7.7 billion annually Agriculture is the largest user of water (70% of fresh withdrawals within the U.S.) How will crop insurance affect irrigation water use?

Background Information Insured Acreage and Premium Subsidy Rate in the United States (1980-2017) Insured Acreage (million acres) Premium Subsidy Rate (%) Insured Acreage Premium Subsidy Rate Year

Background Information (Contd.) Water Withdrawals (Mgal/day)

Potential channels through which crop insurance affect water use Intuition Potential channels through which crop insurance affect water use Land use impacts of crop insurance Moral Hazard leads to “normal” amount of irrigation to receive indemnity payment May not be sufficient in extreme events Push farmers to irrigate when crop has failed Net impact of crop insurance on irrigation withdrawals is not clear

Literature Review Deryugina and Konar (2017): Overlooked the impacts of climate variation and water rights Regional analysis of one crop Time period: 1990-1995 May suffer from omitted variable bias

Our Contribution Comprehensive analysis Entire contiguous U.S. Expanded time frame: 1985-2015 Incorporate climate variation and water rights information

Empirical Approach Poisson Fixed Effects Regression via GMM Nonlinear panel-data model Wooldridge quasi-differencing transformation Moment condition

Identification Strategy Instrumental Variables (IVs): Subsidy rate at 75 % coverage level First order lag of monthly maximum temperature First order lag of monthly precipitation

Data USGS National Water Information System Total fresh water use (Mgal/day) Fresh groundwater use (Mgal/day) Fresh Surface water use (Mgal/day) RMA’s Summary of Business Reports Subsidy amount ($) Liability amount ($) Insured Acres Ag-Analytics: Cornell University Monthly maximum temperature (Celsius) Monthly average precipitation (Millimeters) Water Rights Institutions

Results Table 1. Poisson Fixed Effects Regression Estimates via GMM   Total Water Groundwater Surface Water Variables (1) (2) (3) (4) (5) (6) (7) (8) (9) Subsidy Amount -0.079*** -0.091*** -0.068*** -0.008 -0.166*** -0.125*** -0.128*** -0.100* (0.015) (0.021) (0.017) (0.024) (0.073) (0.033) (0.028) (0.030) (0.054) Temperature Yes Precipitation Water Rights No Year Fixed Effects FIPS 2,602 Obs. 12,641 Note: Robust standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1. We use subsidy rate at 75% coverage level, first order lag of average maximum temperature of the growing season, first order lag of average precipitation of the growing season as IVs.

Results (Contd.) Table 2. Poisson Fixed Effects Regression Estimates via GMM Total Water Groundwater Surface Water Variables (1) (2) (3) (4) (5) (6) (7) (8) (9) Subsidy Amount -0.071*** -0.154*** -0.103*** (0.016) (0.027) 0.038) Liability Amount -0.141** -0.123*** -0.058 (0.066) (0.034) (0.040) Insured Acreage -0.047*** -0.038 -0.011 (0.009) (0.042) (0.242) Temperature Yes Precipitation Water Rights Tim Trend No Year Fixed Effects FIPS 2,602 Obs. 12,641 12641 Note: Robust standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1. We use subsidy rate at 75% coverage level, first order lag of average maximum temperature of the growing season, first order lag of average precipitation of the growing season as IVs.

Conclusions Holding everything else fixed, one dollar increase in subsidy amount in a county, on average, leads to decreases of 1.68 gallon/day of fresh water withdrawals 1.87 gallon/day of groundwater withdrawals, and 1.34 gallon/day of surface water withdrawals for irrigation Results are robust to various specifications of explanatory variables Provides empirical evidence that federal crop insurance programs encourage water sustainability

Acknowledgement Partially Sponsored by: Alabama Agricultural Experiment Station Hatch program of the National Institute of Food and Agriculture, U.S. Department of Agriculture

Questions? Thank You!

Descriptive Statistics (N=12,935)