Decomposing Crop Loss: The Role of Subsidies and Market Price Uncertainty
Abstract: Farmers choose to leave between 10% and 60% of harvestable crops on the field in the United States. This paper studies two of the economic drivers of this crop loss: price uncertainty and subsidies. I develop a dynamic stochastic structural framework of crop loss in agricultural production, incorporating subsidy distortions and farmer price expectations. Estimated with wheat data, the baseline model indicates that the presence of subsides targeting downside price risk cause crop loss to be higher relative to a no-subsidy world. However, as the signals over prices received by farmers become noisier, the subsidy distortion decreases in importance relative to price uncertainty. The model provides two possible channels of crop loss that I test in an empirical exercise using wheat and wheat futures data. I find that given a high price expectation at planting, a one standard deviation increase in the price expectation at harvest decreases crop loss by around 8-10\%. An additional environmental analysis shows that mean greenhouse gas (GHG) emissions due to crop loss increased after the introduction of the PLC/ARC programs by about 1.48% and that eliminating price uncertainty would reduce GHG from crop loss by about 3.78%.