Response to adverse weather conditions by cotton and other major crops are likely to be heterogeneous across varieties, but it is unclear whether this translates into yield risk heterogeneity across varieties. Crop insurance is the dominant agricultural policy instrument and will play an important role as farmers adapt to climate change. However, climate change impact on the performance of the crop insurance programs is not well established and currently the Risk Management Agency (RMA) does not offer alternative premium rates across varieties; nor has there been any public acknowledgement that it plans to adjust rates in anticipation of climate change. In this study, we identify whether there are heterogeneous premium rates across varieties; we also measure the impact of warming on these premium rates. Our findings show heterogeneities of premium rates across varieties and different warming scenarios, as well as heterogeneities in expected yield and yield risk.

The federal crop insurance program provides crop insurance for millions of acres and many commodities every year. The Risk Management Agency of the USDA is responsible for determining the premium rates for these covered commodities. Currently, the quality of soil is not considered when determining baseline yields and expected premium rates. This study utilizes the moment-based maximum entropy method to assess the effect of incorporating soil in the rate making methodology. Several moments of upland cotton yield in Arkansas, Mississippi, and Texas are conditioned on weather, irrigation, and soil control variables. Ultimately, I find evidence of mispriced premium rates for counties in all three states for both irrigated and non-irrigated upland cotton yield.