Crop Insurance:

Inaccurate FCIC Price Forecasts Increase Program Costs

PEMD-92-4: Published: Dec 13, 1991. Publicly Released: Jan 21, 1992.

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Pursuant to a congressional request, GAO examined the accuracy of the Federal Crop Insurance Corporation's (FCIC) independent price surveys, focusing on how: (1) inaccuracies in the forecast affect FCIC program costs; and (2) FCIC can improve its forecast accuracy.

GAO found that: (1) bias errors showed that FCIC forecasts for corn and wheat overestimated actual prices by an average of 10 percent and 6 percent, respectively, and underestimated actual prices for soybeans by about 2 percent; (2) during crop years 1983 through 1989, FCIC final price forecasts for wheat and corn were less accurate than alternative benchmarks with respect to bias error measures; (3) if FCIC had used the World Agricultural Outlook Board's (WAOB) forecasts for crop years during fiscal year (FY) 1983 to FY 1989, it could have saved $194 million in program costs, since WAOB forecasts were more accurate than the FCIC forecast; (4) FCIC could have incurred $54 million in additional costs if it had used its future market forecasts for crop years FY 1983 to FY 1989; (5) if FCIC had used the forecast recommended by the Actuarial and Underwriting Service for crop years during FY 1983 to FY 1989, it could have saved $167 million in program costs; (6) FCIC forecasting lacks an effective management process to identify sources of forecasting error, maintain data records, and document and validate forecasting methods; and (7) FCIC could save up to 5 percent of its program costs if FCIC deducted the harvest costs lost by farmers.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: FCIC now uses available WAOB forecasts for program crops.

    Recommendation: The Manager, FCIC, should, to the extent possible, use available WAOB crop price forecasts because they have been shown to be more accurate.

    Agency Affected: Department of Agriculture: Federal Crop Insurance Corp.

  2. Status: Closed - Implemented

    Comments: FCIC is considering an option to move the price election process closer to sales closing dates. Feasibility of plans should be known during 1993.

    Recommendation: The Manager, FCIC, should determine the feasibility of using or making forecasts prepared later in the year, closer to the insurance closing date.

    Agency Affected: Department of Agriculture: Federal Crop Insurance Corp.

  3. Status: Closed - Implemented

    Comments: FCIC currently offers price differentials on most fruit and vegetable crops; FCIC is studying the possibility of offering price differentials on field crops.

    Recommendation: The Manager, FCIC, should use price differentials for any crop where available.

    Agency Affected: Department of Agriculture: Federal Crop Insurance Corp.

  4. Status: Closed - Implemented

    Comments: FCIC has begun a Decision Memorandum process to present various options for price elections in 1993. The memorandum provides supply/demand information for each crop, the assumptions used to make price forecasts, and price options for different scenarios. FCIC plans an assessment of this process after seasonal average prices are known next year.

    Recommendation: The Manager, FCIC, should implement a stronger forecast management process.

    Agency Affected: Department of Agriculture: Federal Crop Insurance Corp.

  5. Status: Closed - Implemented

    Comments: FCIC does not believe this recommendation can be supported. However, FCIC indicates further analysis will be done to determine if the recommendation has merit.

    Recommendation: The Manager, FCIC, should develop a more effective method for deducting harvest costs for participants who have total losses yet do not have to harvest a crop.

    Agency Affected: Department of Agriculture: Federal Crop Insurance Corp.

  6. Status: Closed - Implemented

    Comments: Plans have been made to collect additional data on specialty crops to the extent that resources are made available through the budget process. A cost assessment and determination on additional price coverage for specialt crops will be completed by the end of fiscal year 1993.

    Recommendation: The Secretary of Agriculture should direct the Assistant Secretary for Economics to assess the cost-effectiveness of conducting additional forecasts and determining actual crop prices on specialty crops for which such information is currently not available.

    Agency Affected: Department of Agriculture

  7. Status: Closed - Implemented

    Comments: NASS has made plans to collect additional data, depending on budget funding for fiscal year 1994. WAOB claims it is not set up to establish price elections on many non-program crops. However, FCIC has begun formally participating in the interagency forecast process coordinated by WAOB.

    Recommendation: WAOB should make the forecasts, and the National Agricultural Statistics Service should prepare actual seasonal average prices for crops that FCIC insures.

    Agency Affected: Department of Agriculture: National Agricultural Statistics Service

  8. Status: Closed - Implemented

    Comments: NASS has made plans to collect additional data, depending on budget funding for fiscal year 1994. WAOB claims it is not set up to establish price elections on many non-program crops. However, FCIC has begun formally participating in the interagency forecast process coordinated by WAOB.

    Recommendation: WAOB should make the forecasts, and the National Agricultural Statistics Service should prepare actual seasonal average prices for crops that FCIC insures.

    Agency Affected: Department of Agriculture: World Agricultural Outlook Board

 

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