The Feasibility of Indemnification
and Check-off Funded Programs
to Manage Invasive Species Risks
in Agriculture
Report of Progress
Barry K. Goodwin
Nicholas E. Piggott
North Carolina State University
Overview
 Increased integration of world markets &
international mobility of goods and people
• heightened concerns regarding harmful
invasive species
 Threat is substantial to agriculture & some
significant damages have already been
realized in U.S. agriculture
Overview…
 Current response has been to provide ad
hoc disaster assistance targeted to specific
commodities and/or regions
 An alternative strategy might involve either
a fund or insurance program to protect
producers from risks associated with
specific invasive specifies
Objectives: Two Fold
Evaluate economic issues in design of
voluntary insurance and mandatory checkoff programs
Statistical modeling of the risks associated
with several case studies with the aim of
pricing insurance or determining optimal
check-off contribution rates
 Case studies: Asiatic canker, karnal bunt, and
soybean rust
Objectives….
 Model contamination risks and expected losses at
county level for a representative producer
 Attention to exogenous factors associated with
transmission including




Trade and transportation patterns
Migrant labor and harvesting crews
Important characteristics of land and farms
Weather
 Statistical models explicitly measure spatial patterns
of risks and transmission
Uncertainty of the Risk
• Harmful economic effects of an infestation
or contamination by a NIS are similar to
effects of any other pest or disease
–Exposure may lead to yield losses or
affect quality (crops and livestock)
• What is different is the uncertainty
associated with the risks from many
different known and unknown pests and
diseases
–Potential for catastrophic losses from
new NIS may far exceed losses from
more common pests and diseases
State of Affairs
• Congress typically responds to losses from
outbreaks of pests and disease by providing
direct ad hoc payment to affected producers
–E.g. $32 m on karnal bunt in wheat in 1990s
–Some states also provide financial assistance
• Costs of prevention and managing spread
of diseases and outbreak impose large cost
on govt
“if the CCC fund cannot be accessed, then we need to consider
the development of an invasive pest trust fund” (Carl Loop,
President FL Farm Bur., congressional testimony (Jan 2000)
Indemnification Programs
• Feasibility and operational aspects of a
program for indemnifying producers
against specific perils
–current programs may not be entirely
comprehensive and sufficient
• e.g, Citrus canker can involve multi-years of
loss in a grove;
Indemnification Programs…
• Two options are considered:
–Mandatory program that operates using a
“check-off” on production, all producers pay
into a fund used to cover losses
• might also fund prevention/eradication
programs
–Voluntary indemnification program that
measures risks relevant to a specific threat
and provides coverage
• “additional insurance” beyond what is
already available
Usefulness of this Work
• Should be of interest to state and federal
policymakers currently faced with developing ways
to manage these risks
• An indemnification involving insurance or checkoff could be independent of government support or
partially subsidized
• These “self-help” alternatives recognized that
some of the risk should be internalized (or borne)
by those who have the most to lose and not entirely
borne by the taxpayer
Premium or Check-off Rate Needed to
Cover Expected Losses?
• Under both scenarios the key parameter is the
appropriate premium or check-off rate that will cover
expected losses
• We are developing and evaluating methods of
measuring the risks associated with these losses
• Analogous to deriving measures of the actuarially fair
insurance rate that would be needed to operate a
specific peril program
Research Methods
• Measuring the risk requires measuring the
probability density underlying risks (e.g.,
yield losses due to the specific peril under
consideration)
Prob.
Yield
Indemnities & Costs
• For a program that reimburses producers for
yields (y) that are beneath a certain
proportion (l) of their expected (mean) yield
(m)
Indemnities = p. (max{ (l m - y), 0})
p the price at which losses are compensated
Premium or Check-off Rate
• Insurance program or check-off requires a premium
or mandated contribution rate determined by
expected payouts
• For p=1, expected loss is given by
E(L)=Prob(y<lm)*[lm-E(y|y<lm)]
• Define F() and f() to be the cumulative probability
distribution functions (cdf) and the probability
density function (pdf)
Premium or Check-off Rate
• E(Loss) = Pr(loss)*(Loss|Loss Occurs)
• Define F() and f() to be the cumulative probability
distribution functions (cdf) and the probability
density function (pdf) and the premium or check
of rate (R) can be shown to be equal to
lm

f ( y ) ydy 
lm


E ( Loss)   f ( y )dy  lm  0 lm
0


0 f ( y)dy 

lm

f ( y ) ydy 

0


 F (lm )  lm 

F (lm ) 


R
E ( Loss)
lm
Economics of Check-off Funded
Prevention/eradication Program
Price
S’
a
P’’
P’
P
S+T
E’’
b
c
d
f
e
g
l
S
E’
h
i
m
n
k
p
j
o
E
Gains in Total
Economic Surplus
r
q
s
D
t
D’
Q’
’
Q’
Q
Quantity
Challenging Modeling
Questions
• What is the appropriate form of the
distribution [f(y)]?
• Are parametric densities appropriate or
less restrictive techniques preferred?
• What factors should the distribution be
conditioned on?
• What are the spatial-temporal relationships
associated with the invasive species?
Case Study: Citrus Canker in FL
• Large concern to Florida citrus
• Threat since 1910s but outbreak in
residential citrus trees in Dade county in
Sept of 1995
– Triggered widespread quarantines and
mandatory destruction of citrus stocks
– Over 1.3 million trees destroyed
• Spatio-temporal aspects of transmission
especially interesting for evaluating risk
Source: Gottwald et. al. (2001)
Spatio-Temporal Impacts of yi,t
f(yz)
i=9
yz
t=1
t=2
t=3
t=4
Model to Estimate the Density
Functions in a Localized Area
County Probability Density Functions f(yi )
f ( yi ,t )  f ( yi ,t yi ,t  k , y j ,t , y j ,t k , θ) + i ,t
where
i  1, 2, ........N (counties)
t  1, 2, ........T (periods)
θ  vector of exogenous factors
 i ,t  error term
Modeling Issues
• Spatio-temporal correlation:
–Contamination spreads along avenues
characterized and influenced by spatial and
temporal characteristics
–Common analysis in epidemiological studies
• The process is likely to be characterized by
models with large numbers of parameters
• We will address this using hierarchical models
which consider stages or layers of relationships
Modeling Issues….
• We likely will adopt a mixture distribution model that
recognizes different states of nature (e.g., recent or
nearby infection versus no obvious infections)
• Similar models have been applied to model
catastrophic versus “normal” crop risks (Goodwin and
Ker)
• Our analysis will be conducted in a Bayesian context
using diffuse priors and the model fitting criterion
proposed by Gelfand and Ghosh
Modeling Issues….
• Account for the catastrophic risk associated with
spread through a significant hurricane event (a
significant catalyst for infection spread)
• This has not been observed in our data and thus we
must assume “tail” probabilities that are associated
with events that are nontrivial in probability but that
have not been experienced
–historical hurricane records (data that we have
already assembled)
Florida Data
• We traveled to Florida in April to learn about citrus
canker (transmission, damaged, current
eradication program etc)
• Met with representatives of citrus canker
eradication program, USDA, and Florida Dept. of
Ag. (Tim Gottwald, Tom Gates, Fritz Roka)
• Recently received authorization (lengthy process)
• On July 29 we received an initial dataset of
commercial grove data (inspection results at the
sub-grove unit level)
Other Applications
• Methodology and techniques being developed are
general and can be applied to other spatio-temporal
risks of invasive species
–e.g. spread of soybean rust rising concern in
North Carolina with new import facility in
Wilmington
• We may shift focus of second application to rust
rather than karnal bunt as we were notified that the
“karnal bunt pest risk assessments (basis for data)
are still in draft format and not ready to be
released”