Using insurance to enhance nitrogen fertilizer application to reduce nitrogen losses to the environment

The advantage of using insurance to help a farmer adopt a best nitrogen management plan (BNMP) that reduces the impact of agricultural production on the environment is analytically and empirically demonstrated. Using an expected value analysis, it is shown that an insurance program can be structured so as to reduce a farmer's cost of bearing the adoption risk associated with changing production practices and, thus, to improve the farmer's certainty equivalent net return thereby promoting the adoption of a BNMP. Using the adoption of growing-season only N fertilizer application in Iowa as a case study, it is illustrated how insurance may be used to promote the adoption of this practice to reduce N fertilizer use. It is shown that it is possible for a farmer and an insurance company both to have an incentive to develop an insurance adoption program that will benefit both the farmer and the insurance company, increasing net social welfare and improving environmental quality in Iowa.