Crop Insurance

This is the last of three GAO reports on the accuracy of U.S. Department of Agriculture (USDA) forecasts. Previous studies looked at the accuracy of USDA's meat and budget commodity forecasts. (See GAO/PEMD-91-16, May 6, 1991, and GAO/PEMD-91-24, Aug. 13, 1991.) This report focuses on (1) the accuracy of the Federal Crop Insurance Corporation's (FCIC) independent price forecasts, (2) the effect of these inaccuracies on program costs, and (3) how FCIC can improve its forecast accuracy. GAO found that FCIC's corn, wheat, and soybean price forecasts exhibit large bias errors exceeding those of other available forecasts and that FCIC would have spent about $194 million less than it did if it had used the forecasts made by the World Agricultural Outlook Board during crop years 1983 to 1989. GAO identified other forecasting and program costs issues affecting the actuarial soundness of the program. These include (1) forecasts being made earlier in the crop year than necessary, leading to potentially larger errors; (2) the lack of an effective management process for evaluating forecast accuracy and methods; (3) the failure to adjust national program price selection options when information on local price variations can be used; and (4) the failure to deduct harvest costs when total crop losses occur.

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

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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