Today is the second in our series on drought mitigation programs. We’ll discuss the Pasture, Rangeland, Forage (PRF) Rainfall Insurance program. The deadline to sign up for this program is November 15. Check out last week’s post on the drought status and outlook.
Local Market Conditions
Pasture, Rangeland, Forage Rainfall Insurance
Today we’ll review the first of several risk management tools and indemnity programs to provide security from drought. If you haven’t had a chance to review last week’s post on the state of the local climate, it is a good starting point before we cover the PRF program. You can find that post here. I also highly recommend using USDA’s PRF Support Tool to review your specific outcomes from enrollment.
Pasture, Rangeland, Forage (PRF) Rainfall Insurance is designed to provide insurance coverage on otherwise uninsurable pasture, rangeland, and forage acres. The program is unique in that it does not measure plant production in order to determine indemnities. Instead, PRF uses the Rainfall Index developed by the National Oceanic and Atmospheric Administration (NOAA) to compare actual rainfall to expected rainfall. Differences between actual and expected rainfall are indemnified according to any one of a series of coverage levels.
Another unique aspect of PRF is the geographic makeup of policies. PRF coverage is not based on county by county rainfall. The contiguous U.S. is divided into a series of square grids roughly 0.25 degrees longitude by 0.25 degrees latitude (between 15 and 20 miles). Payments are based on the rainfall within a grid, not a specific county. USDA provides a tool to locate your grid. For our purposes we’ll review the decision based on a grid in Amarillo, Grid 18113. The first step in enrolling acreage in PRF is selecting the appropriate grid and number of acres to be insured within that grid.
Like any insurance program, different coverage levels are available. Producers can elect 70, 75, 80, 85, or 90% coverage of a base county level established for the value of the forage (grazed vs hayed). The premium cost does increase with each successively increased level of coverage.
You may customize your coverage using a productivity factor. A productivity value (per acre) has been established for each county based on haying and grazing operations under normal precipitation. You may adjust your protection multiplying the coverage level by anywhere from 60-150% of the base county level. This customization will provide additional protection in the event that traditional forage productivity in a given producer’s operation exceed’s normal county levels. Again, premium costs change with each successive change in productivity.
Each year is split in to different periods called “Index Intervals”. The intervals are pairs of consecutive months, i.e. January-February, February-March, March-April, and so on. Indemnities are based on actual precipitation in a given Index Interval compared to expected precipitation. For example, if actual precipitation in January-February 2020 will be compared to the historic index for January-February only. If actual precipitation in January-February 2020 is below an insured amount of expected January-February precipitation, an indemnity is paid. There are 11 month pairs per year over which you can spread your coverage, with a few restrictions. First, only 50% of total coverage value may be allocated to a given interval. Second, you may not ‘overlap’ months of coverage. For example you cannot insure the February-March and March-April intervals.
Consider our example grid, 18113. According to USDA’s PRF Decision Support Tool an acre of grazed land in 18113 during 2020 had a base value of $20.40. Given our 90% coverage level and 100% productivity factor, each acre is insured for $18.36. Over 100 acres the total policy protection is $1,836.
Based on the Index Interval rules, we could insure February-March and April-May (but not March-April). If each interval is insured for 50% of the total value then the policy protection per interval is $918, or $1,836 halved. In 2020 the February-March Actual Index Value was 117.7, i.e. precipitation was 117.7% of normal. No indemnity was triggered. However, the April-May Actual Index Value was 19.6%, meaning that precipitation was less than 20% of expected levels. Given our insured level of 90%, the expected indemnity for the April-May interval was $718.
Risk Management with PRF
Based on the climate outlook from last week’s post, we know the probability of below average precipitation is high in the near future. PRF is designed to indemnify producer’s in these very circumstances. It is important to insure for the months in which the value of your forage is the highest. For example, if the Decision Support Tool indicates a low value for certain intervals through history, and/or a low probability of payouts, producer’s likely won’t benefit from enrolling that period. However, if historic payout frequency is high in a given index interval and that interval coincides with a period that is important for forage in that grid, the choice of which interval to choose is more straightforward.