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Dry conditions are spreading: How can I reduce my risk?

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Consider pasture, rangeland, and forage insurance as a risk management tool.

The most recent drought monitor, released on October 27th, shows the majority of the United States dealing with drought or abnormally dry conditions. While I hope some of those regions received some much needed rain recently, I do think this presents an opportunity to discuss Pasture, Rangeland, and Forage (PRF) Insurance. PRF insurance provides an opportunity for producers to purchase rainfall coverage for perennial forages used for pasture and / or hay production. James provided an introduction to PRF insurance in the April 11 and May 2 newsletters. Since James went through PRF insurance in detail back in the spring, I am just going to focus on three reminders for producers as they consider PRF insurance for the upcoming year.

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PRF is a single-peril index insurance product

Producers first need to understand that indemnities from PRF are not based on rainfall at their farm, but rather on actual and historical rainfall for a 0.25 degree latitude by 0.25 degree longitude grid, where their farm is located. Daily rainfall for each grid is collected through NOAA weather stations and used by the program. Certainly, there should be a correlation between rainfall amounts for a given grid and farms located on those grids, but variability will exist. This variability creates a type of “basis” risk that isn’t that different than an insurance product like Livestock Risk Protection Insurance, which pays based on changes in the CME© Feeder Cattle Index, rather than local prices. It is also important to understand that PRF insurance does not protect against extremely high rainfall levels, or any other challenge that might impact forage production. It simply provides coverage for less than normal rainfall levels over 2 month periods during the year.

The premium subsidy for PRF is significant

The premium subsidy levels for LRP depend on the level of coverage that is selected, but exceed 50% in all cases. The USDA Risk Management Agency (USDA-RMA) has intended for this to be relatively affordable so that farmers will be more likely to utilize it. While indemnities may not be received in a given year, the subsidy levels suggest that indemnities should exceed premium levels over a large number of years. Given this, producers may want to consider scaling the coverage upward to increase the base value per acre they are insuring. Base values per acre can be increased by up to 150% by increasing the productivity factor.

Multiple approaches are possible for covered months

Finally, I think it is important that producers give some thought to the months they want to cover. Producers must select coverage in a minimum of two, two-month periods and can place no more than 60% of their coverage value in any single two-month interval. A month also may not be double-covered. For example, one cannot cover the June-July interval and the July-August interval, because August is double-covered. However, one could put up to 60% of the value in a two month interval that included August.

A logical approach would be to cover months in which rainfall and forage productivity are of the most concern. For example, someone may choose to cover June-July and August-September, if they are concerned about the summer months. A producer who is highly dependent on fall pasture growth to stockpile forage may choose to stretch coverage into the fall months. Producers should also discuss this with their insurance agent as they are likely to have valuable insights as well. Most importantly, producers should give this some thought and be deliberate about this decision.

While no insurance product is perfect, PRF insurance does provide producers with a relatively inexpensive opportunity to get some protection against less than normal rainfall levels. Producers have until December 1st to sign up for coverage for the 2023 calendar year, so the time is right to be thinking about it. In addition to talking with your insurance agent, a great deal of information can be found on the PRF page of the USDA-RMA website here.

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