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2017 Pasture, Rangeland, Forage Rainfall Index (PRF-RI) Insurance

October 17, 2016

Landowners and producers with pastures may want to revisit Pasture, Rangeland, and Forage (PRF) insurance. PRF is available for 2017 based on a Rainfall Index (RI), similar to a year ago. The 2017 base price used to pay out for grazing losses has been adjusted from the 2016 rate. November 15, 2016 is the deadline to purchase or change coverage for the 2017 calendar year.

About PRF-RI Insurance
The insurance, PRF-RI, relies on a relationship between rainfall timing and forage production amounts. Thus, producers insure against low precipitation during specific intervals for localized grids that ideally match their haying or grazing needs. Producers are likely more familiar with direct insurance, for example, they often insure wheat against losses to their wheat. With PRF-RI, haying and grazing can be covered against rainfall shortages.

Selecting Coverage
In 2016 there were a record 1,699 PRF-RI policies sold in South Dakota covering a record $104 million of production. The 2.2 million acres insured in 2016 was not a record level and was less than 10 percent of the 22.5 million acres of permanent pasture and rangeland across South Dakota (2012 Census of Agriculture). A limiting factor continues to be uncertainty about how to best select rainfall intervals.

Rainfall is grid-level and not farm- or ranch-level when measured. Producers have to pick a coverage level from 70-90% of the grid base. Most 2016 acres in South Dakota were covered at the 90% level despite its lower subsidy rate. Producers also have to pick a productivity level from 60% to 150% of the county base, making the base price an important factor.

Indemnity Payments
Any indemnity payment is based on a base price level that has been set at $190 per acre for non-irrigated haying acres for 2017 in South Dakota and from $19.50 to $39.80 per acre for grazing (Figure 1). The grazing base levels have been adjusted from 2016, but may still align with reported grazing rates when using productivity factor adjustments.

The premium subsidy is comparable to other crops and the historic loss ratio is favorable for insured parties, suggesting positive returns to buying the insurance. Premiums for PRF-RI vary by:

  • County.
  • Use for grazing or haying.
  • Coverage level.
  • Productivity level.
  • Intervals chosen, and
  • Grid location.

Spread-Out Coverage
There are many ways to allocate coverage and not all acres need to be insured. Selected acres are allocated across 11 two-month intervals that cannot overlap a given month. The loading of acres within a given interval have to be 10-70% of the total acres insured. For risk reduction, spreading out coverage across intervals is a sound strategy, such as Example Loadings A (Table 1).

Concentrated Coverage
If a producer wants to concentrate the coverage, selecting higher loadings for specific intervals becomes more challenging, such as Example Loadings B (Table 2). Ideally, a producer will know key months that a lack of precipitation would result in less forage production.

The Bottom Line

Concentrating coverage in too few intervals may reduce the diversification effect of using multiple intervals. Loading up coverage in a specific interval may be attractive in the very long run, e.g., 70% in May-Jun. However, the historic rainfall pattern across intervals at the grid level is fairly sporadic. There can be long stretches of very normal rainfall, and thus no indemnity payments, when looking at specific intervals in specific grids. Such spans are mitigated by diversifying across a few different intervals. Using multiple intervals will likely result in more consistent indemnity payments and a shorter duration of realizing benefits from the coverage.

For more information, interested insurable parties can contact a crop insurance agent or go online to the Risk Management Agency’s Pasture, Rangeland, Forage page.

Source: Matthew Diersen, South Dakota State University