Forage Risk Management and

PRF Insurance

Little Red River Beef Conference, Batesville, AR

March 5, 2024

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Dr. James L. Mitchell and Dr. Ryan Loy

Assistant Professors and Extension Economists

Department of Agricultural Economics and Agribusiness

Forage Production Risk

• Pests
• Weeds
• Wildfires
• Inputs (fertilizer, fuel, etc.)
• Rainfall (quantity and timing)
• Irrigation failure

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Forage Production Risk

• What happens when we don’t produce enough forage?
• Buy supplemental feed
• Find, buy, and haul hay
• Cull some or all of the cow herd
• Change marketing strategy for calves

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• Need to find ways to manage forage production risk…

Managing Forage Production Risk

• Farm management
• Forage diversification
• Soil fertility
• Hay tests
• Hay storage
• Grazing management (Arkansas 300 Day Grazing)

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• Pasture, Rangeland, Forage – Rainfall Index (PRF-RI)

PRF Introduction

• Area-based insurance product offered by USDA-RMA for perennial forages (grazing and hay)
• Subsidized crop insurance
• Long-run payments should exceed premiums
• Single peril crop insurance product
• Rainfall only

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• Financial assistance to buy replacement feed
• Lack of rainfall is the trigger

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• Using rainfall as a proxy for forage production
• Insuring against decline in forage production caused by lack of precipitation

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PRF Introduction

• Measuring forage production directly is more complicated
• Bale size
• Number of cuttings
• Growing conditions
• Forage types (cool season vs. warm season)

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• Forage Production Insurance uses Actual Production History
• Not available in Arkansas

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• Rainfall for a specified time interval is a good predictor of forage production

2021 RMA Data

Top 5 States by Enrollment

Data Source: USDA-RMA

Terminology

• Indemnity Payment: Dollar amount paid to producer when loss is triggered due to lack of precipitation

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• Premium: Dollar amount to purchase PRF insurance policy

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• Subsidy Rate: Amount of premium covered by federal government

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• Producer Premium: Dollar amount that producer pays for a PRF policy

Area-Based Insurance

• Crop insurance
• County yield
• County revenue
• PRF insurance
• Based on rainfall for a grid system
• Policy is based on the grid you select

Grid Locator

• Grid information shows state, county, grid id, longitude, and latitude

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• Grid size is 0.25 latitude by 0.25 longitude (12 by 12 miles at equator)

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• Can only choose one grid for land that is split

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• Remember grid id

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Rainfall Index

• Based on rainfall in a grid

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• Uses precipitation data from NOAA for 11 two-month intervals
• Data goes back to 1948

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• Weighted average of four closest stations to center of grid

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• Index reflects precipitation relative to long-run average for a grid

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• Loss triggered if index is below average and cover level

Rainfall Index Example

• Faulkner county grid 18151 average rainfall in June is 4.8 inches
• June 3.5 inches
• Index value for May 72.9
• Coverage level relative to index value triggers payment

Rainfall Index for Grid 18151 (Faulkner County, AR)

• 100 = normal rainfall
• 101 + = above normal rainfall
• 0-99 – below normal rainfall
• Indemnity payment triggered when index is below coverage level
• For 90% coverage, the red boxes show which windows would have triggered

Producer Decisions

1. Intended use
2. Insured acres
3. Coverage level
4. Productivity factor
5. Two-month index intervals and percent of value

Intended Use

• Choose the intended use of the insured forage acreage
• Grazing or hay acreage
• Lower premiums for grazing acres
• Lower indemnity payment for grazing acres when loss is triggered

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Insured Acres and Coverage Level

• Choose acres to insure for a PRF policy
• Do not have to cover all of forage acreage

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• PRF coverage level is the index value that triggers an indemnity when realized precipitation is below it for an interval
• Ranges from 90% to 70% in 5% increments
• Subsidy rate depends on coverage level (51-59%)

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• Higher coverage levels are:
• More expensive (and lower subsidy)
• More likely to trigger a payment

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Productivity Factor

• USDA-RMA calculates a county base value of production
• $59.50/acre in Hempstead County

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• Producer chooses how much of the base value to cover
• Changes how much protection producer purchases
• Ranges from 60% to 150%

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• Higher productivity factors are:
• More expensive
• Greater chance of loss and greater chance of higher indemnity

Two-Month Index Intervals

• Choose which 2-month intervals to protect against low precipitation
• Must choose a minimum of two 2-month intervals
• Cannot exceed six 2-month intervals
• Cannot choose overlapping intervals

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• Producer chooses how to allocate coverage across intervals
• Max 60% and min 10% for an interval

• Risk management
• Or maximize probability of receiving a payment

Avg. premium $10.69/acre

Avg. premium $38.57/acre

Example Using RMA Decision Tool�https://prodwebnlb.rma.usda.gov/apps/prf

Dollar Amount Protection =

County Base Value x Coverage Level x Productivity Factor

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$162.90 =

$181.00 x 90% x 100%

Total Policy Protection (Liability) =

Dollar Amount Protection x Insured Acres

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$16,290 =

$162.90 x 100

Allocate $16,290 across intervals

Sums to $16,290

Total Premium =

$4,073 x 17.94 (%) =

$731

Producer Premium =

$731 x (1– 0.51) =

$358

Indemnity =

$4,073 x (90 – 57.9 )/90 =

$1,453

Coverage Level: 90%

• Paid $11.68/acre to purchase $162.90/acre of coverage
• Losses resulted in an indemnity payment of $16.97/acre

• Assume 1,000 pound 4x5 bale @ $60/bale
• PRF policy would buy 28 bales

PRF and Basis Risk

• Precipitation on your farm

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• Precipitation on neighbor’s farm

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• Precipitation for the grid

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• Can all be different

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• Correlation between index and forage production

Thank You!! Questions?

Dr. Ryan Loy

Email: rloy@uada.edu

Phone: (214) 642-9066

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Dr. James L. Mitchell�Email: jlmitche@uark.edu�Phone: (479) 575-3253

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