Pasture Range Forage Rainfall Index Insurance in Montana

1
Pasture Range Forage Rainfall Index Insurance in
Montana
James B. Johnson Vince Smith MSU Department of
Agricultural Economics and Economics
Collaborating Partners Billings RMA Regional
Office Fort Peck Community College
May 2009
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Pasture, Rangeland, Forage Rainfall Index (PRFRI)
Pilot Program

• A pilot insurance program that provides
  protection against losses of forage on
  grazingland and/or or hayland.
• PFR Rainfall Index insurance is available in all
  Montana counties.

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PRF Rainfall Index Insurance Program

• A rainfall index is used as a proxy indicator
  the amount of forage production on grazing land
  and hayland.
• A rainfall index is constructed for each
  approximately 8 square mile grid in the state for
  six separate two month index intervals in a
  crop year.
• The size of each grid is determined by how the
  National Oceanic and Atmospheric Administration
  (NOAA) reports rainfall data in the United
  States.
• Data on daily rainfall have been collected by
  NOAA for each Grid since 1948.
• These data are used to construct a rainfall index
  for each two month period where an index value of
  100 represents average rainfall in each Grid for
  the index interval of interest.

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Pasture, Rangeland, Forage Rainfall Index Pilot
Program

• The PRFRI
• A Group Risk Program that provides insurance
  against reductions in the Rainfall Index below
  its average value for each insurance or grid
  area in the insured index intervals.
• A product used by producers with forage
  production on grazingland or hayland (feed for
  livestock comprised of plants grown for haying or
  grazing).
• Producers need to recognize that it is possible
  for them to have low forage production on the
  acreage they insure and still not receive a
  payment under this group risk plan.
• The actuarially fair Insurance premiums are
  subsidized by the federal government

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PRF Rainfall Index Insurance Program Concepts

• Most GRP insurance programs are based on county
  level information
• The PRF Rainfall Index program is based on
  geographic grids.
• A grid includes all land within an approximately
  8 mile by 8 mile area and is identified by
  longitude and latitude.
• A unique Rainfall Index exists for each grid in
  each insurance time period.

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PRF Rainfall Index Insurance Program Concepts

• Grid Identification Number (GRID ID) A specific
  code associated with each grid contained in the
  actuarial documents for the PRF Rainfall program.
  
• The Grid ID is determined by a geographic point
  of reference selected by the forage producer
  that identifies the location of the area the
  producer wants to insure. A part (but not all)
  of the area to be insured must be in the selected
  GRID
• The RMA website provides producers and insurance
  agents with information about the Rainfall Index
  for each grid and the PRFRI product for that grid.

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PRF Rainfall Index Insurance Program Concepts

• The insured crop is defined as pasture,
  rangeland, or forage.
• There are two crop types grazingland and
  hayland.
• Grazingland has an established stand of forage
  suitable and intended for grazing by livestock.
• Hayland has an established stand of forage
  suitable and intended for haying.

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PRF Rainfall Index Insurance Program Acres to be
Insured

• A producer does not have to insure all of the
  insurable acreage of grazingland or hayland in a
  grid.
• The producer chooses the acres to be insured.
• Some grazingland may not be insurable (for
  example, the area may be too steeply sloped, or
  too far from water for livestock to graze it).
• Some land in a hayland area may also be
  uninsurable (because it is not suitable for
  mechanical harvesting).

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PRF Rainfall Index Insurance Program General
Principles

• Each grids Rainfall Index is normalized so that
  the value of 100 represents average rainfall.
  (Historical values for each grids NDVI are
  available on RMAs PRF website).
• A producer will receive an indemnity payment when
  the Rainfall Index value for the grid falls
  sufficiently far below its average value in each
  index interval which the producers has chosen to
  insure.

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PRF Rainfall Index Example from Roosevelt County
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PRF Rainfall Index Insurance Program
Implementation

• The crop year PRFRI in Roosevelt County is
  divided into six periods referred to as the
  index intervals. These intervals are
• Interval I February 1 through March 31
• Interval II April1 through May 31
• Interval III June1 through July 31
• Interval IV August 1 through September 30
• Interval V October 1 through November 30
• Interval VI December 1 through January 31
• A producer must select at least two intervals for
  insuring forage production on the hayland and/or
  grazingland to be covered in each grid
• No more than 70 of the total insured area can be
  insured in any single interval.

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PRF Rainfall Index Insurance Program Interval
Selection

• Each producer must decide on which intervals
  they want to select to insure against losses in
  forage production (no less than two). For
  example
• A producer may be concerned that a lack of
  rainfall in early Spring could result in lack of
  forage in the summer. So the producer may choose
  to insure against low levels of rainfall in
  Interval I (February March)
• A producer may also be concerned about the
  availability a second hay cutting and fall forage
  due to lack of precipitation in the summer and so
  may also insure in Interval III (June July) .
• So a producer with 1600 acres of rangeland and
  400 acres of hayland may want to insure half of
  those lands in interval I and half in interval
  III.

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PRF Rainfall Index Insurance Program Amount of
Insurance

• County Base Value The production value of
  grazingland or hayland forage production in a
  county (determined by RMA for each county).
• Coverage Level The percentage of the county base
  value chosen by the producer for insurance
  coverage on forage production.
• A producer may choose a coverage level of 70,
  75, 80, 85 or 90 percent.
• Producers must insure each grid in the same
  county at the same coverage level.
• CAT coverage is not available for the PRFRI but a
  producer may also acquire NAP coverage from the
  USDA Farm Service Agency.

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PRF Rainfall Index Insurance Program Amount of
Insurance
Grazing land and hayland have different county
base values. For example, in Roosevelt
county Country base value for grazingland
7.92 per acre County base value for hayland
148.98 per acre (and is the same for many
Montana counties).
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PRF Rainfall Index Insurance Program

• Productivity Factor A percentage between 60 and
  150 percent chosen by the insured producer to
  reflect their individual operations forage
  productivity relative to the county base value.
• Producer Share The operators share of the
  forage production.
• Producers may select coverage levels and
  productivity factors to reflect the forage
  production value of the acreage they are
  insuring.
• For example, a producer may believe that the
  value of forage production on the insured area is
  similar to the county base value.
• So the producer may select a coverage level (say
  90) and productivity factor (say 110) to obtain
  coverage approximately equal to the county base
  value.

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PRF RainfallIndex Insurance Program Amount of
Insurance

• Dollar Amount of Protection per Acre county
  base value per acre for the crop type x coverage
  level x productivity factor.
• A producer can select only one dollar amount of
  protection for each crop type in a grid.
• Policy Protection per Unit The dollar amount of
  protection per acre x the number of insured
  acres x the producers share of the area insured
  in each unit.
• A producer may have between two and six units in
  each grid, reflecting the number of index
  intervals in which the producer has purchased
  insurance.
• Policy Protection The sum of the policy
  protections chosen by the producer for each
  insured unit in a grid.

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PRF RainfallIndex Insurance Program Insurance
Premiums
For Each Unit Total Premium Dollar
Protection Per Acre x Number of Insured
Acres/Unit x Premium Rate per 100 of
Insurance x Adjustment factor (0.01) x
Producer Share Premium Subsidy Premium
per Unit x Subsidy rate Producer Premium Total
Premium per unit - Premium subsidy per
unit The adjustment factor expresses the
premium rate on a per dollar of insurance rate
because the premium rate is quoted in terms of
dollars per 100 of insurance.
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PRF Rainfall Index Insurance Program Indemnities

• Indemnities are paid when the grids average
  Rainfall Index for a specific interval is
  sufficiently low.
• The Expected GRID Index for each interval is
  established by the Risk Management Agency using
  historical data on precipitation for that
  interval and always equals 100.
• The Expected Grid Index is therefore known to a
  producer prior to the November 30 sales closing
  date.
• A producer can examine a grids historical
  rainfall values for each interval for the period
  1989 to the current year using the RMA website
  for the PRFRI.

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PRF Rainfall Index Insurance Program Indemnities

• The Final Grid Index Value for a specific
  interval is determined by the Federal Crop
  Insurance Corporation using the actual rainfall
  observed for the grid during the interval.
• An rainfall index value of 100 represents the
  average value for the index in the interval of
  interest.
• An rainfall index value of less 100 represents a
  lower than average value for that interval.
• The Final Grid Index Value for an interval can
  only be calculated after the end of the interval.

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PRF Rainfall Index Insurance Program Indemnities

• The Trigger Grid Index 100 x the coverage
  level (selected by the producer).
• An indemnity payment is made if the Final Grid
  Index (determined by RMA) is less than the
  Trigger Grid Index.
• Indemnity payment Policy Protection per Unit x
  Payment Calculation Factor (PCF).
• where
• PCF Trigger Grid Index Final Grid Index/
  Trigger Grid Index.
• Insurance payments are relatively timely as final
  grid indexes can be computed immediately after
  each index interval has ended and no information
  about forage yields has to be provided by
  producers.

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PRFVI Insurance Program A hayland example in a
Roosevelt county grid
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PRFVI Insurance Program A hayland example in a
Fremont county
Producers also must pay an additional 30
administration fee
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PRF Rainfall Index Insurance Program

• Indemnity Per Unit Policy Protection Per Unit
  Per Interval (Interval I) x Payment
  Calculation Factor
• 26,456 x (90 65) / (90)
• 26,456 x
  0.2777
• 7,346

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PRF Rainfall Index Insurance Program

• PRF is not available at the catastrophic coverage
  level (CAT level).
• The Farm Service Agency policy applicable to the
  2009 production year is therefore that NAP
  (Noninsured Crop Disaster Program) may be used
  for
• Rangeland production in all Montana counties
• Hay production for all types except
• Alfalfa
• Alfalfa/grass
• Grass/alfalfa

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PRF Rainfall Index Insurance Program

• Producers should remember that NAP is available
  on a fee per crop basis (200 per crop per farm)
  and covers only losses in excess of 50 of the
  established yield (as determined for FSA
  purposes) at 55 of the average marketing price
  for FSA.

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PRF Rainfall Index Insurance Program Summary

• The PRF Rainfall Index product is a pilot group
  risk insurance program in Montana
• Sales closing date is November 30.
• The program covers grazingland and hayland
  production in all Montana counties.
• This program is based on rainfall indexes
  calculated for six periods during the crop year
  (index intervals).
• In Montana , even though PRFRI is available,
  producers may also use NAP for rangeland
  production and some types of hay production.