CATTLEFAX TRENDS

from November 2021 Brangus Journal

by International Brangus Breeders Association

NATIONAL SHOW OF MERIT RESULTS

PASTURE, RANGELAND AND FORAGE INSURANCE

Between volatile market swings and relying on Mother Nature, doing business in the cow-calf segment can bring many challenges and risks. There are several different options producers can utilize to protect against a price drop. While the selection is limited, there is also a risk management tool to help cover the necessary precipitation needed for forage production. Purchasing Rainfall Index (RI) – Pasture, Rangeland and Forage (PRF) insurance is a way producers could be compensated during a dry year. While a single policy may not make an operation whole after enduring a dry period, it is a tool that can work well with other strategies.

PRF is technically a form of crop insurance provided by the USDA’s Risk Management Agency (RMA). Pasture and hay acres are both eligible for the program. Enrollment begins in September, and the deadline was extended to December 1 this year instead of November 15 like in past years. Producers would be purchasing a policy that covers the following calendar year – 2022 in this case. The program is offered in all counties within the 48 contiguous states.

It is important to understand RI-PRF insurance protects against one thing – precipitation. Essentially the policy protects against precipitation falling below the longterm average in a specific area. There is no forage or crop production data used. While it is not very likely, you could have record hay production and still receive an indemnity due to precipitation falling well below the average. RI-PRF should also not be mistaken as drought insurance. It does not specifically protect against high temperatures or extreme wind conditions, that may intensify drought.

The RI-PRF program uses a grid-based system, not county boundaries, to measure precipitation amounts. Each grid covers 0.25 degrees latitude by 0.25 longitude and is identified by the USDA. National Oceanic and Atmospheric Administration (NOAA) Climate Prediction Center (CPC) collects precipitation amounts from at least four different weather stations each day for one single grid. As a result, the official precipitation data may not match the amount a producer measured.

Some properties may cover multiple grids. If the land is contiguous, the producer can insure all the property in one grid or separate the land and assign portions into different grids. The grid(s) the producer selects will be the only location(s) that the precipitation amount matters for the insurance policy. If the property is not contiguous, then each area will be assigned to the respective grid.

The long-term average precipitation that is used as the benchmark is calculated from 1948 to two years prior to the crop year. The 2022 calendar year will include data from 1948 to 2020. With over 70 years of data, a few really dry or wet years will not significantly impact the threshold. The long-term measurement is known as the expected grid index – equaling 100. The precipitation that is collected during a crop year, or final grid index, is expressed as a percent relative to the long-term average. A final grid index above 100 is above average precipitation, while an index below 100 represents below average precipitation.

The precipitation data for a calendar year is broken down into 11 two-month time intervals: • January and February • July and August • February and March • August and September • March and April • September and October • April and May • October and November • May and June • November and December • June and July

A producer must select at least two intervals, and a maximum of six. Because producers are only allowed a maximum 50% of value per period, and the total must equal 100%, at least two intervals must be chosen. Only six intervals are allowed because there cannot be any overlap of the months. For example, producers cannot select JanuaryFebruary and February-March. Picking logical intervals is one of the most critical components for this program to be beneficial. One might consider what time of the year has the greatest impact on forage production. Seasonality of historical precipitation should also be considered when selecting intervals. If the summer months are typically dry in your area and the long-term average moisture is very low, it would be difficult for precipitation to drop far enough below to collect an indemnity.

Producers have the option to cover 70 to 90% of the

long-term average precipitation per interval. The coverage rates are also referred to as trigger levels. When the final grid index, or measured precipitation, falls below the trigger levels an indemnity is paid.

PRF insurance becomes more enticing for producers because the program is subsidized by the USDA depending on the coverage level. The 70 and 75% trigger levels have a 59% subsidy applied to the premium, while 80 to 85% coverage has a 55% subsidy. The highest level of coverage, 90%, carries a 51% subsidy rate. Another option producers can take advantage of is deferring their premium payments. The premiums can also be subtracted from indemnities – meaning producers may never make a payment.

Another variable producers must decide on is the productivity factor. This is essentially the perceived productivity of their land relative to other properties in the county. Each county is assigned a county base value by the USDA using historical data. Producers can select a productivity factor between 60 and 150%, in one percent increments. A productivity factor of 120% implies production is 20% better than the county average. There is a direct one-to-one relationship between the productivity factor and premiums, and potential indemnities.

To summarize what was discussed, a very basic example will be provided. Let’s assume the producer chose to put 50% of the policy value in the March and April interval, and the other half in the May and June period. An 85% coverage, or trigger level, was decided, which means the premium has a 55% subsidy rate, and the productivity factor was left at 100%. In March and April, NOAA CPC measures precipitation that is 70% of the long-term average. Because the final grid index of 70 falls below the trigger level, the producer earns an indemnity. However, in May and June the final grid index is 90, or the measured precipitation is 10% below average. Then the trigger level is not achieved, and no indemnity is received for that interval.

For someone to be eligible to enroll in the PRF program, they must have interest in the livestock that utilize the forage. If a landowner cash leases all acres to a producer, the landowner is not eligible, only the producer owning the livestock. Obviously, there are several other forms of lease arrangements. Some will allow both parties to participate in the program if both have interest in the livestock. It is recommended to consult a crop insurance agent to clarify who is eligible based on the lease agreement.

More information about PRF insurance can be found on USDA’s RMA website. A valuable online resource to check out is RMA’s Pasture, Rangeland, Forage Support Tool, where historical data, grid locations, scenario analysis, and more can be found.

While much of the information in this article was sourced from the USDA, Will Phinizy with Matlock and Associates Crop Insurance, also provided a lot of valuable insight. It is important to work with an agent who thoroughly understands PRF insurance to help sort through the different options that are available from a grid location and calendar interval standpoint, among other things. Analyzing historical data and probabilities with an expert can be beneficial to decide what time of the year provided the greatest return on investment over time.

Because producers are dealing with volatile and uncertain markets every day, PRF insurance can help mitigate the uncertainty from Mother Nature. While this program may not be a good fit for everyone, CattleFax encourages producers to at least take a close look. If someone does decide to pursue PRF insurance, it is important to have a plan. One of the first things to decide is how much are you willing to spend on PRF insurance? This can be measured on a per head or per acre basis. Adjusting the productivity factor and/ or not ensuring all land can help operations find the optimal dollar amount. Nonetheless, having a tool to manage risk against lack of precipitation can become a valuable asset for an operation.