This article was first published in RightRisk News in October 2023.
The last four years have reminded livestock producers throughout the country of the risk of drought. For many livestock producers, their livelihood is dependent upon perennial grass production that is dependent upon an adequate amount of rainfall. One tool that can help mitigate the short-term financial risk associated with the lack of rainfall is the Pasture, Rangeland, Forage (PRF) insurance program, administered by the USDA – Risk Management Agency (RMA). PRF is available for purchase from crop insurance agents with coverage available on a calendar year basis in all forty-eight contiguous states. The signup deadline for calendar year 2024 coverage is December 1, 2023.
PRF insurance is a group insurance policy based on grids 0.25 degrees longitude by 0.25 degrees latitude. It uses precipitation data from the National Oceanic and Atmospheric Administration Climate Prediction Center (NOAA CPC), providing producers with the opportunity to insure 70 percent to 90 percent of the Expected Grid Index Precipitation across a series of two-month intervals dispersed throughout the calendar year. Premium subsidies range from 51 percent to 59 percent, depending upon the coverage level selected.
If precipitation falls below the insured coverage level, the producer receives an insurance indemnity payment for the productive value of the difference. For example, suppose a cattle producer insured a thousand acres of grass at a productive value of $48.00 per acre at the 90 percent coverage level and distributes their coverage throughout the year putting $8.00 per acre of coverage in the January-February interval, $8.00 of coverage in the March-April interval, and so on. If the precipitation index turns out to be less than 90 percent of normal in any two-month interval, then the producer indemnity calculation multiplies the index shortfall by the policy protection for that interval period. For example, if the May-June interval precipitation index turns out to be 52.4, then the indemnity payment would calculate to (90-52.4)/100 * 1,000 acres * $8.00 = $3,008, or a little over $3 per acre.
In the calendar year 2023, producers insured a record 290.6 million acres with PRF insurance across the nation (Table 1). The average number of acres covered per policy was 4,770 with an average producer premium per policy of $10,325 or $2.16 per acre. With several actual index values yet to be determined, 84 percent of policies nationally have earned an indemnity payment in 2023. To date, the average indemnity per policy is $11,071 or $2.32 per acre. The producer loss ratio to date is 1.07 indicating for every $1 of producer premiums, indemnity payments of $1.07 have accrued in 2023.
Table 1: Pasture, Rangeland, Forage (PRF) insurance national summary of business 2018-23.
|Crop Year||Policies Earning Premium||Policies Indemnified||Acres||Total Premiums||Total Subsidies||Total Indemnities||Producer Loss Ratio|
For the five-year period from 2018-2022, the producer loss ratio nationally was 2.41 (Table 1). The producer loss ratio varied across the nation (Figure 1). It was highest in the Pacific (2.89) and Mountain (2.62) regions, reflecting the extreme drought across the western half of the U.S. over the three-year span from 2020-2022. It was the lowest in the Delta (0.84) and Appalachia (0.90) regions. Most of the acres insured with PRF are in the western half of the U.S. with the Mountain region leading the way with an average of almost 109 million acres insured per year over the 2018–2022-time span. In 2023, the Mountain region has over 185 million acres insured, reflecting the steady increase seen nationally over the past six years (Table 1).
Figure 1: National Pasture, Rangeland, Forage (PRF) average insured acres per year, average producer premium per acre, and producer loss ratios (in red) for the five-year period 2018-2022 for the ten USDA crop production regions.
Source: USDA-RMA, Summary of Business.
The decision about whether or how to participate in PRF insurance should be strategic. PRF is a heavily subsidized (51-59 percent) insurance product that U.S. law requires to be actuarial sound based on decades of indexed rainfall data. This means that most policies over the long term will produce similar returns per dollar invested. Therefore, it is important to do work up front to produce the best policy fit so you can stick with it for several years. RMA offers a PRF Rainfall tool on their website (http://www.rma.usda.gov) to help put together a policy plan that works for you. Crop insurance agents have similar tools, but it is valuable to explore diverse options before sitting down with an agent to make coverage decisions.
Some items to consider include which months to insure, the dollar amount of coverage per acre, how to distribute the dollar amount of coverage across the months insured, and the level of rainfall to insure. Each two-month interval combined with a rainfall coverage level has a premium rate reflecting the expected indemnity based on historical data. Higher coverage levels result in higher premium rates. Two-month intervals with a history of more variable rainfall, particularly below the coverage level, will also have higher premium rates.
For example, the April-May interval may have a premium rate of 12.30 percent at the 90 percent rainfall coverage level and a 7.33 percent premium rate at the 75 percent coverage level. The 75 percent coverage level would qualify for a 59 percent subsidy, dropping the effective producer premium rate to 3.01 percent while the 90 percent coverage level would qualify for a 51 percent subsidy, dropping the effective producer premium rate to 6.03 percent. Meanwhile, the February-March interval for the same land may have an unsubsidized premium rate of 21.58 percent at the 90 percent coverage level and 15.90 percent at the 75 percent coverage level, reflecting more rainfall variability in that interval.
Nationally, most of the PRF coverage is at the 90 or 85 percent coverage level (Table 2). Dropping from the 90 percent coverage level to the 85 percent coverage level lowers the total premium charge per acre as well as increases the subsidy from 51 percent to 55 percent. Some producers use this strategy to lower their overall premium expense. It is effectively increasing their “rainfall deductible” in exchange for a lower premium just like increasing the deductible on homeowners’ insurance would lower your homeowners’ insurance premium.
Table 2: Pasture, Rangeland, Forage (PRF) insurance national summary of coverage levels in 2023.
|Cov. Level Percent||Policies Earning Premium||Policies Indemnified||Acres||Total Premiums||Total Subsidies||Total Indemnities||Loss Ratio||Producer Loss Ratio|
When it comes to which months to insure, some producers focus on the pasture growing season months where rainfall is critical while other producers simply spread coverage out throughout the year. Some producers balance spring and early summer coverage with winter coverage to balance premium cost and expected indemnities. The more intervals covered; the more steady indemnity payments are across years. However, you may be able to find a more customized coverage strategy that best matches your pasture production and/or financial outcomes that makes the most sense for your operation.
With the December 1 signup deadline date quickly approaching, producers interested in purchasing PRF for the 2024 calendar year should contact their crop insurance as soon as possible to begin the application process. For more information on PRF insurance visit: http://www.rma.usda.gov.
John Hewlett, Ranch/Farm Management Specialist - University of Wyoming
Jay Parsons, Risk Management Specialist - University of Nebraska-Lincoln
Jeff Tranel, Ag and Business Management Specialist - Colorado State University