Pasture, Rangeland, and Forage (PRF) insurance is available for 2016 in South Dakota and the other contiguous states based on a Rainfall Index (RI). Several states shifted to RI coverage and several states became eligible for coverage for the first time. Another change for 2016 is in the base price used to pay out for grazing losses. November 15, 2015 is the deadline to purchase or change coverage for the 2016 calendar year.
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. While producers would prefer to be paid if they did not have forage, haying and grazing can be covered against rainfall shortages using PRF-RI.
According to the Census of Agriculture there were 22.5 million acres in permanent pasture and rangeland across South Dakota in 2012. In addition, there were 1.4 million acres of other (non-alfalfa) hay harvested in South Dakota in 2015. Those hay acres would likely be ineligible for Forage Production insurance, but eligible for PRF-RI insurance. However, only 1.54 million acres were insured with PRF-RI in 2015 across grazing and haying. The premium subsidy is comparable to other crops and the historic loss ratio is favorable for insured parties, suggesting favorable returns on any covered acres.
Premiums for PRF-RI vary by county, type, coverage level, practice/interval, and grid location. 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 2015 acres in South Dakota were covered at the 90% level despite its lower subsidy rate. In the event that precipitation is low during an insured interval, producers could use indemnity payments to purchase replacement feed. Any indemnity payment is based on a price level that has been set at $38 per acre for grazing and $215 per acre for non-irrigated haying acres for 2016 in South Dakota. The price level varies for other states and for irrigated haying within the state. The coverage price level does not have a harvest adjustment feature.
Producers also have to pick a productivity level from 60% to 150% of the county base, making the base price an important factor. Many producers said the base grazing rates used in earlier years did not reflect their cost for renting grass. The new grazing coverage price level of $38.00 per acre, regardless of the location in South Dakota, should make PRF-RI more attractive and more effective for many locations. Now the base price level can be “matched” to the cost of grazing on a per acre basis. The productivity factor can then be chosen to adjust the value of coverage from the base.
Ideally, a producer will know key months that a lack of precipitation would result in less forage production. There are many ways to allocate coverage and not all acres need to be insured. For risk reduction, spreading out coverage across intervals is a good starting point. If a producer wants to concentrate the coverage, selecting higher loadings for specific intervals becomes more challenging. Selected acres are allocated across 11 two-month intervals that cannot overlap a given month. At most 70% and no fewer than 10% of acres can be included in a single interval.
Consider a producer with 1,000 acres of eligible ground to insure. A portion of the acres could be allocated to three different two-month intervals, insuring 250 acres in Apr-May, Jun-Jul, and Aug-Sep (see Example 1). The remaining acres would be left uninsured. The shaded intervals would be ineligible to use because they overlap with a chosen interval. Alternatively, the coverage could be concentrated in specific months deemed essential or critical to forage production (see Example 2). Here 700 acres are insured in Mar-Apr, 200 acres in Jun-Jul and 100 acres in Aug-Sep. Again the shaded intervals would be ineligible as they overlap with selected intervals. The ideal allocation is dependent on the forage production history and risk aversion of the producer.
Empirically, losses from historic haying shortfalls were bundled in a portfolio with insurance intervals across several South Dakota counties. Intervals that included higher weights for May through August minimized the difference between haying losses and indemnity payments. Thus loading coverage in key months would give insurance payouts when needed to offset haying shortages. Grazing data are not available in a similar format, but higher grazing loadings earlier in the year compared to haying loadings would likely capture similar risk-reducing effects.
For more information, interested insurable parties can contact a crop insurance agent or go on-line to the Risk Management Agency PRF website.