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

2. 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.

3. 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.

4. 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

5. 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.

6. 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.

7. PRF Rainfall Index Insurance Program: Concepts • The insured crop is defined as pasture, rangeland, or forage. • There are two crop types: grazinglandand 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.

8. 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).

9. PRF Rainfall Index Insurance Program: General Principles • Each grid’s Rainfall Index is normalized so that the value of 100 represents average rainfall. (Historical values for each grid’s NDVI are available on RMA’s 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 producer’s has chosen to insure.

10. PRF Rainfall Index: Example from Roosevelt County

11. 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.

12. 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.

13. 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.

14. 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).

15. PRF Rainfall Index Insurance Program • Productivity Factor: A percentage between 60 and 150 percent chosen by the insured producer to reflect their individual operation’s forage productivity relative to the county base value. • Producer Share: The operator’s 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.

16. 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 producer’s 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.

17. 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.

18. PRF Rainfall Index Insurance Program: Indemnities • Indemnitiesare paid when the grid’s average Rainfall Index for a specific interval is sufficiently low. • The Expected GRID Indexfor 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 grid’s historical rainfall values for each interval for the period 1989 to the current year using the RMA website for the PRFRI.

19. 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.

20. 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.

21. PRFVI Insurance Program: A hayland example in a Roosevelt county grid

22. PRFVI Insurance Program: A hayland example in a Fremont county *Producers also must pay an additional $30 administration fee

23. 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

24. 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

25. 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.

26. 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.