A few weeks ago, I offered here a brief introduction to a new crop insurance product called Pasture, Rangeland, and Forage coverage, or PRF. Today I’d like to review PRF again, and provide a little closer look at how well it might work to help manage your forage production risks.
Pasture, Rangeland, and Forage coverage is designed for grazing land or hay producers. PRF coverage is offered by the Risk Management Agency of USDA, through your local crop insurance agent. The PRF sales closing date, or sign-up deadline, is next Thursday, Nov. 15. You need to get in touch with your crop insurance agent right away if you are interested in coverage.
In Nebraska in 2013 PRF will work with a rainfall index. Producers are first assigned to a grid area where their land is located, with each grid area measuring about 13 miles by 17 miles. Rain gauge observations from several weather stations, weather radar, and satellite information will then be combined to calculate a single composite rainfall amount for each grid area. This observed rainfall value is then calculated as a percentage of the long-term average for that grid area, and an insurance payment is made whenever observed rainfall falls below a trigger or guarantee level, starting as high as 90% of average rainfall. PRF coverage uses a dollar value per acre as an indicator of production rather than a producer’s yield history. These base dollar amounts are established by RMA at a county level. For most locations in Nebraska for 2013 the base dollar value of production for grazing land across the State has been assigned a value of about $10 to $25 per acre per season, while haying land in many locations has a base dollar value of production over $200 per acre. Producers select as a productivity factor which adjusts the base dollar value up or down, from 60 percent of the base up to 150 percent of the base value. For example, grazing land with a base dollar value of $20 per acre and a productivity factor of 150% would have dollar value of production of $30 per acre (= $20 x 150%). Producers also select the percentage coverage level, which ranges from 70 percent to 90 percent, in five-percent increments. The total dollar protection, or liability, is the maximum payout of the policy, the amount that would be paid if there were a complete loss. On a per-acre basis, the liability is calculated as the dollar value of production (including the productivity factor adjustment) times the guarantee level (expressed as a percentage). Using our previous example of $30 per acre value of production and a 90% coverage level, then the total dollar coverage or liability is $27 (90% of $30) per acre. At sign-up producers also must select the time periods, called index intervals, which will be covered by insurance. Index intervals are two months long, and producers must insure each parcel of land for at least two index intervals during the season. An insurance payment is triggered if the rainfall for the entire period falls below the guaranteed level.After selecting the time periods to insure, producers must then allocate the total dollar value of protection across these index intervals. Suppose the producer in our earlier example with $27 per acre of total protection allocates 60% to the May-June interval and 40% to the July-August interval. Thus, the liability per acre for the May-June period is thus $16.20 (60% of $27), and the liability for the July-August period is $10.80 (40% of $27).
Page 2 of 3 - Should rainfall come up short for an insured period, the insurance indemnity payment is calculated as the difference between the guaranteed or trigger index level and the actual index level, divided by the trigger index value. So for example, our producer has 90% coverage for the May-June index interval, with a dollar protection for that period of $16.20 per acre. Suppose the actual rainfall index value for the period turns out to be 65. The percentage loss, or payment calculation factor is (90-65)/90, or 0.277. We multiply this value by the dollar coverage amount to get the indemnity. In our example, the indemnity is $16.20 x .277 = $4.49 per acre (rounded).Having looked at the nuts and bolts of how PRF coverage works, let’s look at a special case as we consider how much coverage should be selected. Livestock producers who need to purchase replacement forage if their own production fails can use PRF payments to buy this feed. Let’s look at how far will the indemnity payment will go.Consider the earlier example of grazing land with $27 of coverage per acre, spread over two index intervals. Suppose that no rain fell at all over this time period, meaning the producer received the maximum payment, $27 per acre. Suppose, too, that the pasture stocking rate was 5 acres per cow-calf pair. This means that the insurance proceeds from 5 acres would be available to purchase replacement forage to feed that cow-calf pair. In our case, that’s $27/acre x 5 acres, or $135. Would this $135 be able to pay for replacement forage? Assuming that cattle eat 2.5% of their body weight each day, measured in dry matter terms, a 1300-lb. cow and a 300-lb. calf would together consume 40 lbs. of dry matter per day. If purchased hay is 85% dry matter, the as-fed weight is 47.1 lbs. of feed per day for the pair, or 1,413 lbs. for every 30 days on feed. Using $200/ton as a price for good quality alfalfa hay, this means replacement forage would cost about $141 per cow-calf pair for each 30 days on feed. Less expensive, lower quality hay and protein supplement could probably be obtained at a lower cost. But these calculations suggest that even the maximum payout for grazing coverage might only pay for about 1 month of replacement forage in a fairly typical grazing scenario.
Producers need to consider their own stocking rates, feed consumption and costs, and grazing productivity to make this type of comparison. The example above suggests that for many grazing situations a higher productivity factor and a higher guarantee level might be needed to raise the dollar value of coverage to reflect the cost of replacement feeds.Let me mention again that the sales closing date in Nebraska to purchase PRF coverage for 2012 is November 15th. If you are interested, contact your crop insurance agent right away for more information.If you would like to review what we’ve covered today, all this information can be found on UNL’s CropWatch website, found at cropwatch.unl.edu.
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