Forage, hay insurance may help reduce drought risk, economist says

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As reported in High Plains journal an insurance management program may help hay and forage growers protect their bottom line in light of drought conditions that persist in the High Plains.

James Mitchell, an assistant professor and Extension economist at the University of Arkansas Department of Agricultural Economics and Agribusiness, spoke about the Risk Management Agency program during a recent National Cattlemen’s Beef Association webinar, “Pasture, Rangeland, Forage Program: A Tool for Your Toolbox.” The RMA is overseen by the U.S. Department of Agriculture. RMA programs are associated with crops, but in recent years Congress has allowed the agency to expand into other farm production sectors to help with risk management. Mitchell has studied the pasture and rangeland segment to help inform farmers and ranchers as they consider if a pasture, rangeland and forage policy is a fit for their operation.

“Risk management is about taking some risks off the table,” he said, adding that a risk management plan is a strategy that looks subjectively and objectively at how to limit risk. The pasture management plan, which includes forage production, was first tested as a pilot program in 2007 and then went nationwide about five years later. Coverage is a subsidized product and part of the premium is underwritten by the federal government.

The top five states in enrollment as of 2021 were Texas, about 29.6 million acres; Arizona, 28.4 million acres; Nevada, 25.2 million acres; Utah, 16 million acres; and New Mexico, 14.7 million acres. About 172 million acres in the country were enrolled nationwide in 2021. Five years ago it was a third of the size, he said.

Risk management can address two areas producers may have limited or no control over—prices and realized production of livestock, forage or crops—which may be different than what producers expect.

Policy plus

An insurance policy can help a rancher, Mitchell said, as he faces risks with pests, weeds, wildfires and inputs such as fertilizer and fuel. Decisions on soil fertility and quality also impact forage production.

What happens when there is not enough forage produced? The rancher has to buy supplemental feed and scramble to find and purchase hay. He may even have to reduce or liquidate a cow herd or change marketing strategy for calves.

“It is a high consequence outcome,” Mitchell said.

Most livestock webinars are about options, futures, the Livestock Risk Protection program, or forward contracts but few touch on the pasture, forage and rangeland because it is a relatively new program, he said.

“When you think about it, what is out there for forage production risks?” Mitchell said. “Besides this insurance product we mainly rely on farm management decisions for forage risk management.”

Evaluating a forage insurance plan as a risk management tool might prove worthwhile for producers, he said. It is a single-peril program based on rainfall index and a lack of moisture is the trigger point.

“We use rainfall as a proxy for forage production,” Mitchell said adding hay type, bale size and cool season versus warm season forages are hard to quantify for an insurance product.

The Pasture, Rangeland and Forage program is based on a rainfall index on by using the equivalent to a 12-by-12 mile grid at the equator and dimensions will be slightly different in each state, which is different from crop insurance, he said. If the rancher’s property straddles the grid he can choose which grid to be placed in. The rainfall totals are based on National Oceanic and Atmospheric Administration reports, which are collected on a daily basis, and those figures help to establish a baseline. Mitchell said there are more reporting stations in the southern Plains than the more sparsely populated northern Plains, which he hopes will be improved upon in the future to help those ranchers.

How it works

A grid ID has to be selected based on the identified land’s location and growers need to keep that number handy, Mitchell said. Producers can see how it works for them by using the calculator tool at https://prodwebnlb.rma.usda/gov/apps/prf.

In his example, Mitchell used Hempstead County, Arkansas. NOAA has been collecting precipitation data for 11, two-month intervals. The data dates back to 1948 and the rainfall index uses a weighted average of the four closest stations to the center of the grid. The index reflects precipitation relative to the long-run average for a grid. The indices have an expected index value and actual index value.

Normal is defined as 100 on the index shows. A rainfall index of 99 or lower indicates below average rainfall, while a rainfall index of 101-plus indicates above average rainfall. An indemnity payment is triggered when there is below average rainfall, and the index is below the producer’s chosen coverage level.

Decision points

As a result a producer has several key considerations.

He’ll need to designate whether he has grazing acres or hay acres. Premiums are lower for grazing acres and as a result if a loss occurs an indemnity payment is lower. Insurance for hay production is more expensive but also provides a higher payout in case of a loss.

A grower will need to choose the acres and he does not necessarily need to cover all of his forage acreage. The coverage level is the index value that triggered an indemnity payment when the realized precipitation is below the expected normal interval and the payout ranges from a high of 90% to 70% in 5% increments.

The higher coverage levels are more expensive and more likely to trigger a payment, he said.

In his calculation for the productivity factor. Mitchell notes USDA-RMA had a county base value of forage production of $59.50 per acre in Hempstead County. The producer has to choose how much of the base value he wants to cover.

The final decision is on the 2-month index intervals and the rancher will have to decide between hay or grazing acres. He will need to choose 2-month intervals to protect against low precipitation. He has to choose a minimum of two, 2-month intervals; he cannot exceed six 2-month intervals and he cannot choose overlapping intervals.

The producer also chooses how to allocate coverage across intervals with a maximum of 60% and a minimum of 10% for any of those 2-month intervals.

In his comparison, Mitchell says ranchers could distribute coverage evenly across intervals based on year-round forage availability, they could match growing season for a specific forage such as a cool season crop, or target specific intervals that could be matched with growth and harvest expectations.

Ranchers need to consider forage production and risks. They could also focus on maximizing the probability of receiving a payment. In Arkansas, September and October is most likely when it is a dry period but the policy will be more expensive for those months. That average premium for grazing is $10.69 per acre. For hay, the premium would be $38.57 per acre.

“A policy for haying acres is much more expensive than grazing acres,” Mitchell said, adding there is also variabilities that are taken into account by insurers.

In his comparison, Mitchell uses total insured acres of 100 acres of pastureland. The county base value is $59.50 per acre for grazing. At 90% coverage (which translates to $53.35 per acre) that meant the coverage level for 100 acres is $5,355 based. A producer than has what two-month intervals he wants to apply.

The subsidy level is 51% and the producer chooses 2-month intervals and then uses the calculator tool and he can see what the payouts could mean and there are also variables for the producer’s share for his premium. It also projects the indemnity payment.

On his overall intervals, an Arkansas producer paid $4.51 an acre to purchase the $53.55 per acre of coverage and received an indemnity payment of $9.28 per acre, which meant he netted nearly $5 an acre in protection.

He encouraged producers to look at past production when risks are highest for their operation. The PRF policy can be purchased from a crop insurance agent.

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