Cornhusker Economics has a wonderful overview of the new Pasture, Rangeland and Forage Insurance pilot program in Nebraska. In summary:
- If you are a Nebraska producer who uses grazing and hay production in your operation, the USDA’s Risk Management Agency is introducing a new insurance product, the Pasture, Rangeland and Forage (“PRF”) coverage.
- In the 2013 crop year, PRF coverage changes from a vegetative index to a rainfall index. This means that, instead of PRF coverage based upon satellite imagery to determine the “greenness” of a pasture, PRF will now be based upon the rainfall received in insured area.
- Insurance (or, in legalese, indemnity) is paid when the rainfall in the insured area is below the guaranteed level, which is determined as a percent of average rainfall. This means that coverage is determined based upon the rainfall in the insured area, and not upon the production of the operator.
- An insured area is based upon a grid. Per Cornhusker Economics, the grid in Nebraska is approximately 13 miles east-to-west and 17 miles north-to-south. Thus, the rainfall index is calculated for the grid rather than an individual farm or ranch.
But how does it work? That requires a few steps.
- First, each grid area has a base dollar value of production determined by RMA for grazing or haying.
- Next, the producer selects a productivity factor. The productivity factor adjusts the base dollar value up or down, from 60 percent to 150 percent of the base dollar value.
- Third, the producer will also select a guarantee level. The guarantee level is the percentage of average rainfall at which insurance payments are triggered. The guarantee level can range from 70 percent to 90 percent, ranging in five percent increments (i.e. 70, 75, 80, 85, and 90 percent). Thus, if a producer selects an 85 percent guarantee level but the grid receives only 82 percent of average rainfall, the insurance is triggered.
- With the base dollar value, productivity factor, and guarantee level, it is possible to calculate the maximum payout. Liability is calculated per acre and is calculated as the productivity factor multiplied by the guarantee level. In other words, if there is a base dollar value of $30 per acre and a productivity factor of 120 percent, the productivity value is $36 per acre. (30 x 1.2 = 36). Then you multiply the productivity value by the guarantee level. Assuming a guarantee level of 80 percent, the total payout would be $28.80 per acre. (36 x .8 = 28.8)
But wait, there is more!
- The producer not only chooses the productivity factor and guarantee rate, but the producer must also select time period of coverage called index intervals. An index interval is two months long. If PFR insurance is selected, a producer must select two index intervals during the calendar year.
- Once the intervals are selected, the total payout must be allocated across the intervals. How does this work? Well, our producer above has $28.80 of total payout available. Thus, our producer must allocate part of the $28.80 to separate index intervals. For example, our producer can allocate 60 percent (or $17.28) to one index interval and 40 percent (or $11.52) to a different index interval. Keep in mind that if an index interval is selected, at least ten percent of the total payout must be assigned to the index interval and the maximum allocation for any index interval is 60 percent of the total payout.
- Premiums are subsidized and the amount of the subsidy depends upon the guarantee level. For a 90 percent guarantee level, 51 percent of the subsidy is paid. An 80 and 85 percent guarantee level has 55 percent of the subsidy paid. For 70 and 75 percent guarantee level, 59 percent of the premiums is subsidized.
Keep in mind that any indemnity paid is based upon the grid system and the index interval selected. That means it may not rain adequately on your acres but the grid may have enough rain that coverage is not triggered. Also keep in mind that two index intervals must be selected. Cornhusker Economics suggests selecting the two index intervals in which precipitation has the greatest impact upon production.