Pasture, Rangeland, and Forage Rainfall Index Insurance (PRF-RI) stands as an underappreciated insurance product within the Midwest's livestock and forage production sector. As highlighted in the Farmdoc Daily article from Oct. 9, 2024, one distinctive feature of PRF-RI is that producers have the autonomy to select the months they wish to insure against low rainfall. This flexibility enables the safeguarding of various forage production systems that thrive at different times throughout the year. Enrolling in different months throughout the year not only influences the total premium paid by producers but also determines the amount and frequency of indemnities received and, ultimately, the extent to which forage production risk is managed.

Secure Your Forage Production with PRF-RI

Background: Unraveling the Determinants of PRF-RI Premiums

The USDA Risk Management Agency (RMA) sets PRF-RI insurance premiums with the aim of achieving actuarial fairness. Over time, the indemnities paid out from PRF-RI are intended to approximately equal the premiums collected. Premiums typically rise as the frequency and magnitude of indemnity payments increase. Consequently, PRF-RI premiums vary based on factors such as the per-acre value insured, the selected two-month intervals, and the chosen coverage levels. These factors impact both the size and likelihood of an indemnity payment. PRF-RI is subsidized, meaning that producer-paid premiums (premium less subsidy) are generally lower than indemnities on average. The subsidy levels depend on the coverage level selected, with 70% and 75% policies receiving a 59% premium subsidy, 80% and 85% policies getting 55%, and 90% policies receiving 51%.In Illinois, Figure 1 presents the average producer-paid premiums for two PRF-RI intended uses in 2024: hay (non-irrigated, conventional) and grazing. For each use, premiums are shown for 90% and 85% coverage levels, with variations based on two-month intervals. Dryland hay generally has higher premiums per acre compared to grazing due to the higher value of production and the increased total value of protection. Higher coverage levels also lead to higher premiums due to the greater probability of an indemnity being triggered and the higher value of protection. The differences in premium amounts among two-month intervals result from variations in rainfall variability. Months with higher variability, such as January/February, September/October, and November/December, have higher premiums due to the increased likelihood of an indemnity payment.

Exploring PRF-RI Interval Enrollment Strategies

From a pure profit-maximization perspective, some may suggest enrolling in months with the highest rainfall variability to leverage the subsidy and maximize the chance of receiving an indemnity. In Illinois, these high variability intervals are typically January/February, September/October, and November/December, although the specific intervals may vary by location. However, when considering such a strategy, one must also take into account the overall risk related to rainfall and forage production. If a lack of rainfall in these highly variable months has minimal impact on forage growth, enrolling only in those months may increase the risk of not receiving an indemnity when forage growth is lost.To illustrate this, the PRF-RI decision tool was used to outline the outcomes of two potential enrollment strategies. The "Profit Maximization" strategy involves spreading the percentage of value insured across the three intervals with the highest rainfall variability in Illinois: 33% in January/February, 33% in September/October, and 34% in November/December. The "Risk Management" strategy, on the other hand, distributes the percentage of value across intervals coinciding with the typical Midwest growing season: 33% in March/April, 33% in May/June, and 34% in July/August. It is important to note that these strategies are for illustrative purposes only and may not be the optimal choices for all producers or locations. By exploring the PRF-RI policy outcomes using Grid ID 24168 in Champaign County for non-irrigated and conventional hay production at a 90% coverage level, it was found that the "Profit Maximization" strategy led to a higher average indemnity of $50/acre compared to $38/acre for the "Risk Management" strategy. Additionally, the 2025 premiums were higher for the "Profit Maximization" strategy due to the higher expected indemnity. When considering premiums and subsidies, the "Profit Maximization" strategy resulted in an average net gain of $19/acre for producers, while the "Risk Management" strategy yielded an average net gain of $13/acre.PRF-RI is designed to provide risk protection against the loss of forage growth due to low rainfall. Therefore, it is crucial to examine how much risk each strategy manages. Table 1 shows the correlation coefficient between indemnities each year and the Illinois state-level average hay yield. Correlation coefficients range from -1 to 1, with values further from zero indicating a stronger correlation. For the "Profit Maximization" strategy, the correlation between indemnities and state-level hay yields is close to zero, suggesting that there is little relationship between the indemnities and hay yields. In contrast, the "Risk Management" strategy indemnities are more correlated, with a coefficient of -0.4. This indicates that when an indemnity occurs from the "Risk Management" strategy, it is likely to occur in years with low yields. Another way to assess this is by examining the outcomes in a particularly low yield year, such as 2012, which was one of the worst drought years in recent history. During 2012, the "Profit Maximization" strategy provided a $50/acre indemnity, while the "Risk Management" strategy offered more than double that amount at $116/acre. This highlights the importance of selecting months that align with when rainfall is beneficial for forage growth to provide better risk protection.

PRF-RI Interval Enrollment in Illinois

Figure 2 depicts the proportion of Illinois grazing and dryland hay acreage enrolled in each two-month interval in 2024. The two most popular intervals for both types of forage are August/September and November/December. However, there is significant variation, with coverage placed in all intervals.

Concluding Thoughts

Livestock and forage producers should seriously consider PRF-RI. Overall, the use of PRF-RI offers a means to reduce the risk associated with inadequate rainfall in forage and hay production. Due to premium subsidies, indemnity payments should exceed the producer-paid premium over time. The "best" enrollment strategy for a producer depends on their risk aversion preferences, overall risk exposure from a lack of rainfall, types of forage systems, and other factors. Producers are encouraged to utilize the USDA RMA's interactive decision tool for PRF-RI to explore policy options and historical outcomes and find the policy that best meets their specific needs.For those new to enrolling in PRF-RI, the enrollment deadline for the 2025 year is December 1, 2024. PRF-RI insurance can be purchased through any authorized crop insurance agent, and the premium payment deadline is September 1 of the following year, so premiums do not need to be paid upfront.