Drought Insurance – Does it work?Written by Dallas Mount
Pasture, Range and Forage insurance (PRF) is a product of the Risk Management Agency (RMA). The idea is to provide ranchers some protection against drought risk. The product now available is the vegetative index method. This is completely different than the product that created a controversy several years ago that was based on dry-land hay production. However, the vegetative index product is not perfect either. It is difficult to measure forage production accurately across broad landscapes. Vegetative index uses satellite imagery to measure the greenness of the landscape. It is assumed that more greenness equates to more growth and vice versa.
The really neat thing about this product is that before you decide to purchase it, you can use the online decision support tool and research how it would have paid during the past decade or longer. Information on the product and the decision support tool can be found at 1.usa.gov/MTvpfI. Make sure you look under the vegetative index product on the website.
There are two questions that you can answer when using this decision support tool. First, did the insurance pay during our worst years? Secondly, what was the overall indemnity collected compared to our premium outlay?
Let’s look at an example ranch and see how the product worked.
I randomly picked a site 10 miles north of Douglas on Hwy 59. If we insured 10,000 acres each year at the maximum levels the insurance would cost about $5,800 per year. If we purchased the insurance every year from 2001 to 2011 using the online tool we can see that that product would have paid an indemnity in 2001, 2002 and 2004 (2012 numbers are not included because the growing season has not completed). The total indemnities we would have received would be about $78,000 over the 10 years. So, I would ask the rancher if the years the product paid were their worst years between 2001 and 2011. If so, then the product is working well as drought insurance. You can see from the numbers that even after paying all the premiums the product paid out $20,000 more than it cost to have it. Generally we don’t expect insurance to be a paying proposition, but rather hope that it will provide some financial stability during the bad years. However, for every operation I have examined over this past 10 year period, it is always a paying proposition to carry PRF insurance.
We can’t go back and retroactively purchase drought insurance for 2012, but we can for 2013 if you get in before Sept. 30. If you would like to look at your ranch specifically like I did for the above example ranch, please call me at 307-322-3667.
Here’s hoping you have a nice wet fall.
Dallas Mount is the Southeast Wyoming UW Extension Educator and can be reached at 307-322-3667.