Insurance Options and Financial Instruments to Consider
The United States Department of Agriculture (USDA) Risk Management Agency (RMA) serves America’s agricultural producers by providing effective, market-based risk management tools to strengthen the economic stability of agricultural producers and rural communities. The RMA is committed to increasing the availability and effectiveness of Federal crop insurance as a risk management tool. RMA manages the Federal Crop Insurance Corporation (FCIC) to provide innovative crop insurance products to America’s farmers and ranchers. In addition to crop insurance, the RMA also provides producers with Livestock Risk Protection (LRP) to safeguard ranchers against unpredictable market prices, low calf crops, and unexpected deaths. For some ranching and farming families, crop insurance is the difference between staying in business or going out after a disaster. FMA provides a federal solution for risk mitigation for ranchers and farmers across the United States.
Pasture, Rangeland, and Forage (PRF)
Pasture, Rangeland, and Forage (PRF) insurance is a type of crop insurance offered by USDA’s RMA that provides financial protection to farmers and ranchers against the risk of forage loss due to lack of average rainfall. This insurance is intended for livestock producers who rely on pasture, rangeland and forage for grazing animals. PRF insurance helps mediate the losses by lack of precipitation that affects the availability of forage.
The only peril that is covered under PRF is lack of precipitation. This is determined by precipitation levels within specific regions and time periods and is based off NOAA weather stations tracking precipitation levels . Coverage options include two-month intervals where you can assign a priority to that time period given its relevance to the forage growth of the area. The payments are given out based on the Rainfall Index (RI) which determines the impact of moisture in the area. The greater deviation between the actual rainfall and expected amount, the higher the payment amount. PRF provides producers with an effective way to manage weather risks. By relying on an index-based system, it provides a safety net without requiring producers to prove actual damage to their land or livestock, making it a very efficient and accessible tool for risk management.
PRF coverage is an annual option that can help protect against unforeseen costs associated with drought. It can help to offset costs associated with the following:
- Purchased feed required to bridge the forage gap created by drought.
- Transportation for forage being moved long distances.
- The increased cost of hay that may be a part of normal purchases for the year.
- Cost of transporting livestock to custom grazing opportunities.
- The cost of restocking the ranch after the drought has recovered.
Livestock Risk Protection
Livestock Risk Protection (LRP) is a federally subsidized program in the United States designed to help livestock producers manage the financial risks associated with fluctuations in market prices. This program is administered by USDA’s RMA and provides price risk coverage for livestock producers. If the market price drops below the coverage price you selected when you selected the policy, you may receive an indemnity payment to offset the loss.
There are different coverage options for different types of livestock, including: feeder cattle, fed cattle, and swine. Coverage is based on the expected market prices for these animals at the end of the policy period. This coverage is considered to be customizable as producers can choose the length of coverage period, which typically ranges from 13-52 weeks, depending on the livestock type. Coverage can also vary between 70-100% expected of the market price. Producers can ensure a portion to all of the herd or a group of animals, making the policy customizable to the producer's needs.
In terms of payments, if the actual ending price for the livestock, which is determined by the RMA market data, is lower than the coverage price, the producer receives a payment to cover the difference. The USDA subsidizes a portion of the premium costs, reducing the up-front costs for producers. This subsidy percentage varies depending on the producer’s location and coverage level selected. LRP coverage is similar to the type of protection that can be found using a put on the CME, yet due to the subsidy is often times more economical. It also has the advantage of being able to secure a position on a smaller number of livestock, where CME feeder calf contracts are traded in 50,000 lb. increments. All in all, LRP is a great way to be proactive for your herd and can make the difference if you are thinking of passing the operation to the next generation.
Annual Forage Insurance
Annual Forage Insurance is a federally subsidized crop insurance program offered by USDA’s RMA and was created to help ranchers and farmers manage risks associated with forage production grown annually for livestock. This program provides financial protection against losses due to lack of precipitation during critical growing periods. Producers can select one or more intervals during the year when their forage crop is most susceptible to precipitation loss, these intervals are in two-month periods and can cover up to four intervals annually.
This program covers annually planted forage crops used for livestock feed, grazing, haying, silage, or green chop. Examples of crops covered include sorghum, sundangrass, millet, oats and rye. The program covers both spring-planted and fall-planted forage crops. Coverage is based off of the Rainfall Index (RI) which measures the precipitation in the area where the forage crop is grown. The index uses historical data to calculate the expected precipitation for a specific area (grid) during a selected time frame. Coverage levels can vary from 70-90% of the expected precipitation for the selected grid and time interval. If the rainfall in the selected grid and interval falls below the chosen coverage level, producers may receive an indemnity payment to offset the financial loss.
This program is a great option for farmers and ranchers who want to protect their operation from unknowns such as rainfall. This program can help stabilize income when forage production is low, and funds are needed to purchase supplemental feed. Importantly, any participation in this program must be indicated by July 1 for the following 12 months- meaning the initial paperwork must be completed well in advance of an ensuing Spring or Summer planted annual forage crop. However, there is one major drawback of this program, the payments are based on rainfall within a grid area not necessarily the producer’s land. When considering this program, it is important to look at the grid and understand the expected payout rate for your area. Regardless of the grid system, this program is a great option for producers who rely on annual forage crop production and rainfall.
