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The types of risks that most agricultural producers are subject to can be classified as price and production risks. Price risk refers to the many different potential scenarios where realized prices differ from price expectations. Similary, production risk refers to the many different potential scenarios where realized output differs from expected output. Producers need to develop risk management plans that fit the needs and objectives of their operations to cope with both types of risk.
One production risk for livestock and forage producers is producing less forage than what is expected or needed. There are several production risks, including pests and weeds, that pose a significant risk for Arkansas forage producers. Weather is perhaps the most significant risk as it is completely out of the producer’s control—for example, the quantity and timeliness of precipitation impact forage yields. Finally, input availability and cost are also sources of forage production risk.
Several tools are available to producers for livestock price risk management. However, there are fewer products available for forage production risk management. Historically, producers have used farm management practices to protect against forage production risk. Namely, forage diversification, soil fertility and hay tests, practices that improve soil fertility, and grazing management like the Arkansas 300 Day Grazing System. A relatively new product offered by USDA’s Risk Management Agency for forage production risk management is Pasture, Rangeland, and Forage Insurance (PRF).
PRF is an area-based subsidized insurance product offered by USDA-RMA for perennial forages used for grazing or hay. The program is intended to help producers cover replacement feed costs when a loss of forage for grazing or hay is experienced due to inadequate precipitation. PRF is based on a rainfall index. As a single-peril insurance product, producers receive an indemnity payment when observed precipitation for a producer’s area falls below a chosen coverage level based on a historic rainfall index. The reason expected rainfall is insured is because it is difficult to uniformly measure forage production on farms, and it is more feasible to measure precipitation. PRF is a tool for producers to protect against forage production risk to the extent precipitation correlates with forage production.
The deadline for enrolling in PRF of December 1st is approaching, and there are key decisions to make about their policy that will impact premium rates and the likelihood of an indemnity payment. The decisions include intended use, insured acres, coverage level, productivity factor, and index intervals and percent of value. Producers choose between grazing and hay as the two intended use of the insured forage acreage and the associated acres to insure for a PRF policy. PRF coverage levels range from 70% to 90% in 5% increments. Premium subsidy rates, or the amount of premium paid by the government, will also depend on the coverage level (see Table 1). The productivity factor allows a producer to adjust how much of a county-level base value of production to insure with high-quality pastureland likely requiring a factor greater than 100% and low-quality pastureland likely requiring a factor less than 100%.
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