Rainfall Insurance as Part of Your Risk Management Plan
The majority of the country is experiencing some degree of drought, ranging from abnormally dry to severe. This creates many challenges in the agricultural sector as well as stress for municipalities, recreationalists, water transportation, and wildfire management. Currently the Western U.S. is experiencing extremely dry conditions with a fraction of the average annual precipitation received over the last year. Many farmers have the opportunity to purchase crop insurance which protects them against various U.S. losses.
In the West, ranchers have an opportunity to purchase Pasture, Rangeland and Forage Insurance, better known as “Rainfall Insurance.” In the Western U.S. this program is becoming very popular. Rainfall Insurance is designed to be a risk management tool, allowing producers to insure against below-average production due to low moisture.
Payments are based on the amount of rainfall received within a location grid and are not tied to production revenues, but rather to the weather and actual precipitation. Producers participate by selecting how many acres they want to enroll, as well as to which corresponding grid or grids (determined by the USDA) for the location of the insurance.
Then they select their coverage level, productivity factor, and timing of coverage. The coverage level refers to the level of rainfall and when the indemnity payment is triggered. The productivity factor gives the producer the ability to select the quality of their land in comparison to the county base value. Lastly, the producer selects which intervals the insurance will be valid. Essentially the producer enrolls the acreage, chooses a risk level, and selects the time period. There is a vast amount of records and data for rainfall across the country, which ultimately gives the producers a large advantage when they are selecting rates. The producer must own or control the acreage enrolled which would include leased lands.
In western states it is very common for ranch properties to have large public land leases as part of their operation. These leases are most commonly either Bureau of Land Management, State Lands, or National Forest lands. Most often these leases include very large acreages, as the productivity is relatively poor requiring more land to support livestock.
Over the last few years Rainfall Insurance has been gaining attention by ranchers and transitioning from a risk tool to a larger portion of their annual earnings. Most producers take more risk each year and are able to bank profits from dry climate, specific dry months, and utilize the wealth of historical data when analyzing their options. The profits being realized are attracting more than just ranch operators to the programs, but have also caught the eye of investor buyers in the market.
In the next release, Ben Ward will provide details regarding the unintended impacts of the “Rainfall Insurance” program and how it is shaping the real estate market throughout the western U.S.