Optimial Allocation of Index Insurance Intervals for Commodities

The objective of this research is to incorporate the relationship between forage yields and rainfall levels to find optimal weights on insurance intervals using Pasture, Rangeland, and Forage Rainfall Index (PRF-RI) insurance. Unlike earlier models, actuarial fairness of the insurance product is assumed. Historical rainfall index and hay yield data are used to calculate returns and generate an efficient frontier using Markowitz Portfolio Theory. Analysis of several counties in South Dakota demonstrates that the May-June and July-August intervals are important months for managing forage production risk. Sensitivity analysis included changing coverage levels, productivity factors, and the subsidy level. It is demonstrated that a producer enrolling in PRF-RI would earn higher returns per acre with lower risk compared to not using the subsidized insurance. Without the premium subsidy the mean returns from the optimal portfolio are lower, but the risk reduction remains.