The Value of Pasture, Rangeland, Forage Rainfall Index Insurance to Texas Ranchers
In the beginning of the 2007 crop year, the Federal Crop Insurance Corporation(FCIC) launched the Pasture, Rangeland, Forage Rainfall Index Pilot Program (PRF-RI)for six states. This insurance is an index and not individual insurance. Risk ManagementAgency officials claim that PRF-RI insurance mitigates the risk because index andforage production move in the same direction. Therefore when the index is low there isthe expectation that production will also be low. PRF-RI is a pilot program and ranchersare skeptical as to whether or not it is viable to purchase the insurance.The objective of this research was to determine the economic benefits of rainfallinsurance in selected counties in Texas and estimate the probability of indemnities underdifferent types of coverage levels and index intervals.Historical rainfall indices were simulated for all index intervals and amultivariate empirical distribution of rainfall indices were used. The model was run foralternative scenarios on the available coverage levels (90%, 85%, 80%, 75%, 70%) andrelevant premium rates. Each scenario resulted in an estimate of the insurance benefits variable probability density function for a particular coverage level. StochasticDominance with Respect to a Function (SDRF), Stochastic Efficiency with Respect to aFunction (SERF), and StopLight chart were used to rank the benefits of alternativecoverage levels.The results indicated that for all regions tested, the best alternative whenpurchasing PRF-RI was to buy the 90% coverage level. Probabilities of earning netindemnities decreased at lower coverage levels. December-January is a critical timeperiod that should be taken into consideration by the ranchers. The results indicated alsothat insurance returns depend on the region where the policy is purchased. In southernand eastern parts of Texas net indemnities appeared to be significantly less and havelower probabilities of being positive than in West Texas. Ranchers from West Texasmay be able to significantly benefit from the insurance.