The Potential for Scale and Sustainability in Weather Index Insurance

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THE POTENTIAL FOR SCALE AND SUSTAINABILITY IN WEATHER INDEX INSURANCE FOR AGRICULTURE AND RURAL LIVELIHOODS Case Study 7 Rainfall and vegetation index insurance pilots in the United States Context There are about 588 million acres of pasture and rangeland in the United States and 61.5 million acres of hay land. 46 These are lands grazed by more than 60 million cattle and 8 million sheep, or grasslands harvested for hay, and they support a livestock industry contributing over US$80 billion in farm sales annually. In 2008, cash receipts for cattle and calves were US$48 billion, about 15 per cent of total cash receipts in the farm sector. The estimated value of hay production alone is some US$13 billion. When too little rain falls in the growing season, plant growth slows and forage yields decline. Other risks include flooding, insects and disease. Historically, forage producers who own livestock have coped with lost forage by purchasing supplemental forage, moving their herds to new grazing lands, or herd liquidation. Specialized hay producers mitigate risk through off-farm jobs and through diversification of farming operations. The United States agriculture sector enjoys the benefits of multiple government programmes addressing farm risk management. These include yield and revenue insurance, disaster payments, emergency loans, marketing loans, loan deficiency payments, counter-cyclical payments and average crop revenue election (ACRE), among others. Programmes closely related to pasture, hay production and livestock production include the Livestock Indemnity Programme, Livestock Forage Disaster Programme and Non-insured Crop Disaster Assistance Programme (NAP). 47 The current set of farm safetynet programmes generally benefits farmers producing only a subset of commodities, and the primary beneficiaries are larger farms. 46 1 acre = 0.405 ha. 47 Acres insured in Pasture, Rangeland, Forage (PRF) programmes are not eligible for payments from NAP. ANNEX 129
130 CASE STUDY 7 RAINFALL AND VEGETATION INDEX INSURANCE PILOTS IN THE UNITED STATES Insurance Programme Table 18: Programme basics Programme Pasture, Rangeland, Forage Rainfall Index (PRF-RI) Pilot Programme and Pasture, Rangeland, Forage Vegetation Index (PRF-VI) Pilot Programme Project leads United States Department of Agriculture, Risk Management Agency (USDA-RMA) Client Producers of forage and hay crops Insurer USDA-RMA, Federal Crop Insurance Corporation (FCIC), along with private insurers Weather data provider PRF-RI: National Oceanic and Atmospheric Administration, Climate Prediction Center (NOAA-CPC) PRF-VI: Earth Resources Observation and Science (EROS) Center – Normalized Difference Vegetation Index (NDVI) Crops Forage and hay crops Risks Late blight disease Index PRF-RI: Rainfall amount PRF-VI: Greenness of vegetation Premium Varies according to the number of insured acres, a productivity factor and the coverage level Farmers insured PRF-RI: 12,685 in 2009 PRF-VI: 3,015 in 2009 History The federal Agricultural Risk Protection Act of 2000 mandated the development of insurance coverage for loss of forage on United States pasture and rangeland, which together account for more than half the country’s agricultural land. The provisions of the act established the development of a pasture, rangeland and forage programme as one of the highest research and development priorities of the Risk Management Agency of the United States Department of Agriculture (USDA-RMA). Traditional multi-peril crop insurance is not suitable for providing forage coverage because of a lack of historical production data and publicly announced prices, and large variations in management practices and forage species. As a result, the RMA developed two pilot programmes to meet the legislative mandate: the Pasture, Rangeland, Forage Rainfall Index (PRF-RI) Pilot Programme and the Pasture, Rangeland, Forage Vegetation Index (PRF-VI) Pilot Programme. Both began in 2007 and are designed to cover the financial consequences of a lower-than-expected production of forage crops. PRF-VI is based on data of the Normalized Difference Vegetation Index (NDVI) from the U.S. Geological Survey’s Earth Resources Observation and Science (EROS) Center, 48 and it uses grids of about 4.8 square miles. Producers can select one or more three-month time periods (or index intervals) in which NDVI data are important to the growth and production of their forage. Insurance payments to farmers are then calculated based on deviation from the normal NDVI within the grid during the selected index interval(s). 49 48 http://eros.usgs.gov/. 49 See www.rma.usda.gov/policies/pasturerangeforage/faq-vi.html for more information.
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The Potential for Scale and Sustainability in Weather Index Insurance

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