With inflation looming and historic droughts affecting the US in recent years, it’s not overzealous to say that finances have been tight for most farmers and ranchers. The question whether or not to participate in Pasture, Rangeland, and Forage (PRF) insurance for your operation requires a thorough evaluation of a policy’s costs and benefits in relation to your risk tolerance, finances, and geography.
To start, how familiar are you with PRF insurance? In short, this federally subsidized insurance program issues indemnity payments when lower than average levels of rainfall limit your operation’s forage availability or hay production. The payments are determined based on geographic grid areas your operation lies in and not on your individual fields or grazing areas. You get to choose your coverage level in bi-monthly periods based on percentages of the area’s historic rainfall index and productivity.
Since PRF insurance is based on the regional 70-year precipitation average specific to your area, it can really be a benefit to your operation. However, there are certain things you will want to think about when evaluating if this coverage is right for you. Consider the following factors and then contact Redd Summit Advisors where industry experts and specialized software can help determine the amount of coverage that is beneficial to you.
1. What Is Your Risk Tolerance If You Secure PRF Rainfall Insurance?
For many ranches across the west, PRF insurance is a net positive for 17 to 20 (or most) years of a 20-year coverage period. Those are pretty good odds! Regardless, some operations with a 20-year net positive will have more years paying premiums than other operations, so the policy benefits are a little more volatile in these cases. Total premium costs do play a role, so operations that choose lower-premium policies may find it easier to take on the risk.
When looking at a policy and its estimated historic performance, how do you feel about the risk versus the reward?
2. How Is Your Operation’s Fiscal Health and How Would PRF Insurance Affect It?
If you rely on debt capital to run your operation, PRF insurance indemnity payments could help you pay off loans and put your operation in a better position to avoid future debt. On the other hand, be aware that if you end up owing a premium the first year, your cash flow may be affected.
Overall, you want money available to pay down long-term debt and increase your net worth versus simply covering annual operating loans. Will a PRF policy help strengthen your balance sheet?
3. How Volatile Is Precipitation in Your Area?
It’s helpful to understand that PRF policies generally don’t perform well in areas where precipitation stays close to average. Because this insurance pays out on lack of rainfall, bigger indemnity payments are always seen in regions of the US with more volatility in precipitation. This is why access to quality analysis software is so important, and a good insurance provider will use it to help you maximize the benefits of your PRF policy.
You can use this Rainfall Index tool from the USDA Risk Management Agency to review rainfall in your area.
Getting A Rangeland Insurance Policy That Fits Your Operation
Are you ready to look into a PRF insurance policy? Redd Summit Advisors can help you assess your risk based on historical rainfall data and will give you the tools to decide if a policy would be beneficial to your operation. Our experienced agents use industry-leading software to give you the best information available and can offer you a no-obligation policy preview so you can see how it could perform on your operation.
Contact Redd Summit Advisors today for a consultation at 1-800-825-2355 or book one here.