Research and Development for a Risk Management Product for Pasture/Rangeland and Forage

Precipitation Index

AgriLogic was awarded a contracted by the USDA Risk Management Agency (RMA) to develop insurance coverage for pasture, rangeland and forage. The first phase of the project was to develop a concept and the second phase was for the development of the concept. AgriLogic prosoed several scenarios and was awarded to develop an insruance program based on a precipitation index.

Producers in various regions often face unique and different problems. The proposed program to be developed will use the concept of a weather derivative and cover the primary risk of forage producers and users – precipitation.

A weather derivative is simply a contract between two parties that stipulates how payment will be exchanged between the parties, depending on certain meteorological conditions that occur during the contract period. For instance, a livestock producer may buy into a “put” contract to hedge the risk of drought. If rainfall fails to reach an agreed-upon figure during the given time-period, the producer is entitled to payment based on the outcome of the precipitation-based weather index. This payment can be used to offset the cost of purchasing additional feed.

The proposed Precipitation Weather Index (Precip-Index) was based on a weighted-average amount of precipitation that has occurred for a particular time period for a particular weather station. The Precip-Index was: easy to repeat, verifiable, and understandable; accepted by industry; and would use publicly available data.