Basis Risk in the Pasture, Rangeland, and Forage Insurance Program: Evidence from California

• Agricultural Economics Workshop

Date and Location

Thursday, February 20, 2020, 4:10 PM - 5:30 PM
ARE Library Conference Room, 4101 Social Sciences and Humanities

Abstract

James Keeler, Ph.D. Student, University of California, Davis

Tina Saitone, Associate Cooperative Extension Specialist, University of California, Davis

Agricultural producers who are reliant upon rangelands and pasturelands are some of the most vulnerable to weather-related risk and climate variability given their dependence on climate-sensitive resources. In an attempt to mitigate weather-related losses in forage and hay production, the U.S. Department of Agriculture’s Risk Management Agency developed a rainfall-based index insurance product known as the Pasture, Rangeland, and Forage (PRF) Insurance Program. Given that a rainfall-based index is an imperfect predictor of individual losses suffered by the insured, producers are still subject to a certain degree of residual risk, referred to as basis risk. Basis risk creates a scenario where insured producers may suffer losses without receiving an indemnity payment. The larger the basis risk, the lower the value of the insurance to the producer. To date, only one study has attempted to quantify the basis risk associated with PRF Insurance; results indicated overall basis risk was 23 - 46% in Kansas and Nebraska. These perennial pasture ecosystems in the Midwest portions of the United States are substantially different from the semi-arid rangelands and annual-grass-type forage production systems that characterize California’s ecosystem, creating a situation where basis risk is likely to be substantially different than the estimates currently available. This study uses the Normalized Difference Vegetative Index (NDVI), a remotely sensed measure of vegetation to absorb photo-synthetically active radiation, to quantify forage production, and thereby estimate basis risk, across the nearly 39 million acres rangelands in California from 2011 to 2018. Preliminary results suggest producers in California face substantial basis risk -- 35 - 55%. This level of basis risk is significantly greater than that estimated for the Midwest, driven by the ecological, climatic, and abiotic differences across the two locations.

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