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Estimating the Basis Risk of Rainfall Index Insurance for Pasture, Rangeland, and Forage

Author

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  • Yu, Jisang
  • Vandeveer, Monte
  • Volesky, Jerry D.
  • Harmoney, Keith

Abstract

Using historical yield and rainfall data from three university-managed ranches in Kansas and Nebraska, we measure basis risk of Rainfall Index Insurance for Pasture, Rangeland, and Forage (PRF-RI). We investigate the relationship between forage yield and monthly precipitation and estimate the relationship between forage yield and PRF-RI indices. Finally, we estimate basis risk of PRF-RI. Our estimates suggest that using actual site-level precipitation values would reduce basis risk by only 5%–9%, indicating that basis risk stems mostly from nonprecipitation factors. Using more flexible contract forms with site-level precipitation would have little impact on decreasing the degree of basis risk.

Suggested Citation

  • Yu, Jisang & Vandeveer, Monte & Volesky, Jerry D. & Harmoney, Keith, 2019. "Estimating the Basis Risk of Rainfall Index Insurance for Pasture, Rangeland, and Forage," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 44(1), January.
    • Handle: RePEc:ags:jlaare:281319
    DOI: 10.22004/ag.econ.281319
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    Citations

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    Cited by:

    1. Brittney Goodrich & Jisang Yu & Monte Vandeveer, 2020. "Participation patterns of the rainfall index insurance for pasture, rangeland and forage programme," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 45(1), pages 29-51, January.
    2. Xiaolan Wang & Xinli Wang & Jundi Liu & Jing Wang, 2024. "Strategic interactions and market equilibrium in China's agricultural catastrophic insurance," Agricultural Economics, Czech Academy of Agricultural Sciences, vol. 70(10), pages 495-512.
    3. Shin, Soye & Magnan, Nicholas & Mullally, Conner & Janzen, Sarah, 2022. "Demand for Weather Index Insurance among Smallholder Farmers under Prospect Theory," Journal of Economic Behavior & Organization, Elsevier, vol. 202(C), pages 82-104.
    4. repec:caa:jnlage:v:preprint:id:358-2023-agricecon is not listed on IDEAS
    5. Davidson, Kelly A. & Goodrich, Brittney K., 2020. "Nudge to Insure: Can Informational Nudges Increase Enrollment in Pasture, Rangeland and Forage Rainfall Index Insurance?," 2020 Annual Meeting, July 26-28, Kansas City, Missouri 304550, Agricultural and Applied Economics Association.
    6. Matthieu Stigler & David Lobell, 2021. "Optimal index insurance and basis risk decomposition: an application to Kenya," Papers 2111.08601, arXiv.org, revised Mar 2023.
    7. Kelly A. Davidson & Brittney K. Goodrich, 2023. "Nudge to insure: Can informational nudges change enrollment decisions in pasture, rangeland, and forage rainfall index insurance?," Applied Economic Perspectives and Policy, John Wiley & Sons, vol. 45(1), pages 534-554, March.
    8. Matthieu Stigler & David Lobell, 2024. "Optimal index insurance and basis risk decomposition: an application to Kenya," American Journal of Agricultural Economics, John Wiley & Sons, vol. 106(1), pages 306-329, January.
    9. James B. Keller & Tina L. Saitone, 2022. "Basis risk in the pasture, rangeland, and forage insurance program: Evidence from California," American Journal of Agricultural Economics, John Wiley & Sons, vol. 104(4), pages 1203-1223, August.
    10. Patalee, M.A. Buddhika & Tonsor, Glynn T., 2021. "Impact of weather on cow-calf industry locations and production in the United States," Agricultural Systems, Elsevier, vol. 193(C).
    11. Srinivasagan N. Subhashree & C. Igathinathane & Adnan Akyuz & Md. Borhan & John Hendrickson & David Archer & Mark Liebig & David Toledo & Kevin Sedivec & Scott Kronberg & Jonathan Halvorson, 2023. "Tools for Predicting Forage Growth in Rangelands and Economic Analyses—A Systematic Review," Agriculture, MDPI, vol. 13(2), pages 1-30, February.
    12. Sarah Janzen & Nicholas Magnan & Conner Mullally & Soye Shin & I. Bailey Palmer & Judith Oduol & Karl Hughes, 2021. "Can Experiential Games and Improved Risk Coverage Raise Demand for Index Insurance? Evidence from Kenya," American Journal of Agricultural Economics, John Wiley & Sons, vol. 103(1), pages 338-361, January.
    13. Tsay, Juo-Han & Paulson, Nick & Schnitkey, Gary, . "Supplemental Area Insurance and Basis Risk Measures: Part I," farmdoc daily, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics, vol. 11(72).
    14. Marin Elisabeth Skidmore, 2023. "Outsourcing the dry season: Cattle ranchers' responses to weather shocks in the Brazilian Amazon," American Journal of Agricultural Economics, John Wiley & Sons, vol. 105(2), pages 409-433, March.
    15. Lichtenberg, Erik & Iglesias, Eva, 2022. "Index insurance and basis risk: A reconsideration," Journal of Development Economics, Elsevier, vol. 158(C).
    16. Keeler, James B. & Saitone, Tina L., 2020. "Basis Risk Associated with the Pasture, Rangeland, and Forage Insurance Program: Evidence from California," 2020 Annual Meeting, July 26-28, Kansas City, Missouri 304322, Agricultural and Applied Economics Association.

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