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

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.
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Yu, Jisang; Vandeveer, Monte; Volesky, Jerry D.; Harmoney, Keith, Estimating the Basis Risk of Rainfall Index Insurance for Pasture, Rangeland, and Forage, Journal of Agricultural and Resource Economics, Volume 44, Issue 1, January 2019, Pages 179-193

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