Ep. 20 Pasture, Rangeland, and Forage Rainfall Index Insurance Deadline is December 1st

00;00;08;14 – 00;00;31;11
Riley Smith
Good deal. Well, I guess we’ll get rolling with this. Well. Good morning. Good morning. Welcome to another episode of Morning Coffee and AG Markets with your host, Riley Smith. Today we’ve got special guest in, Well, I say, and we’re doing a zoom recording with them, and. But right beside me, I got my right hand. Left hand man, Dr. Hunter Biram.

00;00;31;16 – 00;00;33;00
Dr. Hunter Biram
Yep. Back again.

00;00;33;02 – 00;00;34;25
Riley Smith
Mister. Mister. Floral.

00;00;34;28 – 00;00;36;24
Dr. Hunter Biram
Yeah, buddy. Floral. King. Floral.

00;00;36;24 – 00;00;52;08
Riley Smith
And, on the zoom recording today, we’ve got, Doctor James Mitchell, who was one of my previous mentors/Professor/ No, it has annoyed him a lot going into his office when he was available. How are you, Doctor Mitchell?

00;00;52;09 – 00;00;57;14
Dr. James Mitchell
You, You turned out you turned out okay, despite my best efforts, so I think you’re okay.

00;00;57;17 – 00;01;19;05
Riley Smith
Well, if if it weren’t for Doctor Mitchell, I literally would have had a panic attack in grad school or had a heart attack. And then we got. Then we got the second year grad student. I got to know him. In my second year, when he first came in. Walker Davis with us. How are you, man?

00;01;19;08 – 00;01;25;12
Walker Davis
I’m good. I’m glad to be here. I really see you all, and not really be with y’all. But see your faces.

00;01;25;14 – 00;01;29;28
Riley Smith
I feel like it’s getting more and more common. Yeah.

00;01;30;01 – 00;01;40;07
Dr. Hunter Biram
We have had quite a few of these. I’m trying to think you’ve done along with Scott. Did you do another one? We did another one recently.

00;01;40;10 – 00;01;42;13
Dr. Hunter Biram
Do we do another one besides the one with Scott?

00;01;42;16 – 00;01;48;19
Riley Smith
We did one with Scott. We did one last. No, not last week.

00;01;48;22 – 00;01;50;19
Dr. Hunter Biram
Maybe it’s just the one.

00;01;50;22 – 00;01;55;04
Riley Smith
No, that ain’t right. We did another one, but I can’t remember who it was. Okay?

00;01;55;07 – 00;01;56;19
Dr. Hunter Biram
Oh, it was me and you.

00;01;56;22 – 00;01;57;27
Riley Smith
Oh, yeah. That’s right. When you were.

00;01;57;27 – 00;02;00;04
Dr. Hunter Biram
At were at your place and I was in my office.

00;02;00;04 – 00;02;04;13
Riley Smith
Yeah, I was around sick people. And you didn’t want to get sick because you going to Disney World? That’s right.

00;02;04;13 – 00;02;07;13
Dr. Hunter Biram
I was about to go and walk my feet off.

00;02;07;16 – 00;02;15;23
Riley Smith
Well, we got, our special guest in here today. We’re going to talk a little bit about pasture rangeland and forage insurance.

00;02;15;26 – 00;02;16;16
Dr. Hunter Biram

00;02;17;05 – 00;02;28;17
Riley Smith
We’re going to give the floor to Doctor Mitchell first. And then we’re going to have Walker. He’s currently working on it as his grad research. I must you’re on thesis, correct?

00;02;28;19 – 00;02;29;19
Walker Davis
Yes, sir.

00;02;29;21 – 00;02;31;15
Riley Smith
So this is part of your thesis? Yeah.

00;02;31;17 – 00;02;36;23
Walker Davis
Work. Yeah. This will be a couple chapters of my thesis. Will be over PRF.

00;02;36;26 – 00;03;01;19
Riley Smith
Okay, so we’re going to have Doctor Mitchell. We’re going to pick his brain for a minute, because I know that they did an episode on the relevant risk. Pet relevant risk page podcast, in 2022, I believe. And first question, we’re going to do is, is talk about, kind of a comparison of then to now, Doctor Mitchell.

00;03;01;19 – 00;03;13;00
Riley Smith
So what do you what do you see as far as PRF goes, what the difference between that conversation you have with Doctor Anderson? Now?

00;03;13;02 – 00;03;32;17
Dr. James Mitchell
Yeah. Well, I’ll say just, private, it’s a good thing you’ve got Walker talking after a minute, because everything that I say, that’s incorrect, he can, bring up it and correct me because he’s the, he’s the expert, right? I mean, that when you work on something for your thesis, like you become the most expert person on that topic.

00;03;32;17 – 00;03;57;21
Dr. James Mitchell
So by now, Walker knows as much about Prep as probably anybody, in Arkansas, which is good. So he can clean up the the mistakes of my conversation. When I, when we were talking about that in 2022, we were the, the the conversation was mainly just what PRF is, how it works, how you can implement that into a broader, risk management plan.

00;03;57;24 – 00;04;24;25
Dr. James Mitchell
I would say the difference between now and then is 2022. We were coming out of what was a pretty bad drought situation, in Arkansas. And nationally, like as bad of a drought as we’ve had in a pretty long time, on a national scale. And in Arkansas was no one’s no different. They were they were certainly is a part of that impact.

00;04;24;27 – 00;04;54;14
Dr. James Mitchell
Now, I would say that in 2024, when we’re talking, drought has not been the least a huge issue, up until really September. We it feels like in Arkansas, like every fall, we’re always one week away from, like, a catastrophic drought. And then it rains. And we were in a pretty bad drought this fall, but, we were spared mostly, the earlier part of the year, the summer when forage and hay production is taking place.

00;04;54;14 – 00;05;05;08
Dr. James Mitchell
So that’s the the biggest difference is we’re having this conversation with a better, summer behind us than in 2022.

00;05;05;11 – 00;05;25;25
Riley Smith
So talking about you said drought, talking about that. So can you elaborate a little bit more on like the current drought context of like what the market conditions and the weather conditions have caused for the livestock market, just based on what we’ve gone through the past 2 or 3 months.

00;05;25;27 – 00;05;54;02
Dr. James Mitchell
Yeah. So I would say the problem this year with drought is it’s happened in the fall, and in early fall. So it really, really started impacting Northwest Arkansas specifically. It was kind of the bull’s eye of it, if you would, for the state, kind of September. And that’s kind of right around when most producers are starting to maybe market some calves.

00;05;54;02 – 00;06;20;29
Dr. James Mitchell
If they have not started, they’ve put a plan together for what that marketing plan is going to look like in the fall. And, if you’re being impacted by drought, one strategy that all of you will do is a little early to wean calves and sell them earlier than they normally would. The problem with that is if everyone is doing that, that means you see a large inflow of cattle into auction barns in the state, and that can put some downward pressure on prices.

00;06;20;29 – 00;06;40;07
Dr. James Mitchell
The right price is that that intersection of supply and demand. If you’ve got a large supply of something all showing up at the same time, you tend to see a little bit of downward pressure on prices. And that’s more or less what occurred was we saw a lot of cattle come into auctions in September that maybe would have happened in October, November.

00;06;40;09 – 00;07;04;27
Dr. James Mitchell
And so that caused some issues there. More of a management problem and less of a market problem would be a and this is an important one, that a lot of people are having to feed hay a lot earlier than they normally. And at first in September that was feeding, hay, to maybe stretch some pasture. And then we got into late late September, early October.

00;07;04;27 – 00;07;22;25
Dr. James Mitchell
And that was just straight up having to feed hay because there was no forage to speak of because of the drought. And then that’s a problem when you’re feeding hay that early in the year. We’re we been fortunate in the state that we had a good year producing a. So we’ve got a lot of it. It’s just we had to feed a lot earlier than we normally would.

00;07;22;25 – 00;07;24;14
Dr. James Mitchell
And that’s a problem in and of itself.

00;07;24;15 – 00;07;43;03
Dr. Hunter Biram
You know, James, one thing that I’d like to ask more about and this is going to reveal my ignorance as a, livestock marketing person, because that’s not what at all, what I am. But when we think about 2022, versus now, you know, wasn’t there a big sell off of cattle and, like, we’re in a different part of the cattle cycle now?

00;07;43;03 – 00;08;06;07
Dr. Hunter Biram
And does does that have any impact on the, for interest management that’s happening? So because the way I think about it is that there’s not as much cattle out there, we don’t have as much to feed. So we’re not going to need to produce as much. Does. Does that does that have any implications for the usefulness of PRF right now?

00;08;06;09 – 00;08;09;28
Dr. James Mitchell
So I’ll kind of say a couple things on that. So in 2022.

00;08;09;28 – 00;08;11;15
Walker Davis

00;08;11;17 – 00;08;45;06
Dr. James Mitchell
We were we had a drought in the, in the country that had kind of started just to migrate from west to east. So 2020, 2021, we had really bad drought in kind of the Montana, Wyoming, Colorado days, 2022. In late in late 2021 and 2022, that drought was just smack over the center of the country. So the southern plains, northern plains, big cattle country 2023 and some of 2024, that drought was hitting the south, the southeast.

00;08;45;06 – 00;09;14;28
Dr. James Mitchell
So a multi-year drought that just kind of went from west to east. And so you had some pretty sharp liquidation in the cow herd because of that. That the current the cattle cycle that we’re in peaked in 2019. So we’ve been in the liquidation phase of the cattle cycle since 2019, where we are today. There’s a we’re trying to figure out where is the bottom of that cattle cycle and when are we going to start the next one, which would occur when those cattle numbers come back up.

00;09;15;01 – 00;09;40;20
Dr. James Mitchell
And most analysts, including myself, think that 2025 is probably going to be the low point of those cattle numbers. And by 2026, we’ll start a new cattle cycle. And forage is a very big part of that. You know, my my colleague at University of Kentucky likes to say that, the cattle cycle and rebuilding the cow herd is a function of three things.

00;09;40;20 – 00;09;59;02
Dr. James Mitchell
Profit, pasture, patients. You can have good cattle prices. Because you’ve got tighter supplies. But if you don’t have any pasture to to graze more cattle on, then you’re not going to grow the size of the cow herd nationally. And so, you know, PRF is still a very important part of that. You have fewer animals.

00;09;59;02 – 00;10;19;21
Dr. James Mitchell
But part of the reason why you have fewer animals is because you’ve probably had a few years of really, really bad and conditions for forage. And so, you, you want to always implement some form of risk management, for forage production annually every year, regardless of a good year or bad year, regardless of having a lot of cattle or not a lot of cattle.

00;10;19;24 – 00;10;40;25
Dr. James Mitchell
That’s kind of the point of risk management, right? Is the risk management works if it’s something that you’re doing every year, it’s not reactionary or you have a bad year, I’ll do something about it. It’s a it’s designed to be something that you implement every year at some level. And then over the long term average you are experiencing less of those downs.

00;10;40;25 – 00;10;47;10
Dr. James Mitchell
And so that’s that’s kind of the point, right. It’s not a reactionary year to year type of thing.

00;10;47;13 – 00;11;10;12
Riley Smith
So, I’ve heard something similar to what he said about the three things that you need and get my buddy in Oklahoma. I always said, he’s like, you need grass, chicken litter and rain. If you want to raise a cowherd in Oklahoma, because it seems like rain is always spotty out there. Doctor Mitchell, I have, kind of a off base question, but it has to tie in with forage.

00;11;10;14 – 00;11;44;01
Riley Smith
So with the drought and forage being a shortage for the last several months, do you see any effect of, like, livestock producers, really? I wouldn’t call it abusing, but, really coming to the hot grain side since, like, corn and beans and, or regular row crops have been really cheap in the market. And we’ve seen a lot of, like, I guess a lot more feed utilization using that versus hay this time of year.

00;11;44;03 – 00;12;18;20
Dr. James Mitchell
So I wouldn’t say more than normal. You know, I would say we have a lot of producers, in Arkansas and in our neighbors to the west of us, Oklahoma, who would normally, this time of year be talking about grazing some stocker cattle on winter pasture? I think because we had very limited opportunity to get any early season winter pasture growth that maybe we’ve seen some producers pencil and, what cost a gain would look like in more of a backgrounding type of situation.

00;12;18;23 – 00;12;38;17
Dr. James Mitchell
And so I think there’s some of that, I think we are grain is cheaper. That’s that’s good. But you never want to be in a situation where you’re having to supplement with a lot of grain, especially this time of year, regardless of what prices are. And so I, I still think that there’s some utilization of that.

00;12;38;17 – 00;13;05;13
Dr. James Mitchell
I wouldn’t say more than normal, for, for both, supplementing cows or, trying to background some cattle this winter. We tend to mainly we, we tend to mainly be a state that utilizes the winter pasture, whether it be wheat, winter rye, fescue. Some backgrounding we, we do have really good access to a lot of commodity feeds being on the Mississippi River.

00;13;05;16 – 00;13;11;12
Dr. James Mitchell
And so you see a pretty wide range of people utilizing a lot of different types of feeds, which is, which is good, too.

00;13;11;14 – 00;13;22;28
Riley Smith
And I think Arkansas and you can correct me on this, I think Arkansas is more of a cow calf state to begin with than it is. What what we would call a stocker state. Just.

00;13;23;01 – 00;13;51;02
Dr. James Mitchell
Yeah. Yeah. You know, there’s, I would say that’s that’s correct. We’re mainly a cow state. I would also say, though, that, geographically, Arkansas is is in a very, advantageous spot. So me and, a colleague like to say that that in some sense, Arkansas is kind of the rest stop for cattle that are coming out of the southeast before they go into feedlots and say, Texas, Oklahoma or Kansas.

00;13;51;02 – 00;14;11;23
Dr. James Mitchell
Right. And so you get quite a bit of some stocker cattle from all over the southeast that might spend some time in the state before they head out that way. So I think there’s it’s maybe one of the hardest industries to understand is the stocker industry, because it looks different to everybody, like it’s stocker. Cattle production is opportunistic by definition.

00;14;11;23 – 00;14;31;27
Dr. James Mitchell
And so there’s no one one size fits all operation for that. So maybe it’s a little hard to categorize, but I would say there’s a decent amount out in the state. But but we are in cow country. This is a cow state. This is a cow calf. Majority state, I would say. Yeah, that’s that’s a very, accurate description of us in Arkansas.

00;14;32;00 – 00;14;55;11
Riley Smith
Well, reason why I just brought that up is because utilization of, like, you’re part of the world out in Texas, and, certainly Oklahoma and Kansas, they use a lot of winter wheat. A lot of cattle ran on winter wheat out there. And utilization here is most of its own cow calf pairs in the winter, the, you know, get your fall calves through and sell them in the spring.

00;14;55;14 – 00;15;01;29
Riley Smith
And but with that, do we want to swap it over to Walker?

00;15;02;02 – 00;15;16;27
Dr. Hunter Biram
Yeah. Walker, Texas Ranger speaking of Texas. You should, you should give us a give the spiel on what you’re doing. Walker. You’re not talking not talked on the phone, and, And you you you were even over my head at some point. So. Good. So go ahead and teach us something. What’s going on with your research?

00;15;16;29 – 00;15;44;15
Walker Davis
Yeah. So kind of came in with the PFR topic, with my advisor, Doctor Lawson. Connor. And as kind of we wanted to sit down and figure out what kind of issues we wanted to look at, and doing so we looked at what is prevalent, other crop insurance, and we kind of land on basis. Risk is being something that we’ve seen some papers and research about, concerning PRF and wanted to jump into that first.

00;15;44;17 – 00;15;45;28
Walker Davis
So that’s where we started today.

00;15;45;28 – 00;15;52;01
Dr. Hunter Biram
I’m Walker, can I stop you real quick, man? Just tell us about basis risk. Just go ahead and stop right there and explain what that is.

00;15;52;01 – 00;16;16;05
Walker Davis
Yeah. No doubt. For PFR at, I like to say there’s three types of bases risks that we’ve gone to found and consider when doing projects. Basis risk in this terms is pretty much your inputs don’t match your outputs is the simplest way I’ve been able to, dumb it down for me to understand. So this is a and fall centric, product to.

00;16;16;07 – 00;16;39;22
Walker Davis
So it’s not really I don’t consider necessarily even a forage product. It’s a rainfall product for livestock, haying and grazing land. So rainfall being its only trigger basis risk is winning. Rainfall doesn’t necessarily match up with, forage. It’s actually happened on the ground. So what we first looked that was something called false negative and false positive probabilities around basis.

00;16;39;27 – 00;17;04;19
Walker Davis
So our false negative probabilities being when rainfall says that oh you don’t deserve a payment, let’s say to 90% coverage level you’re indexed. Rainfall is 90 or above. However when you look at actual vegetation and use an ndVi, and create a normalized index like there is for rainfall, that index actually shows. No, you do deserve a payment.

00;17;04;21 – 00;17;27;22
Walker Davis
So you lost your forage. So you technically were trying to cover. However, you didn’t get a payment due to rainfall. Not seeing that. Then inversely from false positive probabilities is when rainfall falls below that coverage level and triggers, payment in indemnity. However, when you look at your normalized, ndVi, or your forage growth index, it’s actually above your coverage level.

00;17;27;24 – 00;17;52;22
Walker Davis
So you’re having forage, above your coverage level, but you’re also getting a payment based on how the rainfall happened. So that’s really good. So there’s good and bad basis risk. And that’s what we tackle first. And then the second kind of basis risk is almost location based is PFR based on grids. So it’s 0.25 by 0.25 longitude latitude grids across all the country, avoiding county and state lines.

00;17;52;22 – 00;18;00;06
Walker Davis
It doesn’t really care about those. They’re just straight up grids identical across the entire country. So in those grids and.

00;18;00;06 – 00;18;08;29
Dr. Hunter Biram
Walker, do you have a, maybe like a mile, like if you could convert latitude longitude over to miles, what does that equate to?

00;18;09;02 – 00;18;12;21
Walker Davis
I believe it’s 12 by 12.

00;18;12;23 – 00;18;16;21
Dr. James Mitchell
12 by 12. That the equator would be the approximate 12 miles.

00;18;16;21 – 00;18;18;12
Dr. Hunter Biram
Okay. Yes. Cool. Sorry to interrupt.

00;18;18;13 – 00;18;39;09
Walker Davis
I know you’re good. And that goes into what I was talking about. The location basis. Right. So you have these different rainfall, records that happen across the grids. So let’s say there’s 3 or 4 different places across a 12 by 12 grid that the rainfall is being recorded. And they, they’re, are amazing to try to average it or it’s that which comes from NOAA.

00;18;39;15 – 00;18;59;10
Walker Davis
We’ll try to average it and give the best estimation as to what rainfall occurred during the those dormant intervals in that grid. However, it’s never going to be perfect if I live 4 or 5 miles from one of the rainfall collections, I’ve seen it rain on the other side of the street where I grew up. So definitely 4 or 5 miles.

00;18;59;10 – 00;19;23;06
Walker Davis
That rainfall that’s reported is going to be a lot different. So there’s that basis risk where rainfall that your grid says your, was received does not actually match your own property. And PFR is not a farm by farm, claim by claim product, it is a grid area based, and there’s no farm level data that’s actually collected or used in any way.

00;19;23;08 – 00;19;46;11
Walker Davis
And then the third kind of basis risk kind of ties into the first. And it’s pretty much like I said, profit is not necessarily a forage insurance. In my mind. It’s a rainfall and insurance for livestock land. Well, it’s grazing or hay so rain does attribute to forage, but it does not attribute fully to forage. There is other things, like Riley said, you need chicken litter.

00;19;46;11 – 00;20;19;00
Walker Davis
You need rain and you need grass. You don’t just need rain for forage to grow. There are other things that go into another, different variables that lead to forage growth. So there’s the basis risk of your covering rainfall, but it’s not actually directly attributing to that actual forage growth or treating it as 100% of rain. True to be to 100% forage growth, but it might only be 50 or 60% of the actual forage growth, depending on the time of year.

00;20;19;02 – 00;20;34;18
Dr. Hunter Biram
So let’s talk about these, grid cells. So these are going to be you know, we said 12 mile by 12 mile. And so most likely that’s going to be like a sub county type of unit. Right. So it’s not going to be a county type of measure. It’s going to even smaller than the county. Now let’s talk about the weather stations.

00;20;34;21 – 00;20;43;08
Dr. Hunter Biram
So is there going to be a weather station in each grid cell. Or will there be a weather station that would, you know, so to speak, service multiple grid cells?

00;20;43;11 – 00;21;11;10
Walker Davis
There’s different RI’s recorded for each grid. So there is type of weather recording happening in each grid, but it might only be 1 or 2 different stations. There’s not necessarily some will be definitely more populous. Another rain gauge, gauge density is something that, I mean, that you’re kind of tossed around looking at and I’ve talked to some different people like doctor IFT over at K in the state about it, and they’ve had the same issues and kind of talked to their farmers and their extension.

00;21;11;10 – 00;21;30;05
Walker Davis
Economists have gotten a lot of questions about it as different grids have rainfall that’s recorded, I guess, more accurately on to a farm level. And that just comes from rain gauge density and where you are your farm as compared to where a rain gauge is.

00;21;30;08 – 00;21;46;27
Dr. Hunter Biram
James, I know that I’ve seen you give this talk, to producers before, and I think the last talk that I watched you give, you were talking about, how there might be multiple weather stations that could attribute to a grid. So could you talk a little bit more about that?

00;21;47;00 – 00;22;22;24
Dr. James Mitchell
Yeah. So, the index that you’re insuring with, with PR is going to be a weighted average. I it’s the four closest weather stations to the center of a grid. So the index is not based off of one weather station. And so that’s important because if one grid can have four weather stations in it, and that those four weather stations are used to create that index, there could be other grids where maybe there’s only one weather station in that grid.

00;22;22;24 – 00;22;53;22
Dr. James Mitchell
There could be other grids where there’s no weather stations in that grid, but importantly, it’s just finding the four closes ones to the center of each grid to calculate that index. And so that that’s important. You know, another type of basis risk that I like to think about is, the difference between precipitation on your farm and precipitation in your grid, right?

00;22;53;22 – 00;23;22;28
Dr. James Mitchell
Because it’s an area that it’s not a farm product like, like Walker was saying, it’s it’s kind of like, you know, like, like Hunter, like your area of work is crop insurance area based usually means you’re using county yields. We’re just using grid, measures of, of rainfall index in the same way that crop insurance uses county yields and crop insurance, there’s differences between, individual farms yields and and county yields.

00;23;22;28 – 00;23;50;17
Dr. James Mitchell
This is the same problem where you might have differences between precipitation on your farm and precipitation, as measured by the index for that grid. And so that’s kind of, the problems topic that I like to at least make people think about, when they’re looking at PFR and that, also matters a lot depending on there’s a lot of regional of that too.

00;23;50;17 – 00;24;12;09
Dr. James Mitchell
Right. Like I’ve heard of example of like a farm in, like Arizona where farm size is huge. And you could have you could have a weather station on your actual farm, but your farm is so dang big that like that, that actually might not even matter versus in Arkansas, where we might have more or less sparse, weather stations.

00;24;12;09 – 00;24;36;18
Dr. James Mitchell
And maybe that basis risk isn’t as big of a deal. I don’t it’s hard to know how to quantify. I haven’t seen, like, definitive answers on how big of a problem that is in Arkansas. But that is something that I think that farmers should discuss with, their crop insurance agent if they’re, looking at, integrating this product into their risk management, plan, if they will.

00;24;36;20 – 00;25;03;28
Dr. Hunter Biram
Yeah. And, I guess in the case of that big farm. I never thought about that. James. Appreciate. That’s a that’s an interesting idea. I guess what you’d really hope then is that you have, multiple weather stations on your farm to be able to capture all of that because, you know, if it’s not, then you’re going to have, spots of, forage that you’re trying to grow, that you know, you’re going to have a brown circle here, and you might have a green patch over here, and you might have a little bit of in between over here.

00;25;03;28 – 00;25;13;16
Dr. Hunter Biram
But, you know, if, if it rained a bunch at that weather station, well, who cares? I mean, you didn’t get any kind of risk protection from. And that is really interesting.

00;25;13;19 – 00;25;33;00
Dr. James Mitchell
Yeah. It’s like, like you can have, you know, it’s it’s a classic, you know, you know, we Riley, Hunter you guys have been around farmers, right? You talk to your neighbor and you guys get there at your place. Oh, yeah. I got like, half an inch what about you. I didn’t get anything right. So you guys could both be on the same grid and Riley on your farm.

00;25;33;00 – 00;25;44;28
Dr. James Mitchell
You might not get any rain until you’re right next door. You might get half an inch or a quarter inch of rain that night. That’s kind of the degree of this problem, right? It’s just a anecdotal thing about the conversations you have had with people about rain on your farm.

00;25;45;00 – 00;26;06;24
Riley Smith
Well, and I can give an example for, like, pasture in cow guys, I got a buddy that lives at Twin Oaks, Oklahoma, which is you could spit across the Arkansas line and hit his house. And when I was up there, at the U, U of A you know, we would get several several rains and I would talk to him and he’d tell me that they hadn’t got it rain four months.

00;26;06;24 – 00;26;24;11
Riley Smith
Well, he was 30 minutes away from us and they would be in a drought. And it seems like they’re constantly I don’t know what it is. And it has a lot to do with geography as far as rain patterns go. But they would not get rain consistently every year in the same time frame and be in a drought.

00;26;24;14 – 00;26;44;06
Riley Smith
And we would have for we might have 4 or 5in in a month. And so I mean that’s where that, that I could see where that basis would be. Yeah. Very, very not skewed. But I don’t know what the word is. I’m lost for words.

00;26;44;09 – 00;27;05;00
Dr. Hunter Biram
Well, what it sounds to me like, guys, is that, there’s, immense potential for research. And, so, Walker, can you give us give us 1 or 2 key takeaways from what you found so far? And what are some plans for for how you’re going to use the model and use the results, in more like a, in an extension type of output?

00;27;05;02 – 00;27;29;18
Walker Davis
No. Absolutely. So, what we in my, me and my advisor, have kind of going out right now is the papers submitted and it’s just is called Is PFR profitable in a letter state? because where it’s most adoption is in those more drought prone state. You’re Texas, Oklahoma, Utah, Arizona, Nevada, those places where you’ll have very long, hard droughts.

00;27;29;20 – 00;27;48;03
Walker Davis
So they need the money almost more. Where Arkansas, like we said, is pretty consistent. Dr. Mitchell said. We’re always about one week away from a good drought, but we somehow just always look out. So we wanted to look at its feasibility in a, well, other state, kind of looking at the southeast as a whole. Evidence from Arkansas, though.

00;27;48;05 – 00;28;13;18
Walker Davis
And so we did that by having different, optimal interval selection strategies. So our different consumers would ensure what, intervals, those intervals, would they put their policy in and how that would of played out over time and used a set amount of years of the training and then forecasted it forward to see how it would do.

00;28;13;18 – 00;28;33;10
Walker Davis
So we had our basis risk leveraging. So, I’m referencing back to those false negative and false positive probabilities. I was talking about. That type of consumer would try to minimize their false negative probability. So not receiving a payment when they should and maximize those false paths and getting that extra payment when necessarily they don’t really deserve it.

00;28;33;10 – 00;29;04;15
Walker Davis
But that’s how consumers think. So we were doing that. Then also our peak forage. So like I said that last my third type of basis risk was how rain actually attributes to forage. It’s on a perfect 1 to 1 ratio. So what months to rain actually are impacting what month of forage. Because if I get rain at the end of May, that does not mean my forage for the April-May intervals on a spike up like it’s not an immediate happening.

00;29;04;15 – 00;29;26;02
Walker Davis
It’s going to take a couple weeks for that to fully affect. And we did the most, volatile interval. So what dual month interval, historically has been the most volatile in terms of rainfall. And it’s funny that those are pretty much or flagged time also by the ones with the highest premium rates, but they also trigger the most.

00;29;26;04 – 00;29;49;25
Walker Davis
So we did that and ran a couple different simulations. And our findings is that PRF is profitable in every scenario, pretty much, as opposed to someone who doesn’t enroll it in this takes a chance would lose in that forage and that the most profitable typically is that the most volatile. Because when you do get a payment, it is going to be at a higher degree and they are more likely to happen.

00;29;49;25 – 00;30;11;10
Walker Davis
But on the years you don’t, you’re also having to bite the bullet. Take a little bit of a heart. We’re going to you. So we were looking at the why why that happens. Loss ratio. This was reported by the Army submarine business for Arkansas is about a .36 historically, which is very low. So loss ratios, your indemnities, divided by your premiums.

00;30;11;10 – 00;30;31;01
Walker Davis
What you’re getting now is over what you’re getting. And and that’s the second lowest in the country. So we wanted to look at why that is, whether it’s a lack of participation. Maybe we don’t have the number of observations to get a true, number for what? It’s not as popular in Arkansas as it is in some of those bigger states out west.

00;30;31;04 – 00;30;54;23
Walker Davis
So what we did, look at that is we did a simulation as well as from our reticle loss ratios, and imagine that every interval was insured over the past X amount. I think we did 15 years and then everything happened and our theoretical loss ratio was still like a .5, .6, very low. So that’s it’s not good, but it’s good to have it.

00;30;54;25 – 00;31;18;27
Walker Davis
Offers a question for us to begin looking at. So we actually looked and found the fourth National climate assessment. It’s found that rainfall trends and outside of the West have grown, especially in where we are in the southeast. So you’re getting more rain than you used to, but, our eyes built on our historic rain back to 1948.

00;31;19;00 – 00;31;37;02
Walker Davis
I thought it was a rolling 30 year average, but actually talk to an old graduate from here, and they said that they actually use all the data from 1948. So we went ahead and graph that using daily precipitation values from the last 15 years. And there’s a pretty strong upward trend in rainfall over the past 15 years in Arkansas.

00;31;37;09 – 00;31;57;17
Walker Davis
However, due to this having that average, that is not the. So you might have less rain observed in 2023 than that trend line. So maybe he did deserve a payment in a way. But however, due to us using that average, you’re not getting. So you might have less rain today than you we did in the past ten years.

00;31;57;17 – 00;32;10;27
Walker Davis
And you’re like, oh, I deserve a payment. It’s less than it has been. But since it’s going that 1948 number, it is still above that average. So you’re not getting an actual payment.

00;32;10;29 – 00;32;35;29
Walker Davis
Which attributes really strongly to those loss ratios. So that’s kind of what we’re starting to look at now. And starting a little research into climate change on we’re not climatologists in any way, but, you know, just trying to figure it out and see if there’s maybe, trend adjustment, we can recommend the Army. Different Olympic averages, how that all affect and see which one predicts the best.

00;32;36;02 – 00;33;01;15
Dr. James Mitchell
So you want to hear an economist be very ignorant to climatology? The is something that I was thinking about as you were talking was like, do you get like a two month interval for this thing? And I wonder over time, how has the intensity of rainfall events changed? Right. So like let’s say for a two month period you have zero rain and that matters a lot for forage production.

00;33;01;20 – 00;33;23;26
Dr. James Mitchell
Let’s say, you know, like we had in Northwest Arkansas a few weeks ago. And one night you get like four inches in just that one day of rain then now make your index above normal. But you had a super dry two month interval. But one day of rain makes you have an index that’s, in like, I don’t.

00;33;23;29 – 00;33;40;17
Dr. James Mitchell
I’m talking about something I have no idea about, like what that means for this product. But I was just like an observation I had of, like another area, how to look historically at how like the intensity of events has changed, as well as the quantity of rain or precipitation.

00;33;40;20 – 00;34;00;11
Riley Smith
Quantity of rain. That quantity of rain ain’t going to help either, because, I mean, if you go two months without in this, in your scenario, if you go two months without rain, you also got to consider past because when we go without rain in this time of year, what’s the first thing that winter wheat gets hit by army worms?

00;34;00;13 – 00;34;15;20
Riley Smith
It’s going to smoke it up and then good chance that even with that rain and trying to reproduce that different the grain that you put in the ground already is probably not going to generate again. So you’re going to lose your forage regardless if you have that rain or not.

00;34;15;22 – 00;34;31;03
Dr. James Mitchell
Well, that was my point, right? Is like you could go two months without rain and you’re like, I’m very dry, I should get a payment. But one big day of rain makes your index such that a payment isn’t actually a true algorithm.

00;34;31;03 – 00;34;36;21
Riley Smith
It says, no, you got four inches of rain. You don’t get it. You don’t trigger payment. Well, add rain to four months.

00;34;36;22 – 00;34;57;20
Dr. Hunter Biram
To nothing else that I’ve heard is, you know, or people have asked and they said, hey, well, what about if there’s too much rain? You know, we talk about drought. What if there’s too much rain? And James, to your example, I mean, what if it what if it was that one day or even two days in that two month interval and it came a flood and, you know, you had to replant your forage.

00;34;57;20 – 00;35;02;24
Dr. Hunter Biram
I mean, that that that’s still is a risk in terms of forage production, at least from my point of view.

00;35;02;24 – 00;35;26;06
Walker Davis
You know, when I was working on that paper over profitability, if we saw that because we did different sample years, in like the most, wettest year, the one we got, the most rain is actually like peak forage in those May, June, July, August, April, those months, a decrease just due to the mere amount of rain you were getting the grass or even able to grow.

00;35;26;08 – 00;35;43;07
Walker Davis
So you were having unrealized loss on your forage, so you were losing money. But also, according to PRF, you did great. You had 200, index points. So you had double the amount of average rain. So you’re not getting any money from that and you’re losing on the foraging.

00;35;43;10 – 00;36;02;08
Riley Smith
That’s a catch 22 situation. Because I mean, from a producer’s aspect, if it rained that much, they’re not going to turn. If you had winter wheat or rye or something planted, they’re not going to turn their cattle in on ground that saturated because it’s the first they’re going to eat some of it, but they’re going to trample and and stomp that seed down.

00;36;02;08 – 00;36;12;25
Riley Smith
And now it ain’t going to regrow. So you’re in a catch 22 situation that you got to hold your cattle back until it dries up enough. Or you could turn them out on it. So you’re going to have to feed on something else.

00;36;12;27 – 00;36;26;13
Dr. Hunter Biram
And that’s when the that’s when the PRF indemnity should be kicking in, so that it’s because it’s supposed to be able to pay for replacement. Or excuse me or some other form of, nutrition for, your cattle. So.

00;36;26;16 – 00;36;38;22
Riley Smith
So is this so is proof. And y’all are way more of an expert on this than, I’m learning this. So is it only triggered by the amount of rainfall in the area? Location?

00;36;38;29 – 00;36;39;11
Walker Davis
Yes.

00;36;39;16 – 00;36;40;25
Riley Smith
And it’s not based on, like.

00;36;40;25 – 00;36;42;15
Walker Davis
Us, rainfall.

00;36;42;17 – 00;36;45;12
Dr. James Mitchell
Or relative to coverage. Yes.

00;36;45;15 – 00;36;47;08
Riley Smith
That’s interesting.

00;36;47;10 – 00;36;51;17
Dr. Hunter Biram
Yeah, I think there’s some good there’s there’s some good and bad with it. And I think we’re doing a good job.

00;36;51;21 – 00;37;05;20
Dr. James Mitchell
So, to, to, pander to hunter doctor Byram, our crop insurance specialist. We would say that PRF is a single peril insurance product.

00;37;05;20 – 00;37;07;11
Dr. Hunter Biram
And it I mean.

00;37;07;11 – 00;37;11;23
Dr. James Mitchell
So it’s triggered by the loss of rainfall, one, one, thing happening.

00;37;11;23 – 00;37;28;06
Dr. Hunter Biram
That’s right. And so you talk about the armyworm stuff. That’s not going to be covered PRF see in a multi peril policy. It would be because it’s you know there’s more than one peril multi which you know James you’ve you’ve mentioned this before I mean there, there is this forage production risk. But I don’t think it’s available in Arkansas.

00;37;28;06 – 00;37;30;13
Dr. Hunter Biram
Is it.

00;37;30;15 – 00;37;31;08
Dr. James Mitchell
Well if you know.

00;37;31;08 – 00;37;34;11
Dr. Hunter Biram
The forage production sorry for its production risk product?

00;37;34;12 – 00;37;34;19
Dr. James Mitchell
Yeah.

00;37;34;26 – 00;37;54;23
Dr. James Mitchell
There’s there’s like a whole, whole farm, like forage insurance product that’s, that’s out there. And it’s, it’s either in pilot stage or it’s just offered in a couple of states. And so I haven’t read up at least this year on where they are with that program, but, but yeah, there is another product out there.

00;37;54;23 – 00;38;26;05
Dr. James Mitchell
And then, but they I guess we didn’t talk about it because we’re kind of blending discussion of, perennial pasture versus like winter annuals. There are two separate prep products for perennial pasture or forage versus like winter annual. So there’s like a winter annual or an annual forage PRF program that you would use on like a winter, like a wheat pasture forage program, which would be separate from prep for, let’s say, your Bermuda or something.

00;38;26;07 – 00;38;29;29
Dr. James Mitchell
So there are two products out there that distinguishes between those two things.

00;38;30;03 – 00;38;56;04
Riley Smith
So can, does it have to be in a livestock environment, like do they have to run cattle or it can say like guy down the road he’s got he’s a hay producer. Hey, that’s all he does. So all his Bermuda grass is strictly sell for hay. So can he get a PRF insurance as well as the guy right next door that runs 300 head of yearlings?

00;38;56;06 – 00;39;14;26
Dr. James Mitchell
Yeah, you can, so you can set PRF. That can be in sharing for pasture or insuring for hay. And then for hay or, and you know, it doesn’t, you know, that can be someone who’s feeding the hay to their own cattle or that can be selling that just to hay producer that that intends on selling that production.

00;39;14;28 – 00;39;19;13
Dr. James Mitchell
That that part does that. That doesn’t matter. So yeah, either one, you.

00;39;19;13 – 00;39;39;17
Dr. Hunter Biram
Just have to prove you have an insurable interest. So you got to prove that there’s something out there to insure, you know, it’s an area products you don’t have, like an APH actual production history yield to report. But, you know, there could be potential. I mean, we’ve talked about some pros and cons and, one of the cons, but one of the potential cons of this could be that you could just speculate.

00;39;39;17 – 00;39;55;22
Dr. Hunter Biram
Right. Let’s just say that we’re going to play the roulette table with our two month interval. Well, you can’t do that because you had to you have to at least show that you have an insurable interest like me. I can’t just go and buy PRF and play the roulette on it because I don’t have insurable interest. My family does, but I don’t.

00;39;55;25 – 00;40;12;12
Dr. Hunter Biram
And so I think that’s a good little safeguard in there. But, I mean, that’s how you could think about it is. Well, what if I just want to put a little bit of premium on a couple, two month intervals and roll the dice and see where the rain falls? No pun intended. But, you know, that’s that’s definitely that’s, that could be an issue.

00;40;12;14 – 00;40;17;01
Dr. Hunter Biram
But fortunately we get worry about it. But she’s got proof that there’s an insurable interest that you have insurable interest in the ground.

00;40;17;05 – 00;40;27;10
Riley Smith
I wonder if a food plot would be an insurable interest, because that is considered an annual or perennial. Maybe forage for wildlife?

00;40;27;17 – 00;40;29;18
Dr. Hunter Biram
Yeah, maybe.

00;40;29;21 – 00;40;52;26
Dr. James Mitchell
Yeah. Because you can do the food plot part. You can insure a one acre or 100 acres like there. It’s not. It’s designed that way too, for producers to utilize it, that those that have smaller farms. So I guess your food plots would fall into that category up by one acre or less not yeah. And you’re not having to hunt this year 100 acres or whatever.

00;40;53;04 – 00;40;54;03
Dr. James Mitchell
Like this whole farm.

00;40;54;06 – 00;40;56;05
Riley Smith
Like I could plant, the plant.

00;40;56;07 – 00;41;09;04
Riley Smith
I think I’ve got roughly 15 acres of food plots, and I could plant them all in clover and put them in like a perennial or a PRF

00;41;09;07 – 00;41;09;29
Dr. Hunter Biram
You probably could.

00;41;10;05 – 00;41;10;29
Riley Smith
That’d be interesting.

00;41;10;29 – 00;41;19;07
Dr. Hunter Biram
An agent, I’d bet you could. Well guys, this has been a ton of fun but I’m going to cut I’m going to cut us off. This has been a fantastic conversation.

00;41;19;07 – 00;41;19;23
Riley Smith
Absolutely.

00;41;19;23 – 00;41;24;22
Dr. Hunter Biram
Doctor Mitchell, really appreciate your time and appreciate your insight. As always.

00;41;24;22 – 00;41;27;29
Riley Smith
And I do want to mention one thing, because I didn’t do it at the beginning.

00;41;27;29 – 00;41;28;19
Dr. Hunter Biram
We’ll go ahead.

00;41;28;24 – 00;41;43;17
Riley Smith
So Doctor Mitchell, James Mitchell, he is at the University of Arkansas. He is a professor up there. And a life extension livestock economist. And then, Walker Davis is a second year grad student at the University of Arkansas as well. I didn’t mention that at the beginning, but I just cut.

00;41;43;17 – 00;41;44;28
Dr. Hunter Biram
That little snippet out, moved to the farm.

00;41;44;28 – 00;41;49;18
Riley Smith
I don’t know how it’s going to mess with the zoom portion of it, but, might try.

00;41;49;18 – 00;41;56;29
Dr. Hunter Biram
It’s all good. James Walker as well. Walker. Appreciate your time. Appreciate, all your insight here. I think it’s been a fun time.

00;41;56;29 – 00;42;01;16
Walker Davis
Oh, yeah. Don’t, thank you for the opportunity.

00;42;01;19 – 00;42;02;10
Dr. James Mitchell
Enjoyed it.

00;42;02;13 – 00;42;03;25
Dr. Hunter Biram
All right. Well sign us off.

00;42;03;28 – 00;42;26;04
Riley Smith
All right, well, you all stay tuned to my market report. Thanks. All right, guys, back with you. Market report December 24 Corn current prices at $4.30 per bushel a month ago prices at $4.10 per bushel. That’s up $0.20 a year ago price was at $4.70 per bushel. That’s down $0.40. November 24 rice, $15.12 per cwt a month ago.

00;42;26;06 – 00;42;55;00
Riley Smith
Prices at $15.12 per cwt. There’s no difference. Year ago prices is at $17.50 per cwt. That’s down $2.38. November 24 soybeans current prices at $9.91 per bushel month goes price was at $9.90 per bushel. That’s up $0.01 a year ago price was at $13.77 per bushel. That’s down $3.86. July 25 wheat current price is at $5.89 per bushel.

00;42;55;03 – 00;43;20;14
Riley Smith
Month goes price is at $6.10 per bushel. That’s down $0.21 a year ago. A year ago, price was at $6.11 per bushel. That’s down $0.22. December 24 cotton current prices at $0.68 per pound. A month ago price was at 70 $0.72 per pound. That’s down $0.04. Year ago price was at $0.77 per pound. That’s down $0.09. And your weekly U.S average for peanuts is at $492 per ton.

00;43;20;14 – 00;43;52;04
Riley Smith
A month ago, prices at $500 per ton. That’s down $8, and a year ago prices at $558 per ton. That’s down $66. That’s your weekly commodity futures this week. Your input prices this week Urea is at $480 per ton, ammonium nitrate at $465 per ton, ammonium sulfates at $520 per ton. DAP is at $740 per ton, triple Super phosphates at $687 per ton, potash is at $412 per ton, and your pellet lime is $225 per ton.

00;43;52;06 – 00;44;16;06
Riley Smith
Your diesel prices this week off road diesels at $2.57 per gallon, your highway diesel is at $3.20 per gallon, and your Mississippi River level at Memphis, Tennessee, this week is at 0.3ft. A year ago was at -8.47ft. Want to thank you all again for joining in on another episode of Morning Coffee and AG Markets. We hope you enjoyed your morning coffee and enjoyed the rest of your work week.

00;44;16;12 – 00;44;18;23
Riley Smith
And until next time we’ll catch you on the flip flop.

00;44;18;27 – 00;44;34;29
Riley Smith
Bye bye now!