Determinants of participation and coverage level choices in the pasture, rangeland and forage insurance program

Abstract

Drought risk has become a primary concern for ranchers as a drought can cause substantial financial losses and have been occurring with more regularity and severity than in years past. The Pasture, Rangeland, and Forage (PRF) insurance program allows ranchers to insure their livestock grazing land against potential losses from low rainfall conditions. This program has undergone substantial changes in its availability and premium prices. We implement a linear fixed effect regression model to estimate changes in participation and coverage level choices in response to changes in factors affecting premium payments. Additionally, we analyze the impacts of future prices, previous year's earnings, and the Livestock Forage Disaster Program (LFP) on participation and coverage level choices. Our results show that increasing county base values (CBVs) has a significant negative impact on participation, suggesting the more costly the premium payment, the lower the participation. Additionally, we find evidence of memory anchoring and rational decision making in the purchasing decisions of participants. Overall, we find preliminary evidence that ranchers display demand sensitivity to changes in CBVs as well as evidence that producers follow expected utility theory in choosing the highest coverage levels, especially when coverage levels have the same subsidy rate.