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Information Value of Climate Forecasts for Rainfall Index Insurance for Pasture, Rangeland, and Forage in the Southeast United States

Denis Nadolnyak and Dmitry Vedenov

Journal of Agricultural and Applied Economics, 2013, vol. 45, issue 1, 109-124

Abstract: In this article, possible use of climate forecasts in rainfall index insurance of hay and forage production is considered in a geographical area (southeast United States) relatively heavily impacted by the El Nino Southern Oscillation (ENSO). Analysis of the stochastic properties of rainfall, yields, and the ENSO forecasts using the copula technique shows that the forecast impact depends on the proximity to the Gulf Coast where the impact of the ENSO is more pronounced and earlier in the year. Stochastic modeling shows that the use of skillful long-term climate forecasts by the insured producers creates intertemporal adverse selection that can be precluded by offering forecast conditional premiums. The impacts on the efficiency of the rainfall index insurance and results of sensitivity analysis with respect to model parameters are discussed.

Date: 2013
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