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Just Your Standard Bull

published: October 4th 2019
by: Michael Sturgess
Chances are that if you reside north of IH10 in the state of Texas, your weather conditions have been much drier than normal since around the 15th of July. And if you live South of that line, then chances are your dryness began much earlier. Much of East, Central and West Texas has seen the months of August and September to be pretty dry. Add to that at least the last 15 days of July, and you are looking at a 75-day period of little or no rainfall.
Forecasts for the month of October do not look a great deal better from what I see. If that pattern holds, then you are looking at as much as 3 1/2-4 months. Thank goodness the first 6 months were pretty wet. So, to recap, that is 6 months of rain followed by 3 1/2 -4 months of dry, followed by…
Well, we will have to wait and see what November and December holds in store for us.
Of course, I bring these patterns up for a reason. As most of you are aware, part of what we do involves working with our customers on providing insurance coverage with the Rainfall Index policy. And coverage on a policy is broken up into 2-months intervals where one can choose to insure as little as 2 intervals, or insure up to 6 intervals, or the entire year. If you choose to insure only 2 intervals, this means you are placing 50% of your annual coverage in each of these 2-month intervals. If you insure all 6 intervals, then you can place a minimum of 10% of your total coverage in an interval.
So, what is the best way to set up your coverage? That is a manner of preference for the customer. However, it is best that he or she is at least apprised of their options going forward. Some would suggest spreading your coverage evenly across all intervals, placing 16% of your total coverage in each of 6 intervals, insuring all 12 months of the year evenly.
And of you choose to do that, there is absolutely nothing wrong with that. However, did you know that the price to insure each interval varies? That’s right, each interval is rated differently, based upon the volatility and frequency of loss. When you think about it, it kind of makes sense. We all know that insuring a home on an ocean beach would have a much higher rate per thousand than a house in Central Texas. I bring this up to point out to you that no two intervals are the same. Some intervals trigger indemnities over 50% of the time, when others may only trigger 30% of the time.
The next thing you should also consider is your rainfall patterns. Let’s say you get an average of 36 inches of rain per year. Does this mean that you get an average of 3 inches per month? Certainly not. Chances are your average for January will not look anything like the monthly average in June.
For one, a conservative approach may be to just insure all 12 months equally. For another, the conservative approach may be to target coverage that shows to keep your out-of-pocket costs at a minimum. And depending on the data for your area, that may mean only insuring 10 months out of the year. Or, you may choose to be more aggressive and insure only 2-4 intervals and elect to target a higher net indemnity per acre, realizing that your out-of-pockets costs will be higher on those years when you owe premiums.
The bottom line is this—know your options. An informed decision is the best decision you can make. If you have questions, please don’t hesitate to call us. Sign up time for 2020 is now through November 15th.
Oh, and by the way, most of our customers have had to recently pay their premiums in September. However, the July-August interval will be released by mid-October and not only return all of their premiums , but provide some much needed net indemnities. Or, if your data said it was best to insure in August-September, that interval is even drier and will report large indemnities by mid-November. Keeping in mind that it also depends on how much of your coverage was placed into that particular interval. Meaning this, what if the data for your September-October suggested that you put up to 25% of your total coverage there? That placement would pay considerably more than placing only 10-15%.
Be informed.
SLS

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