Morning Coffee and Ag Markets
This podcast delivers weekly insights for the agriculture industry, covering everything from farm-level risk management to market volatility and production challenges. Beyond the farm, we discuss key supply chain issues, like Federal Reserve policies, port strikes, and Mississippi River disruptions, affecting everyone from producers to those all along the supply chain. Join host Riley Smith every Monday morning for engaging conversations with agricultural economists and industry experts about the agricultural economy at both the micro and macro level. Each episode also features a market report, offering current and historical futures price trends.
Morning Coffee and Ag Markets
Episode 46 Analyzing the upside and downside risk in PRF policy selection: Timing mismatch
In this episode of Morning Coffee and Ag Markets, Hunter is joined by Walker Davis, a graduate student at the University of Arkansas, for an insightful discussion on the complexities of Pasture, Rangeland, and Forage (PRF) insurance policy selection. Together, they dive into Walker’s ongoing research titled “Analyzing the Upside and Downside Risk in PRF Policy Selection: Timing Mismatch.”
Tune in as they break down how timing mismatches between rainfall indices and forage production can significantly impact risk exposure and policy effectiveness. Whether you're a producer, policymaker, or student of agricultural economics, this conversation offers valuable perspectives on navigating PRF decisions in a changing climate and market landscape.
Grab your coffee and join us for a timely and thought-provoking conversation!
00;00;00;00 - 00;00;11;23
Dr. Hunter Biram
So, Walker, we just, you know, Riley just got married, and he just had his honeymoon. There's just something in the water, because you're about to get married, and you're about to have your honeymoon.
00;00;11;26 - 00;00;14;04
Walker Davis
Yes, sir. Yes, sir.
00;00;14;04 - 00;00;36;27
Dr. Hunter Biram
So, Walker, we just, you know, Riley just got married, and he just had his honeymoon. There's just something in the water, because you're about to get married, and you're about to have your honeymoon.
00;00;37;00 - 00;00;43;07
Walker Davis
Yes, sir. Yes, sir. Memorial Day wedding and then the honeymoon phase.
00;00;43;12 - 00;00;46;27
Dr. Hunter Biram
But that's quite a thing to memorialize, I would say.
00;00;47;00 - 00;00;49;29
Walker Davis
Oh, yeah. Well, we get a permanent holiday for our anniversary.
00;00;50;06 - 00;00;53;08
Dr. Hunter Biram
I mean, it was made for y’all, it was made for y'all.
00;00;53;10 - 00;01;02;15
Walker Davis
Yeah. And so they remember., and us, along with the veterans, of course. We’re gonna walk out with sparklers and mini American flags for everybody.
00;01;02;16 - 00;01;09;21
Dr. Hunter Biram
As you should. As you should., the American way. Oh, yeah, the American way. I love that. So, where are you guys going to honeymoon at?
00;01;09;23 - 00;01;13;07
Walker Davis
We're going out to Bozeman, Montana, and then doing Yellowstone.
00;01;13;09 - 00;01;19;29
Dr. Hunter Biram
Oh, wow. That's going to be wonderful. That's going to be beautiful. So are you. Are you guys both? Would you call yourselves mountain people? More so than beach people?
00;01;19;29 - 00;01;21;24
Walker Davis
Yeah. I can't stand the beach.
00;01;22;00 - 00;01;25;04
Dr. Hunter Biram
Really can't stay on the beach.
00;01;25;06 - 00;01;35;20
Walker Davis
Mackenzie, she could do a day or two of it, but I can do about three hours. And after that... I like a pool fine. I think it's a sand thing more than anything else. I'm not a big fan.
00;01;35;27 - 00;01;54;02
Dr. Hunter Biram
Yeah, you know what? That's fair. Sand does get everywhere. If you're not careful. Because, like in most of these, like, beach club resorts, they've got places to rinse off your feet and stuff. But, I mean, even then. Right? Like, there's even gonna be a little bit that's going to trickle into your, suitcase coming home. So it's going to end up bringing some sand home.
00;01;54;02 - 00;02;22;01
Dr. Hunter Biram
But, Yeah, I think, Riley, he, he, he and his now wife kind of crazy thing about, I think that they got a little sunburn. They went to Cancun, so they went to the beach, and, they got a little too sunburned and, because, I mean... And listen, it's an honest mistake. So, Annie and I, we went to Hawaii a couple of years ago, and I didn't really think much about being closer to the equator, having that more direct sunlight.
00;02;22;01 - 00;02;40;27
Dr. Hunter Biram
But, dude, like, there was a day where, I mean, we both just got torched and we were putting sunscreen on every hour. But I just... I just guess we didn't cover ourselves well enough or didn't have the strongest SPF or what it is, but, yeah. Yeah, you definitely have got to be careful, with the beach and, be careful with those sunburns.
00;02;40;29 - 00;02;49;01
Walker Davis
I get burnt real bad, and I'm real pasty, just naturally. It's, just I try to stay covered up the best I can 100%.
00;02;49;01 - 00;03;07;03
Dr. Hunter Biram
Well, I'm with you. Well, let's go and dive in. Good morning. Good morning, and welcome to another episode of Morning Coffee Ag Markets. This is, your host for the day, Dr. Hunter Biram, and with me in the studio remotely, I've got Mr. Walker Davis. And, Walker. If I can, I'm going to claim you as one of my grad students.
00;03;07;08 - 00;03;26;05
Dr. Hunter Biram
I think that you've got some fantastic work. And, with, the pasture, rangeland, forage, rainfall index insurance, and, that's what we're going to talk about today, because, although we're going to release this at a later date, actually, in the week that we're recording this, on Friday, you're going to be defending your thesis and you are about to become a master.
00;03;26;08 - 00;03;28;06
Dr. Hunter Biram
How are you feeling about that?
00;03;28;08 - 00;03;46;15
Walker Davis
I feel real good. Real excited. It's been a really fun two years. And what a lot better than I ever could have expected. I wasn’t really too happy to be coming to Fayetteville. I wanted to stay at Arkansas State, but my mentors over there really pushed me, and, I really had fun. And I'm excited for the next chapter, though.
00;03;46;18 - 00;04;01;04
Dr. Hunter Biram
Well, and for those of our listeners who have not listened to the previous podcast, just a quick primer on Walker. Walker's an Arkansas boy through and through from southeast Arkansas. His mom is actually an instructor at the University of Arkansas at Monticello. Went to Hamburg High School?
00;04;01;07 - 00;04;01;29
Walker Davis
Yes, sir.
00;04;02;01 - 00;04;23;00
Dr. Hunter Biram
Correct? And so, and then he went to Arkansas State for his undergraduate in finance on just straight finance. And, went over to the University of Arkansas for his master's and probably going to get a couple papers out of this thesis. I mean, I just read it this week. I think it's fantastic work. And, so without further ado, let's just dive into today's topic, talking about interval selection.
00;04;23;00 - 00;04;36;29
Dr. Hunter Biram
So, Walker, what what makes interval selection under PRF insurance. and again that's pasture rangeland forage, a unique challenge for forage producers? And how does the timing mismatch between rainfall and forage growth contribute to this risk?
00;04;37;01 - 00;04;56;04
Walker Davis
Yeah. Well the first big thing about PRF is it is so different than your traditional crop insurance and how those policies are made and how you're choosing, because you're not necessarily insuring your corn crop from, let's say, hail or prevent plan or whatever. You're choosing what months throughout the year you want to cover, and you can choose what months you care about more.
00;04;56;05 - 00;05;17;24
Walker Davis
You can still cover each month, but care about your intervals because everything in PRF is in dual-month interval. So January-February, February-March, and so on and so forth. So you could actually, if you only care about, let's say, your April through August rainfall and forage, then that's all you have to cover. But if you want to cover year round you can do that.
00;05;17;27 - 00;05;39;09
Walker Davis
So you can choose what percent of your policy, of course, has to add up to 100. But what percent of policy goes in each interval. It can be zero. If it's more than zero, it has to be at least ten, and it can't be more than 60. So you have to choose at least two intervals, but you can choose as many as all 11, or, not all 11, because you can't cover the same thing.
00;05;39;09 - 00;06;02;13
Walker Davis
I think you can choose six, I guess is the most you could actually choose. Because you can't do January-February and February-March, because that double insures February. But so that, that creates a unique challenge because you have to know what time is most important to you. PRF, pasture, rangeland and forages insurance. While it is a forage insurance, it's really not a forage insurance.
00;06;02;13 - 00;06;22;28
Walker Davis
It's a rainfall insurance for forage. And it's more than that. It's a single parallel drought, rainfall insurance, or forage. It is that covering the chance you get too much rain, because of course that can hurt your ground just as much. You got cows out there and got a tearing up, drowning in your forage, but it's when you don't get enough forage or, sorry, enough rainfall.
00;06;23;03 - 00;06;49;14
Walker Davis
And when that affects your forage. So that's a unique challenge, because you have this timing mismatch of... rainfall and forage growth, of course, has a very strong relationship. But it is not an immediate relationship, is one big thing. So if I get rainfall today, I'm not going to get forage growth necessarily today. And I'm definitely not going to get to the full extent of what that rainfall is doing for me immediately.
00;06;49;17 - 00;07;07;07
Dr. Hunter Biram
Yeah. So what's interesting about this particular topic that, that, that we're going to dive deeper into today is just, you know, Walker, you mentioned that you got to get at least two intervals. And these are two month intervals. You have to select those. That has to add up to 100. So, you know, you could do 50/50 on say like a January-February and a March-April.
00;07;07;09 - 00;07;31;06
Dr. Hunter Biram
Right. So you can do like 50% Jan-Feb and then 50% in March-April and boom, you're covered and you're like, all right, well that's like all the first four months of the year. But you know, depending on how, how, how you as a producer would, raise your forage and what the growing season looks like, you know, you might choose a different set of intervals and, I'm not sure that that's going to get ahead of things, but Walker can.
00;07;31;07 - 00;07;42;16
Dr. Hunter Biram
Can you tell me which? Oh, let's say which buckets of intervals, tend to see the most, losses when it comes to triggering that rainfall index?
00;07;42;24 - 00;07;53;00
Walker Davis
No, definitely. And that's actually something that we we've looked into a lot. And it's typically of course, it's funny, the ones that are most expensive, the ones that trigger the most, which.
00;07;53;01 - 00;07;54;05
Dr. Hunter Biram
Absolutely. Of course.
00;07;54;05 - 00;08;12;28
Walker Davis
Intuitively, makes sense because if they're going to be more often to pay out, insurance programs are required to be rated this close, to where your payouts equal, what you pay in over time. So, the ones that are more likely to pay out and pay out more often, more amounts, the ones I know cost a pretty penny more.
00;08;13;02 - 00;08;36;23
Walker Davis
So, interestingly, it's actually the months you wouldn't think really in back forage. A lot of those in the fall beginning of winter months. Your September, October, November, December kind of consistently the ones that are the most variable, the most expensive ones to enroll in, as well as some of the most common policies that have been doing it.
00;08;36;23 - 00;08;50;21
Walker Davis
So that kind of raises the question, are producers using it as a straight up risk protection? Or are they risk protection, also, “Hey, let's see if we can luck out and hit the lottery” quote unquote this this year.
00;08;50;23 - 00;09;07;29
Dr. Hunter Biram
Yeah. You know, I like roulette, Walker. I'm not sure if you've ever been to a casino, but I do like roulette. And everyone says, Hunter, you're an economist and you're a risk management specialist, why do you do roulette, you know, the worst odds in the world? But I just like spreading out my chips on the board. And, you know, that's kind of how I view PRF, is like, you know, how do you want to spread out your chips?
00;09;07;29 - 00;09;37;22
Dr. Hunter Biram
How do you want to spread out that hundred percent on these two month intervals? And, and one thing that you've done a lot of study into is looking at when, is looking at basis for specifically and how maybe it'll rain, but you might get a payment that triggers, just because, just based on how that rainfall index is measured, based on where the weather stations are placed, or maybe, it doesn't rain, but because it might have rain closer to that weather station, you're not going to get a payment.
00;09;37;25 - 00;09;43;21
Dr. Hunter Biram
And so, can you talk about a couple concepts that you've introduced, in your, in your thesis in particular?
00;09;43;24 - 00;10;09;19
Walker Davis
Yeah. No, for sure. The basis risk, of course, and, this terminology. Interestingly, the PRF has a lot of different types of things you could classify as basis risk. But this way, it's just your rainfall that you receive is not matching up to your forage necessarily that you receive. And the inconsistencies in payments- overpayment and underpayment. So what we call that is a false negative probability or an FNP.
00;10;09;21 - 00;10;34;03
Walker Davis
And what that is, is you don't get the rainfall that you're supposed to have. However, you are not receiving a payment. So how we measure that is, you're not receiving the forage growth. So everything for PRF is based on a rainfall index. So that looks at rainfall all the way back to 1948 and looks at how that particular interval.
00;10;34;03 - 00;11;05;00
Walker Davis
So let's say January-February for your location, how rainfall January-February of that year compares to the historical average from 2024 to 1948. So, lots of years. And you get assigned a percentage, pretty much. If you got three inches, but historically you get four, then you would have 75 percent. Or your index would be 75. So if that falls below your coverage level, that's how you get your payment triggered.
00;11;05;02 - 00;11;37;10
Walker Davis
So, following that, we went and found the NDVI. So, your vegetation index, and looked at how vegetation in that current interval... So, let's keep January-February, how that compares to your historical average vegetation. So, what's your forage looking like, that interval as compared to the past? In that same couple months. And then we compare our two indexes, our forage index that we made, as well as the rainfall index that PRF uses.
00;11;37;12 - 00;11;56;01
Walker Davis
So we get our false negative probability, is how often our forage index says: hey, you deserve a payment, it's below your selected coverage level as compared to the historical average. But in terms of rainfall, you're above your excuse me, cover level.
00;11;56;03 - 00;12;02;07
Dr. Hunter Biram
And so, and so, at what level is this being measured? Is this at the grid cell level, even with the NDVI, too?
00;12;02;10 - 00;12;29;27
Walker Davis
Yes, it was actually in pixels, and then we averaged it across grid. So NDVI is a very, really big data set, you're getting, very, very small thing like 0.25 by 0.25km, little grid, grids, pretty much little cells inside the grids. And then we averaged all the land inside of each grid. And those grids are 0.25 longitude .25 latitude.
00;12;30;00 - 00;12;52;12
Walker Davis
So, 17 miles by 17 miles, or so as the equator. So, smaller than counties, but sizable enough that if you're at one corner, you are definitely going to at times experience different weather than the other corner. Yeah, but it is a grid based product, so it does the best to average all those chances together. Of course.
00;12;52;15 - 00;12;59;24
Dr. Hunter Biram
Yeah. So, so just to recap, go through false negative probability and false positive probability before we go to the next idea.
00;12;59;24 - 00;13;25;07
Walker Davis
Yeah. So, false negative probability, that is when our forage is telling us: hey, based on the past, you deserve a payment. However, your rainfall index, which is how you're actually paid through PRF, says: actually, you got enough rainfall. Or, your grid, on average, got enough rainfall that you actually do not deserve a trigger. You don't deserve an indemnity.
00;13;25;07 - 00;13;44;23
Walker Davis
Then, false positive probabilities. The opposite. You look at your forage index, and it's like, hey, we're good, you're above your coverage level in terms of how your forage is now, as compared to, in the past, you don't deserve a payment. But in terms of rainfall, you do. So that's producers like that, of course, a lot more. You're going to get your forage you need.
00;13;44;23 - 00;14;01;17
Walker Davis
So you're not going to impact your financial health of your operation. But then you're getting a little, little chunk of change on top, too. So a little pocket money. So, it's interesting to see how both of those happen and how they both occur, which I'm sure we're about to talk about.
00;14;01;24 - 00;14;16;22
Dr. Hunter Biram
Yeah. So then, so then in what ways might a high, you know, false negative probability or false positive probability in the same region create conflicting incentives for producers, and how can this affect long term financial planning or even trust in the program?
00;14;16;24 - 00;14;38;13
Walker Davis
Now that's very, very strongly. So, of course, PRF is year-round product, like it's an annual product. You choose your policy for the year, but it's really an interval by interval product. Each interval is going to have a different premium rate. You're going to get paid out differently based on the interval in which you're enrolled in, based on how much of your policy you put in it.
00;14;38;15 - 00;15;03;22
Walker Davis
So, things happen different in January-February than they do March-April than they do in November-December. So, you are experiencing different things. So they're pretty much individual policies. And each of those individual policies are exposed to basis risk in a different amount. So your January-February is going to have a different FNP, false negative probability, and false positive probabilities.
00;15;03;24 - 00;15;35;12
Walker Davis
And the likelihood of those happening as opposed to other intervals. So how that can create conflicting incentives is a producer would hopefully know what rainfall they really need to ensure to be safe and actually cover their forage. However, PRF is a highly subsidized program. It's not really that expensive. If they're just like, hey, I know the false positive probabilities for these different intervals are higher,
00;15;35;15 - 00;15;58;09
Walker Davis
they could try to play the game, almost, and enroll in those and hope they're getting that extra payment, that extra change in their pocket. Conversely, if they know the FNP, your false negative probability are in really high, in the intervals, that they actually need to insure to properly cover their forage the best, that creates conflicting thoughts.
00;15;58;09 - 00;16;19;04
Walker Davis
I know that I really need March, April, May and June rain. However, if my FNPs for my grid are high at that time, that kind of makes me a little wary. Because, do I really want to take that risk? Is yes, I'm playing the policy right. But am I getting the actual coverage I'm paying for? And that, of course, impacts financial.
00;16;19;04 - 00;16;54;13
Walker Davis
If you're not getting that payment when you really need it. So that FNP strikes, even if you're getting false positive probabilities and you're getting extra money, we're not all going to save that money for a rainy day necessarily. That's, you know, go out for a nice dinner kind of money. So you got your FNP's happen, and then you're just up a creek without a paddle, impacting your financial health as well as your trust in the program, knowing that even though you're playing it right, you're insuring the intervals, that rainfall, you actually need and not trying to play a game with the program that you could still get the butt end of the stick.
00;16;54;16 - 00;17;13;08
Dr. Hunter Biram
Yeah. Walker, this is so interesting to me because, you know, I think one, I think someone listening could be like, wait a minute. Like it's just a lottery game, you know, 100% roulette, Walker’s saying lottery. And so, like, is even mitigating risk. But you know, this is just the best we can do right now. And I want to and I want to introduce a new way to reframe this.
00;17;13;11 - 00;17;38;02
Dr. Hunter Biram
You know, yes, maybe there are some false negatives in those intervals that we really do need to insure. Like those are the key growing seasons for, for forage, the key growing months for forage. But I think if the farmer knows the false negatives and the false positives, one way that I think about this is let's just take, let's just leverage that false positive, because it should be protecting me where the false negatives are high.
00;17;38;02 - 00;17;56;14
Dr. Hunter Biram
But they're not, if that makes sense. Like it's just kind of like we're swapping the intervals to still get the coverage that we need. It's not so much like just maximizing the program. I think it's just you want to get the risk protection that you need. And if, you know, you're faced with a high false negative because I well, shoot it didn’t rain, and I'm not getting any protection,
00;17;56;14 - 00;18;17;04
Dr. Hunter Biram
but you know there's another interval that has a high false positive. It's like, well, I know that I'm growing in you know, I know I'm growing mostly in this, you know, July-August window, but it has a high false negative. So I'm going to leverage maybe a, a March-April instead, just to kind of put it in the place just to be able to measure my risk appropriately.
00;18;17;04 - 00;18;19;16
Dr. Hunter Biram
Is that a fair way to think about this?
00;18;19;19 - 00;18;43;10
Walker Davis
Absolutely. And part of my thesis, I have a paper that we've already got accepted, it's coming out in the next month or two, and that's looking at how, is PRF profitable outside of the states that it's majorly consumed? Outside of the West? You have your big cattle and you have your Utah, your Arizona, your Texas, of course, Nevada, your Dakotas, Montana, Wyoming.
00;18;43;12 - 00;19;11;08
Walker Davis
That livestock is a lot different than Arkansas’, of course, or anywhere in the southeast. We got better dirt. We're growing crops. We can make more money off a per acre growing corn than you can cows here. However, so there's not that much, use of it. And historically, in the little time PRF's been out, it started in 2012 as a pilot program in Arkansas, but it came out nationwide in 2016, and it has not performed the best financially in terms of loss ratios.
00;19;11;08 - 00;19;33;24
Walker Davis
Because you’re paying in a lot more than you’re paid out, on average. So we wanted to look, is it that producers aren't making their policies right? Or are they trying it, not getting paid, and then quitting? Or is there something deeper happening? So how we did that is, we made different selection strategies. One of them, we called basis risk leveraging, which is kind of what you're talking about.
00;19;33;26 - 00;19;58;09
Walker Davis
Our goal with that one was to minimize our FNPs, so false negative probabilities, while maximizing our false positive probabilities. Same thing you're talking about. You choose your interval with the lowest FNP., maybe you put half your policy in there and then you choose half the policy for the one with the highest FPP. Or you really choose the second best interval with the lowest FNP.
00;19;58;09 - 00;20;19;20
Walker Davis
But it also has a pretty good, pretty high FPP and it plays a game. It was just using, linear programing, you’re minimizing one or maximizing the other, trying to have the least - minimax is what it was called. And you're trying to minimize your maximum deviation from the optimum of both.
00;20;19;23 - 00;20;20;22
Dr. Hunter Biram
That's your prediction.
00;20;20;24 - 00;20;46;12
Walker Davis
It was really cool to see how all that played out. It turns out it is profitable in Arkansas on average across the wettest median in the driest counties over the last 30 years, average across the years. And the program, all strategies were more profitable than not insuring in the program at a unsubsidized rate. So once you throw in that 51% subsidy, very much so recommend looking into the product
00;20;46;15 - 00;20;47;24
Walker Davis
is kind of what we found.
00;20;47;27 - 00;21;06;06
Dr. Hunter Biram
Well, that is super interesting. And so Walker, then, as we wrap up today, you know, what are well, what's advice that you would give to a producer? If, if they're looking to insure their, forage production, for their livestock operation, first off.
00;21;06;08 - 00;21;27;09
Walker Davis
Of course, like I said at the beginning, PRF is a forage product, but it's a rainfall product for forage. So you have to realize that. If I really care about my forage in going into August, September, October, if I'm trying to keep that 300 day grazing cycle happening, I'm trying to keep forage on the ground as long as possible. And of course, you need rainfall for that.
00;21;27;11 - 00;21;47;24
Walker Davis
That doesn't necessarily mean you need October rainfall. There's other stuff that builds up to that, of course, and we've done some work on that. And I think we'll have another, little paper out about that here in the coming weeks. This is kind of talking more about figuring out what rainfall is impacting your forage more. And that's the biggest thing.
00;21;47;24 - 00;22;23;14
Walker Davis
What's your rainfall happening. Your past rainfall, how does it compare to now? Some work we're doing now is looking at rainfall trends. Are you increasing in rainfall? Are you decreasing in rainfall? That's a big thing. And of course producers are smart, that's your livelihood, you know what's happening on your land. Just be proactive. Realize your rain. If you're decreasing, at a particular interval over time in rainfall and you’re just noticing that, it wouldn't be a bad idea to insure in that one, it's kind of, because, of course, that index is based off of 1948.
00;22;23;16 - 00;22;39;17
Walker Davis
So if your mean from that time is higher than what your mean would be for the last ten years in rainfall, probably wouldn't be a bad idea to look insuring that interval, especially if that is at a time of rainfall that you actually need.
00;22;39;19 - 00;23;08;17
Dr. Hunter Biram
That is so interesting, Walker. And I know that that's in your thesis. And, you know, whenever I think about this, it's it's really downside risk. It's downside rainfall risk is what you're talking about. And, you know, in places, we'll say, in counties, generally, where there is significant downside risk just because that rainfall so high historically. Absolutely. Like in that two month interval, like go all in. To me, I think about it from the, you know, it's very similar on the row crops side of things.
00;23;08;20 - 00;23;26;18
Dr. Hunter Biram
If you have a really high APH, you've got high downside risk. Like an APH yield. If you have a really high, you know, corn yield, if you had like, like a 250 bushel an acre average corn yield, you've got a pretty high downside risk because that's a pretty high yield. Same thing on price. You know, we're in we're in a very low price environment in the commodities, as I'm sure you're well aware of.
00;23;26;18 - 00;23;43;17
Dr. Hunter Biram
And you know, if we, you know, if if only we knew that the, the prices we're going to get this low. Whenever we saw those $15 beans, I mean, even $15 beans, that's just so high compared to history. And so it's like we know there's significant downside risk there. And so I think that's a great point to make, Walker.
00;23;43;17 - 00;24;01;15
Dr. Hunter Biram
Like, if you know that you've had a lot of rain historically, but you've been noticing the past few years, you haven't gotten as much rain, that's probably a good sign that, or a good indicator, that you probably have a high rainfall guarantee and a significant downside risk to be able to protect against that risk. And so with that, Walker, we are out of time.
00;24;01;19 - 00;24;04;10
Dr. Hunter Biram
But I sure appreciate your time. Appreciate you being here today.
00;24;04;12 - 00;24;15;13
Walker Davis
No, I appreciate you having me. It's a lot of fun getting to talk about this stuff, because this has been my life for the past two years. So I enjoy talking about it and hopefully it can help somebody understand it a little better.
00;24;15;16 - 00;24;19;22
Dr. Hunter Biram
Well, that's always the goal. Appreciate your time and stay tuned for the market report. Thanks, guys.
00;24;19;24 - 00;24;41;18
Speaker 3
All right guys. Back with your market report. September 25 corn current price is at $4.30 per bushel. Month ago’s price is at $4.42 per bushel. That's down $0.12. And a year ago’s price is at $4.72 per bushel. That's down $0.42. September 25 rice, current price is at $13.63 per 100 weight. A month ago’s price is at $13.04 per 100 weight, that's up $0.59.
00;24;41;21 - 00;25;08;10
Speaker 3
And a year ago’s price is at $15.56 per 100 weight, excuse me. That's down $1.93. November 25 soybeans current price is at $10.38 per bushel. Month ago’s price is at $10.35 per bushel. That's up $0.03 and a year ago’s price is at $12.11 per bushel. That's down $1.73. July 25 wheat current price is at $5.30 per bushel, a month ago’s price is at $5.31 per bushel.
00;25;08;10 - 00;25;31;19
Speaker 3
That's down $0.01, and a year ago’s price is at $7 per bushel. That's down $1.70. December 25 cotton current price is at $0.68 per pound. A month ago’s price is at $0.69 per pound. That's down $0.01, and a year ago’s price is at $0.79 per pound. That's down $0.11. And your weekly U.S. average for peanuts. Current prices at $466 per ton , a month ago’s price is at $496 per ton.
00;25;31;19 - 00;26;01;16
Speaker 3
That's down $30 in a year. Gas prices at $528 per ton. That's down $62. And that that is your weekly commodity futures this week. Your fertilizer prices this week. Urea $677.50 per ton. Ammonium nitrate is at $547.50 per ton. Ammonium sulfate is at $556 per ton. DAP is at $791 per ton, triple super phosphate is at $656 per ton. Potash is $457.50 per ton.
00;26;01;16 - 00;26;25;00
Speaker 3
Ag lime is $45 per ton. Pellet lime this week's $240 per ton. Your diesel prices this week. Off road diesel is $2.39 per gallon. Highway diesel $3.20 per gallon. And your Mississippi River level at Memphis, Tennessee, this week. Current levels at 17.6ft and a year ago’s at 20.23ft. Want to thank y'all guys again for tuning in to another episode of Morning Coffee and Ag Markets.
00;26;25;02 - 00;26;48;00
Speaker 3
This will be my last market report and last episode to join. It's truly been quite an honor and, quite the journey, moving on to greener pastures. But I've, truly enjoyed doing this and, starting this for these guys. And I know the team is going to carry it on further. So until next time, we'll catch y’all on the flip flop.
00;26;48;05 - 00;27;10;21
Speaker 3
Bye bye. Now.
00;27;10;21 - 00;27;33;14
Dr. Hunter Biram
So, Walker, we just, you know, Riley just got married, and he just had his honeymoon. There's just something in the water, because you're about to get married, and you're about to have your honeymoon.
00;27;33;17 - 00;27;39;24
Walker Davis
Yes, sir. Yes, sir. Memorial Day wedding and then the honeymoon phase.
00;27;39;29 - 00;27;43;14
Dr. Hunter Biram
But that's quite a thing to memorialize, I would say.
00;27;43;17 - 00;27;46;16
Walker Davis
Oh, yeah. Well, we get a permanent holiday for our anniversary.
00;27;46;23 - 00;27;49;25
Dr. Hunter Biram
I mean, it was made for y’all, it was made for y'all.
00;27;49;27 - 00;27;59;00
Walker Davis
Yeah. And so they remember., and us, along with the veterans, of course. We’re gonna walk out with sparklers and mini American flags for everybody.
00;27;59;01 - 00;28;06;08
Dr. Hunter Biram
As you should. As you should., the American way. Oh, yeah, the American way. I love that. So, where are you guys going to honeymoon at?
00;28;06;10 - 00;28;09;24
Walker Davis
We're going out to Bozeman, Montana, and then doing Yellowstone.
00;28;09;26 - 00;28;16;16
Dr. Hunter Biram
Oh, wow. That's going to be wonderful. That's going to be beautiful. So are you. Are you guys both? Would you call yourselves mountain people? More so than beach people?
00;28;16;16 - 00;28;18;11
Walker Davis
Yeah. I can't stand the beach.
00;28;18;17 - 00;28;21;21
Dr. Hunter Biram
Really can't stay on the beach.
00;28;21;23 - 00;28;32;07
Walker Davis
Mackenzie, she could do a day or two of it, but I can do about three hours. And after that... I like a pool fine. I think it's a sand thing more than anything else. I'm not a big fan.
00;28;32;14 - 00;28;50;19
Dr. Hunter Biram
Yeah, you know what? That's fair. Sand does get everywhere. If you're not careful. Because, like in most of these, like, beach club resorts, they've got places to rinse off your feet and stuff. But, I mean, even then. Right? Like, there's even gonna be a little bit that's going to trickle into your, suitcase coming home. So it's going to end up bringing some sand home.
00;28;50;19 - 00;29;18;18
Dr. Hunter Biram
But, Yeah, I think, Riley, he, he, he and his now wife kind of crazy thing about, I think that they got a little sunburn. They went to Cancun, so they went to the beach, and, they got a little too sunburned and, because, I mean... And listen, it's an honest mistake. So, Annie and I, we went to Hawaii a couple of years ago, and I didn't really think much about being closer to the equator, having that more direct sunlight.
00;29;18;18 - 00;29;37;14
Dr. Hunter Biram
But, dude, like, there was a day where, I mean, we both just got torched and we were putting sunscreen on every hour. But I just... I just guess we didn't cover ourselves well enough or didn't have the strongest SPF or what it is, but, yeah. Yeah, you definitely have got to be careful, with the beach and, be careful with those sunburns.
00;29;37;16 - 00;29;45;18
Walker Davis
I get burnt real bad, and I'm real pasty, just naturally. It's, just I try to stay covered up the best I can 100%.
00;29;45;18 - 00;30;03;18
Dr. Hunter Biram
Well, I'm with you. Well, let's go and dive in. Good morning. Good morning, and welcome to another episode of Morning Coffee Ag Markets. This is, your host for the day, Dr. Hunter Biram, and with me in the studio remotely, I've got Mr. Walker Davis. And, Walker. If I can, I'm going to claim you as one of my grad students.
00;30;03;23 - 00;30;22;20
Dr. Hunter Biram
I think that you've got some fantastic work. And, with, the pasture, rangeland, forage, rainfall index insurance, and, that's what we're going to talk about today, because, although we're going to release this at a later date, actually, in the week that we're recording this, on Friday, you're going to be defending your thesis and you are about to become a master.
00;30;22;23 - 00;30;24;21
Dr. Hunter Biram
How are you feeling about that?
00;30;24;23 - 00;30;43;00
Walker Davis
I feel real good. Real excited. It's been a really fun two years. And what a lot better than I ever could have expected. I wasn’t really too happy to be coming to Fayetteville. I wanted to stay at Arkansas State, but my mentors over there really pushed me, and, I really had fun. And I'm excited for the next chapter, though.
00;30;43;03 - 00;30;57;17
Dr. Hunter Biram
Well, and for those of our listeners who have not listened to the previous podcast, just a quick primer on Walker. Walker's an Arkansas boy through and through from southeast Arkansas. His mom is actually an instructor at the University of Arkansas at Monticello. Went to Hamburg High School?
00;30;57;20 - 00;30;58;12
Walker Davis
Yes, sir.
00;30;58;14 - 00;31;19;15
Dr. Hunter Biram
Correct? And so, and then he went to Arkansas State for his undergraduate in finance on just straight finance. And, went over to the University of Arkansas for his master's and probably going to get a couple papers out of this thesis. I mean, I just read it this week. I think it's fantastic work. And, so without further ado, let's just dive into today's topic, talking about interval selection.
00;31;19;15 - 00;31;33;14
Dr. Hunter Biram
So, Walker, what what makes interval selection under PRF insurance. and again that's pasture rangeland forage, a unique challenge for forage producers? And how does the timing mismatch between rainfall and forage growth contribute to this risk?
00;31;33;16 - 00;31;52;19
Walker Davis
Yeah. Well the first big thing about PRF is it is so different than your traditional crop insurance and how those policies are made and how you're choosing, because you're not necessarily insuring your corn crop from, let's say, hail or prevent plan or whatever. You're choosing what months throughout the year you want to cover, and you can choose what months you care about more.
00;31;52;20 - 00;32;14;09
Walker Davis
You can still cover each month, but care about your intervals because everything in PRF is in dual-month interval. So January-February, February-March, and so on and so forth. So you could actually, if you only care about, let's say, your April through August rainfall and forage, then that's all you have to cover. But if you want to cover year round you can do that.
00;32;14;12 - 00;32;35;24
Walker Davis
So you can choose what percent of your policy, of course, has to add up to 100. But what percent of policy goes in each interval. It can be zero. If it's more than zero, it has to be at least ten, and it can't be more than 60. So you have to choose at least two intervals, but you can choose as many as all 11, or, not all 11, because you can't cover the same thing.
00;32;35;24 - 00;32;58;26
Walker Davis
I think you can choose six, I guess is the most you could actually choose. Because you can't do January-February and February-March, because that double insures February. But so that, that creates a unique challenge because you have to know what time is most important to you. PRF, pasture, rangeland and forages insurance. While it is a forage insurance, it's really not a forage insurance.
00;32;58;26 - 00;33;19;13
Walker Davis
It's a rainfall insurance for forage. And it's more than that. It's a single parallel drought, rainfall insurance, or forage. It is that covering the chance you get too much rain, because of course that can hurt your ground just as much. You got cows out there and got a tearing up, drowning in your forage, but it's when you don't get enough forage or, sorry, enough rainfall.
00;33;19;18 - 00;33;45;29
Walker Davis
And when that affects your forage. So that's a unique challenge, because you have this timing mismatch of... rainfall and forage growth, of course, has a very strong relationship. But it is not an immediate relationship, is one big thing. So if I get rainfall today, I'm not going to get forage growth necessarily today. And I'm definitely not going to get to the full extent of what that rainfall is doing for me immediately.
00;33;46;02 - 00;34;03;22
Dr. Hunter Biram
Yeah. So what's interesting about this particular topic that, that, that we're going to dive deeper into today is just, you know, Walker, you mentioned that you got to get at least two intervals. And these are two month intervals. You have to select those. That has to add up to 100. So, you know, you could do 50/50 on say like a January-February and a March-April.
00;34;03;24 - 00;34;27;21
Dr. Hunter Biram
Right. So you can do like 50% Jan-Feb and then 50% in March-April and boom, you're covered and you're like, all right, well that's like all the first four months of the year. But you know, depending on how, how, how you as a producer would, raise your forage and what the growing season looks like, you know, you might choose a different set of intervals and, I'm not sure that that's going to get ahead of things, but Walker can.
00;34;27;22 - 00;34;39;01
Dr. Hunter Biram
Can you tell me which? Oh, let's say which buckets of intervals, tend to see the most, losses when it comes to triggering that rainfall index?
00;34;39;09 - 00;34;49;15
Walker Davis
No, definitely. And that's actually something that we we've looked into a lot. And it's typically of course, it's funny, the ones that are most expensive, the ones that trigger the most, which.
00;34;49;16 - 00;34;50;20
Dr. Hunter Biram
Absolutely. Of course.
00;34;50;20 - 00;35;09;13
Walker Davis
Intuitively, makes sense because if they're going to be more often to pay out, insurance programs are required to be rated this close, to where your payouts equal, what you pay in over time. So, the ones that are more likely to pay out and pay out more often, more amounts, the ones I know cost a pretty penny more.
00;35;09;17 - 00;35;33;08
Walker Davis
So, interestingly, it's actually the months you wouldn't think really in back forage. A lot of those in the fall beginning of winter months. Your September, October, November, December kind of consistently the ones that are the most variable, the most expensive ones to enroll in, as well as some of the most common policies that have been doing it.
00;35;33;08 - 00;35;47;06
Walker Davis
So that kind of raises the question, are producers using it as a straight up risk protection? Or are they risk protection, also, “Hey, let's see if we can luck out and hit the lottery” quote unquote this this year.
00;35;47;08 - 00;36;04;14
Dr. Hunter Biram
Yeah. You know, I like roulette, Walker. I'm not sure if you've ever been to a casino, but I do like roulette. And everyone says, Hunter, you're an economist and you're a risk management specialist, why do you do roulette, you know, the worst odds in the world? But I just like spreading out my chips on the board. And, you know, that's kind of how I view PRF, is like, you know, how do you want to spread out your chips?
00;36;04;14 - 00;36;34;07
Dr. Hunter Biram
How do you want to spread out that hundred percent on these two month intervals? And, and one thing that you've done a lot of study into is looking at when, is looking at basis for specifically and how maybe it'll rain, but you might get a payment that triggers, just because, just based on how that rainfall index is measured, based on where the weather stations are placed, or maybe, it doesn't rain, but because it might have rain closer to that weather station, you're not going to get a payment.
00;36;34;10 - 00;36;40;06
Dr. Hunter Biram
And so, can you talk about a couple concepts that you've introduced, in your, in your thesis in particular?
00;36;40;09 - 00;37;06;06
Walker Davis
Yeah. No, for sure. The basis risk, of course, and, this terminology. Interestingly, the PRF has a lot of different types of things you could classify as basis risk. But this way, it's just your rainfall that you receive is not matching up to your forage necessarily that you receive. And the inconsistencies in payments- overpayment and underpayment. So what we call that is a false negative probability or an FNP.
00;37;06;08 - 00;37;30;20
Walker Davis
And what that is, is you don't get the rainfall that you're supposed to have. However, you are not receiving a payment. So how we measure that is, you're not receiving the forage growth. So everything for PRF is based on a rainfall index. So that looks at rainfall all the way back to 1948 and looks at how that particular interval.
00;37;30;20 - 00;38;01;17
Walker Davis
So let's say January-February for your location, how rainfall January-February of that year compares to the historical average from 2024 to 1948. So, lots of years. And you get assigned a percentage, pretty much. If you got three inches, but historically you get four, then you would have 75 percent. Or your index would be 75. So if that falls below your coverage level, that's how you get your payment triggered.
00;38;01;19 - 00;38;33;27
Walker Davis
So, following that, we went and found the NDVI. So, your vegetation index, and looked at how vegetation in that current interval... So, let's keep January-February, how that compares to your historical average vegetation. So, what's your forage looking like, that interval as compared to the past? In that same couple months. And then we compare our two indexes, our forage index that we made, as well as the rainfall index that PRF uses.
00;38;33;29 - 00;38;52;18
Walker Davis
So we get our false negative probability, is how often our forage index says: hey, you deserve a payment, it's below your selected coverage level as compared to the historical average. But in terms of rainfall, you're above your excuse me, cover level.
00;38;52;20 - 00;38;58;22
Dr. Hunter Biram
And so, and so, at what level is this being measured? Is this at the grid cell level, even with the NDVI, too?
00;38;58;25 - 00;39;26;14
Walker Davis
Yes, it was actually in pixels, and then we averaged it across grid. So NDVI is a very, really big data set, you're getting, very, very small thing like 0.25 by 0.25km, little grid, grids, pretty much little cells inside the grids. And then we averaged all the land inside of each grid. And those grids are 0.25 longitude .25 latitude.
00;39;26;17 - 00;39;48;29
Walker Davis
So, 17 miles by 17 miles, or so as the equator. So, smaller than counties, but sizable enough that if you're at one corner, you are definitely going to at times experience different weather than the other corner. Yeah, but it is a grid based product, so it does the best to average all those chances together. Of course.
00;39;49;02 - 00;39;56;11
Dr. Hunter Biram
Yeah. So, so just to recap, go through false negative probability and false positive probability before we go to the next idea.
00;39;56;11 - 00;40;21;22
Walker Davis
Yeah. So, false negative probability, that is when our forage is telling us: hey, based on the past, you deserve a payment. However, your rainfall index, which is how you're actually paid through PRF, says: actually, you got enough rainfall. Or, your grid, on average, got enough rainfall that you actually do not deserve a trigger. You don't deserve an indemnity.
00;40;21;22 - 00;40;41;08
Walker Davis
Then, false positive probabilities. The opposite. You look at your forage index, and it's like, hey, we're good, you're above your coverage level in terms of how your forage is now, as compared to, in the past, you don't deserve a payment. But in terms of rainfall, you do. So that's producers like that, of course, a lot more. You're going to get your forage you need.
00;40;41;08 - 00;40;58;00
Walker Davis
So you're not going to impact your financial health of your operation. But then you're getting a little, little chunk of change on top, too. So a little pocket money. So, it's interesting to see how both of those happen and how they both occur, which I'm sure we're about to talk about.
00;40;58;07 - 00;41;13;07
Dr. Hunter Biram
Yeah. So then, so then in what ways might a high, you know, false negative probability or false positive probability in the same region create conflicting incentives for producers, and how can this affect long term financial planning or even trust in the program?
00;41;13;09 - 00;41;34;28
Walker Davis
Now that's very, very strongly. So, of course, PRF is year-round product, like it's an annual product. You choose your policy for the year, but it's really an interval by interval product. Each interval is going to have a different premium rate. You're going to get paid out differently based on the interval in which you're enrolled in, based on how much of your policy you put in it.
00;41;35;00 - 00;42;00;07
Walker Davis
So, things happen different in January-February than they do March-April than they do in November-December. So, you are experiencing different things. So they're pretty much individual policies. And each of those individual policies are exposed to basis risk in a different amount. So your January-February is going to have a different FNP, false negative probability, and false positive probabilities.
00;42;00;09 - 00;42;31;27
Walker Davis
And the likelihood of those happening as opposed to other intervals. So how that can create conflicting incentives is a producer would hopefully know what rainfall they really need to ensure to be safe and actually cover their forage. However, PRF is a highly subsidized program. It's not really that expensive. If they're just like, hey, I know the false positive probabilities for these different intervals are higher,
00;42;32;00 - 00;42;54;24
Walker Davis
they could try to play the game, almost, and enroll in those and hope they're getting that extra payment, that extra change in their pocket. Conversely, if they know the FNP, your false negative probability are in really high, in the intervals, that they actually need to insure to properly cover their forage the best, that creates conflicting thoughts.
00;42;54;24 - 00;43;15;19
Walker Davis
I know that I really need March, April, May and June rain. However, if my FNPs for my grid are high at that time, that kind of makes me a little wary. Because, do I really want to take that risk? Is yes, I'm playing the policy right. But am I getting the actual coverage I'm paying for? And that, of course, impacts financial.
00;43;15;19 - 00;43;50;28
Walker Davis
If you're not getting that payment when you really need it. So that FNP strikes, even if you're getting false positive probabilities and you're getting extra money, we're not all going to save that money for a rainy day necessarily. That's, you know, go out for a nice dinner kind of money. So you got your FNP's happen, and then you're just up a creek without a paddle, impacting your financial health as well as your trust in the program, knowing that even though you're playing it right, you're insuring the intervals, that rainfall, you actually need and not trying to play a game with the program that you could still get the butt end of the stick.
00;43;51;01 - 00;44;09;23
Dr. Hunter Biram
Yeah. Walker, this is so interesting to me because, you know, I think one, I think someone listening could be like, wait a minute. Like it's just a lottery game, you know, 100% roulette, Walker’s saying lottery. And so, like, is even mitigating risk. But you know, this is just the best we can do right now. And I want to and I want to introduce a new way to reframe this.
00;44;09;26 - 00;44;34;17
Dr. Hunter Biram
You know, yes, maybe there are some false negatives in those intervals that we really do need to insure. Like those are the key growing seasons for, for forage, the key growing months for forage. But I think if the farmer knows the false negatives and the false positives, one way that I think about this is let's just take, let's just leverage that false positive, because it should be protecting me where the false negatives are high.
00;44;34;17 - 00;44;52;29
Dr. Hunter Biram
But they're not, if that makes sense. Like it's just kind of like we're swapping the intervals to still get the coverage that we need. It's not so much like just maximizing the program. I think it's just you want to get the risk protection that you need. And if, you know, you're faced with a high false negative because I well, shoot it didn’t rain, and I'm not getting any protection,
00;44;52;29 - 00;45;13;19
Dr. Hunter Biram
but you know there's another interval that has a high false positive. It's like, well, I know that I'm growing in you know, I know I'm growing mostly in this, you know, July-August window, but it has a high false negative. So I'm going to leverage maybe a, a March-April instead, just to kind of put it in the place just to be able to measure my risk appropriately.
00;45;13;19 - 00;45;16;01
Dr. Hunter Biram
Is that a fair way to think about this?
00;45;16;04 - 00;45;39;25
Walker Davis
Absolutely. And part of my thesis, I have a paper that we've already got accepted, it's coming out in the next month or two, and that's looking at how, is PRF profitable outside of the states that it's majorly consumed? Outside of the West? You have your big cattle and you have your Utah, your Arizona, your Texas, of course, Nevada, your Dakotas, Montana, Wyoming.
00;45;39;27 - 00;46;07;23
Walker Davis
That livestock is a lot different than Arkansas’, of course, or anywhere in the southeast. We got better dirt. We're growing crops. We can make more money off a per acre growing corn than you can cows here. However, so there's not that much, use of it. And historically, in the little time PRF's been out, it started in 2012 as a pilot program in Arkansas, but it came out nationwide in 2016, and it has not performed the best financially in terms of loss ratios.
00;46;07;23 - 00;46;30;09
Walker Davis
Because you’re paying in a lot more than you’re paid out, on average. So we wanted to look, is it that producers aren't making their policies right? Or are they trying it, not getting paid, and then quitting? Or is there something deeper happening? So how we did that is, we made different selection strategies. One of them, we called basis risk leveraging, which is kind of what you're talking about.
00;46;30;11 - 00;46;54;24
Walker Davis
Our goal with that one was to minimize our FNPs, so false negative probabilities, while maximizing our false positive probabilities. Same thing you're talking about. You choose your interval with the lowest FNP., maybe you put half your policy in there and then you choose half the policy for the one with the highest FPP. Or you really choose the second best interval with the lowest FNP.
00;46;54;24 - 00;47;16;07
Walker Davis
But it also has a pretty good, pretty high FPP and it plays a game. It was just using, linear programing, you’re minimizing one or maximizing the other, trying to have the least - minimax is what it was called. And you're trying to minimize your maximum deviation from the optimum of both.
00;47;16;10 - 00;47;17;09
Dr. Hunter Biram
That's your prediction.
00;47;17;11 - 00;47;42;29
Walker Davis
It was really cool to see how all that played out. It turns out it is profitable in Arkansas on average across the wettest median in the driest counties over the last 30 years, average across the years. And the program, all strategies were more profitable than not insuring in the program at a unsubsidized rate. So once you throw in that 51% subsidy, very much so recommend looking into the product
00;47;43;02 - 00;47;44;11
Walker Davis
is kind of what we found.
00;47;44;14 - 00;48;02;23
Dr. Hunter Biram
Well, that is super interesting. And so Walker, then, as we wrap up today, you know, what are well, what's advice that you would give to a producer? If, if they're looking to insure their, forage production, for their livestock operation, first off.
00;48;02;25 - 00;48;23;26
Walker Davis
Of course, like I said at the beginning, PRF is a forage product, but it's a rainfall product for forage. So you have to realize that. If I really care about my forage in going into August, September, October, if I'm trying to keep that 300 day grazing cycle happening, I'm trying to keep forage on the ground as long as possible. And of course, you need rainfall for that.
00;48;23;28 - 00;48;44;11
Walker Davis
That doesn't necessarily mean you need October rainfall. There's other stuff that builds up to that, of course, and we've done some work on that. And I think we'll have another, little paper out about that here in the coming weeks. This is kind of talking more about figuring out what rainfall is impacting your forage more. And that's the biggest thing.
00;48;44;11 - 00;49;20;01
Walker Davis
What's your rainfall happening. Your past rainfall, how does it compare to now? Some work we're doing now is looking at rainfall trends. Are you increasing in rainfall? Are you decreasing in rainfall? That's a big thing. And of course producers are smart, that's your livelihood, you know what's happening on your land. Just be proactive. Realize your rain. If you're decreasing, at a particular interval over time in rainfall and you’re just noticing that, it wouldn't be a bad idea to insure in that one, it's kind of, because, of course, that index is based off of 1948.
00;49;20;03 - 00;49;36;04
Walker Davis
So if your mean from that time is higher than what your mean would be for the last ten years in rainfall, probably wouldn't be a bad idea to look insuring that interval, especially if that is at a time of rainfall that you actually need.
00;49;36;06 - 00;50;05;02
Dr. Hunter Biram
That is so interesting, Walker. And I know that that's in your thesis. And, you know, whenever I think about this, it's it's really downside risk. It's downside rainfall risk is what you're talking about. And, you know, in places, we'll say, in counties, generally, where there is significant downside risk just because that rainfall so high historically. Absolutely. Like in that two month interval, like go all in. To me, I think about it from the, you know, it's very similar on the row crops side of things.
00;50;05;05 - 00;50;23;03
Dr. Hunter Biram
If you have a really high APH, you've got high downside risk. Like an APH yield. If you have a really high, you know, corn yield, if you had like, like a 250 bushel an acre average corn yield, you've got a pretty high downside risk because that's a pretty high yield. Same thing on price. You know, we're in we're in a very low price environment in the commodities, as I'm sure you're well aware of.
00;50;23;03 - 00;50;40;02
Dr. Hunter Biram
And you know, if we, you know, if if only we knew that the, the prices we're going to get this low. Whenever we saw those $15 beans, I mean, even $15 beans, that's just so high compared to history. And so it's like we know there's significant downside risk there. And so I think that's a great point to make, Walker.
00;50;40;02 - 00;50;57;28
Dr. Hunter Biram
Like, if you know that you've had a lot of rain historically, but you've been noticing the past few years, you haven't gotten as much rain, that's probably a good sign that, or a good indicator, that you probably have a high rainfall guarantee and a significant downside risk to be able to protect against that risk. And so with that, Walker, we are out of time.
00;50;58;02 - 00;51;00;25
Dr. Hunter Biram
But I sure appreciate your time. Appreciate you being here today.
00;51;00;27 - 00;51;11;28
Walker Davis
No, I appreciate you having me. It's a lot of fun getting to talk about this stuff, because this has been my life for the past two years. So I enjoy talking about it and hopefully it can help somebody understand it a little better.
00;51;12;01 - 00;51;16;07
Dr. Hunter Biram
Well, that's always the goal. Appreciate your time and stay tuned for the market report. Thanks, guys.
00;51;16;09 - 00;51;38;03
Speaker 3
All right guys. Back with your market report. September 25 corn current price is at $4.30 per bushel. Month ago’s price is at $4.42 per bushel. That's down $0.12. And a year ago’s price is at $4.72 per bushel. That's down $0.42. September 25 rice, current price is at $13.63 per 100 weight. A month ago’s price is at $13.04 per 100 weight, that's up $0.59.
00;51;38;06 - 00;52;04;25
Speaker 3
And a year ago’s price is at $15.56 per 100 weight, excuse me. That's down $1.93. November 25 soybeans current price is at $10.38 per bushel. Month ago’s price is at $10.35 per bushel. That's up $0.03 and a year ago’s price is at $12.11 per bushel. That's down $1.73. July 25 wheat current price is at $5.30 per bushel, a month ago’s price is at $5.31 per bushel.
00;52;04;25 - 00;52;28;04
Speaker 3
That's down $0.01, and a year ago’s price is at $7 per bushel. That's down $1.70. December 25 cotton current price is at $0.68 per pound. A month ago’s price is at $0.69 per pound. That's down $0.01, and a year ago’s price is at $0.79 per pound. That's down $0.11. And your weekly U.S. average for peanuts. Current prices at $466 per ton , a month ago’s price is at $496 per ton.
00;52;28;04 - 00;52;57;29
Speaker 3
That's down $30 in a year. Gas prices at $528 per ton. That's down $62. And that that is your weekly commodity futures this week. Your fertilizer prices this week. Urea $677.50 per ton. Ammonium nitrate is at $547.50 per ton. Ammonium sulfate is at $556 per ton. DAP is at $791 per ton, triple super phosphate is at $656 per ton. Potash is $457.50 per ton.
00;52;57;29 - 00;53;21;15
Speaker 3
Ag lime is $45 per ton. Pellet lime this week's $240 per ton. Your diesel prices this week. Off road diesel is $2.39 per gallon. Highway diesel $3.20 per gallon. And your Mississippi River level at Memphis, Tennessee, this week. Current levels at 17.6ft and a year ago’s at 20.23ft. Want to thank y'all guys again for tuning in to another episode of Morning Coffee and Ag Markets.
00;53;21;17 - 00;53;44;15
Speaker 3
This will be my last market report and last episode to join. It's truly been quite an honor and, quite the journey, moving on to greener pastures. But I've, truly enjoyed doing this and, starting this for these guys. And I know the team is going to carry it on further. So until next time, we'll catch y’all on the flip flop.
00;53;44;20 - 00;54;07;06
Speaker 3
Bye bye. Now.
00;54;07;06 - 00;54;29;29
Dr. Hunter Biram
So, Walker, we just, you know, Riley just got married, and he just had his honeymoon. There's just something in the water, because you're about to get married, and you're about to have your honeymoon.
00;54;30;02 - 00;54;36;09
Walker Davis
Yes, sir. Yes, sir. Memorial Day wedding and then the honeymoon phase.
00;54;36;14 - 00;54;39;29
Dr. Hunter Biram
But that's quite a thing to memorialize, I would say.
00;54;40;02 - 00;54;43;01
Walker Davis
Oh, yeah. Well, we get a permanent holiday for our anniversary.
00;54;43;08 - 00;54;46;10
Dr. Hunter Biram
I mean, it was made for y’all, it was made for y'all.
00;54;46;12 - 00;54;55;15
Walker Davis
Yeah. And so they remember., and us, along with the veterans, of course. We’re gonna walk out with sparklers and mini American flags for everybody.
00;54;55;16 - 00;55;02;23
Dr. Hunter Biram
As you should. As you should., the American way. Oh, yeah, the American way. I love that. So, where are you guys going to honeymoon at?
00;55;02;25 - 00;55;06;09
Walker Davis
We're going out to Bozeman, Montana, and then doing Yellowstone.
00;55;06;11 - 00;55;13;01
Dr. Hunter Biram
Oh, wow. That's going to be wonderful. That's going to be beautiful. So are you. Are you guys both? Would you call yourselves mountain people? More so than beach people?
00;55;13;01 - 00;55;14;26
Walker Davis
Yeah. I can't stand the beach.
00;55;15;02 - 00;55;18;06
Dr. Hunter Biram
Really can't stay on the beach.
00;55;18;08 - 00;55;28;22
Walker Davis
Mackenzie, she could do a day or two of it, but I can do about three hours. And after that... I like a pool fine. I think it's a sand thing more than anything else. I'm not a big fan.
00;55;28;29 - 00;55;47;04
Dr. Hunter Biram
Yeah, you know what? That's fair. Sand does get everywhere. If you're not careful. Because, like in most of these, like, beach club resorts, they've got places to rinse off your feet and stuff. But, I mean, even then. Right? Like, there's even gonna be a little bit that's going to trickle into your, suitcase coming home. So it's going to end up bringing some sand home.
00;55;47;04 - 00;56;15;03
Dr. Hunter Biram
But, Yeah, I think, Riley, he, he, he and his now wife kind of crazy thing about, I think that they got a little sunburn. They went to Cancun, so they went to the beach, and, they got a little too sunburned and, because, I mean... And listen, it's an honest mistake. So, Annie and I, we went to Hawaii a couple of years ago, and I didn't really think much about being closer to the equator, having that more direct sunlight.
00;56;15;03 - 00;56;33;29
Dr. Hunter Biram
But, dude, like, there was a day where, I mean, we both just got torched and we were putting sunscreen on every hour. But I just... I just guess we didn't cover ourselves well enough or didn't have the strongest SPF or what it is, but, yeah. Yeah, you definitely have got to be careful, with the beach and, be careful with those sunburns.
00;56;34;01 - 00;56;42;03
Walker Davis
I get burnt real bad, and I'm real pasty, just naturally. It's, just I try to stay covered up the best I can 100%.
00;56;42;03 - 00;57;00;05
Dr. Hunter Biram
Well, I'm with you. Well, let's go and dive in. Good morning. Good morning, and welcome to another episode of Morning Coffee Ag Markets. This is, your host for the day, Dr. Hunter Biram, and with me in the studio remotely, I've got Mr. Walker Davis. And, Walker. If I can, I'm going to claim you as one of my grad students.
00;57;00;10 - 00;57;19;07
Dr. Hunter Biram
I think that you've got some fantastic work. And, with, the pasture, rangeland, forage, rainfall index insurance, and, that's what we're going to talk about today, because, although we're going to release this at a later date, actually, in the week that we're recording this, on Friday, you're going to be defending your thesis and you are about to become a master.
00;57;19;10 - 00;57;21;08
Dr. Hunter Biram
How are you feeling about that?
00;57;21;10 - 00;57;39;17
Walker Davis
I feel real good. Real excited. It's been a really fun two years. And what a lot better than I ever could have expected. I wasn’t really too happy to be coming to Fayetteville. I wanted to stay at Arkansas State, but my mentors over there really pushed me, and, I really had fun. And I'm excited for the next chapter, though.
00;57;39;20 - 00;57;54;04
Dr. Hunter Biram
Well, and for those of our listeners who have not listened to the previous podcast, just a quick primer on Walker. Walker's an Arkansas boy through and through from southeast Arkansas. His mom is actually an instructor at the University of Arkansas at Monticello. Went to Hamburg High School?
00;57;54;07 - 00;57;54;29
Walker Davis
Yes, sir.
00;57;55;01 - 00;58;16;02
Dr. Hunter Biram
Correct? And so, and then he went to Arkansas State for his undergraduate in finance on just straight finance. And, went over to the University of Arkansas for his master's and probably going to get a couple papers out of this thesis. I mean, I just read it this week. I think it's fantastic work. And, so without further ado, let's just dive into today's topic, talking about interval selection.
00;58;16;02 - 00;58;30;01
Dr. Hunter Biram
So, Walker, what what makes interval selection under PRF insurance. and again that's pasture rangeland forage, a unique challenge for forage producers? And how does the timing mismatch between rainfall and forage growth contribute to this risk?
00;58;30;03 - 00;58;49;06
Walker Davis
Yeah. Well the first big thing about PRF is it is so different than your traditional crop insurance and how those policies are made and how you're choosing, because you're not necessarily insuring your corn crop from, let's say, hail or prevent plan or whatever. You're choosing what months throughout the year you want to cover, and you can choose what months you care about more.
00;58;49;07 - 00;59;10;26
Walker Davis
You can still cover each month, but care about your intervals because everything in PRF is in dual-month interval. So January-February, February-March, and so on and so forth. So you could actually, if you only care about, let's say, your April through August rainfall and forage, then that's all you have to cover. But if you want to cover year round you can do that.
00;59;10;29 - 00;59;32;11
Walker Davis
So you can choose what percent of your policy, of course, has to add up to 100. But what percent of policy goes in each interval. It can be zero. If it's more than zero, it has to be at least ten, and it can't be more than 60. So you have to choose at least two intervals, but you can choose as many as all 11, or, not all 11, because you can't cover the same thing.
00;59;32;11 - 00;59;55;13
Walker Davis
I think you can choose six, I guess is the most you could actually choose. Because you can't do January-February and February-March, because that double insures February. But so that, that creates a unique challenge because you have to know what time is most important to you. PRF, pasture, rangeland and forages insurance. While it is a forage insurance, it's really not a forage insurance.
00;59;55;13 - 01;00;15;28
Walker Davis
It's a rainfall insurance for forage. And it's more than that. It's a single parallel drought, rainfall insurance, or forage. It is that covering the chance you get too much rain, because of course that can hurt your ground just as much. You got cows out there and got a tearing up, drowning in your forage, but it's when you don't get enough forage or, sorry, enough rainfall.
01;00;16;03 - 01;00;42;14
Walker Davis
And when that affects your forage. So that's a unique challenge, because you have this timing mismatch of... rainfall and forage growth, of course, has a very strong relationship. But it is not an immediate relationship, is one big thing. So if I get rainfall today, I'm not going to get forage growth necessarily today. And I'm definitely not going to get to the full extent of what that rainfall is doing for me immediately.
01;00;42;17 - 01;01;00;07
Dr. Hunter Biram
Yeah. So what's interesting about this particular topic that, that, that we're going to dive deeper into today is just, you know, Walker, you mentioned that you got to get at least two intervals. And these are two month intervals. You have to select those. That has to add up to 100. So, you know, you could do 50/50 on say like a January-February and a March-April.
01;01;00;09 - 01;01;24;06
Dr. Hunter Biram
Right. So you can do like 50% Jan-Feb and then 50% in March-April and boom, you're covered and you're like, all right, well that's like all the first four months of the year. But you know, depending on how, how, how you as a producer would, raise your forage and what the growing season looks like, you know, you might choose a different set of intervals and, I'm not sure that that's going to get ahead of things, but Walker can.
01;01;24;07 - 01;01;35;16
Dr. Hunter Biram
Can you tell me which? Oh, let's say which buckets of intervals, tend to see the most, losses when it comes to triggering that rainfall index?
01;01;35;24 - 01;01;46;00
Walker Davis
No, definitely. And that's actually something that we we've looked into a lot. And it's typically of course, it's funny, the ones that are most expensive, the ones that trigger the most, which.
01;01;46;01 - 01;01;47;05
Dr. Hunter Biram
Absolutely. Of course.
01;01;47;05 - 01;02;05;28
Walker Davis
Intuitively, makes sense because if they're going to be more often to pay out, insurance programs are required to be rated this close, to where your payouts equal, what you pay in over time. So, the ones that are more likely to pay out and pay out more often, more amounts, the ones I know cost a pretty penny more.
01;02;06;02 - 01;02;29;23
Walker Davis
So, interestingly, it's actually the months you wouldn't think really in back forage. A lot of those in the fall beginning of winter months. Your September, October, November, December kind of consistently the ones that are the most variable, the most expensive ones to enroll in, as well as some of the most common policies that have been doing it.
01;02;29;23 - 01;02;43;21
Walker Davis
So that kind of raises the question, are producers using it as a straight up risk protection? Or are they risk protection, also, “Hey, let's see if we can luck out and hit the lottery” quote unquote this this year.
01;02;43;23 - 01;03;00;29
Dr. Hunter Biram
Yeah. You know, I like roulette, Walker. I'm not sure if you've ever been to a casino, but I do like roulette. And everyone says, Hunter, you're an economist and you're a risk management specialist, why do you do roulette, you know, the worst odds in the world? But I just like spreading out my chips on the board. And, you know, that's kind of how I view PRF, is like, you know, how do you want to spread out your chips?
01;03;00;29 - 01;03;30;22
Dr. Hunter Biram
How do you want to spread out that hundred percent on these two month intervals? And, and one thing that you've done a lot of study into is looking at when, is looking at basis for specifically and how maybe it'll rain, but you might get a payment that triggers, just because, just based on how that rainfall index is measured, based on where the weather stations are placed, or maybe, it doesn't rain, but because it might have rain closer to that weather station, you're not going to get a payment.
01;03;30;25 - 01;03;36;21
Dr. Hunter Biram
And so, can you talk about a couple concepts that you've introduced, in your, in your thesis in particular?
01;03;36;24 - 01;04;02;21
Walker Davis
Yeah. No, for sure. The basis risk, of course, and, this terminology. Interestingly, the PRF has a lot of different types of things you could classify as basis risk. But this way, it's just your rainfall that you receive is not matching up to your forage necessarily that you receive. And the inconsistencies in payments- overpayment and underpayment. So what we call that is a false negative probability or an FNP.
01;04;02;23 - 01;04;27;05
Walker Davis
And what that is, is you don't get the rainfall that you're supposed to have. However, you are not receiving a payment. So how we measure that is, you're not receiving the forage growth. So everything for PRF is based on a rainfall index. So that looks at rainfall all the way back to 1948 and looks at how that particular interval.
01;04;27;05 - 01;04;58;00
Walker Davis
So let's say January-February for your location, how rainfall January-February of that year compares to the historical average from 2024 to 1948. So, lots of years. And you get assigned a percentage, pretty much. If you got three inches, but historically you get four, then you would have 75 percent. Or your index would be 75. So if that falls below your coverage level, that's how you get your payment triggered.
01;04;58;02 - 01;05;30;12
Walker Davis
So, following that, we went and found the NDVI. So, your vegetation index, and looked at how vegetation in that current interval... So, let's keep January-February, how that compares to your historical average vegetation. So, what's your forage looking like, that interval as compared to the past? In that same couple months. And then we compare our two indexes, our forage index that we made, as well as the rainfall index that PRF uses.
01;05;30;14 - 01;05;49;03
Walker Davis
So we get our false negative probability, is how often our forage index says: hey, you deserve a payment, it's below your selected coverage level as compared to the historical average. But in terms of rainfall, you're above your excuse me, cover level.
01;05;49;05 - 01;05;55;07
Dr. Hunter Biram
And so, and so, at what level is this being measured? Is this at the grid cell level, even with the NDVI, too?
01;05;55;10 - 01;06;22;29
Walker Davis
Yes, it was actually in pixels, and then we averaged it across grid. So NDVI is a very, really big data set, you're getting, very, very small thing like 0.25 by 0.25km, little grid, grids, pretty much little cells inside the grids. And then we averaged all the land inside of each grid. And those grids are 0.25 longitude .25 latitude.
01;06;23;02 - 01;06;45;14
Walker Davis
So, 17 miles by 17 miles, or so as the equator. So, smaller than counties, but sizable enough that if you're at one corner, you are definitely going to at times experience different weather than the other corner. Yeah, but it is a grid based product, so it does the best to average all those chances together. Of course.
01;06;45;17 - 01;06;52;26
Dr. Hunter Biram
Yeah. So, so just to recap, go through false negative probability and false positive probability before we go to the next idea.
01;06;52;26 - 01;07;18;09
Walker Davis
Yeah. So, false negative probability, that is when our forage is telling us: hey, based on the past, you deserve a payment. However, your rainfall index, which is how you're actually paid through PRF, says: actually, you got enough rainfall. Or, your grid, on average, got enough rainfall that you actually do not deserve a trigger. You don't deserve an indemnity.
01;07;18;09 - 01;07;37;25
Walker Davis
Then, false positive probabilities. The opposite. You look at your forage index, and it's like, hey, we're good, you're above your coverage level in terms of how your forage is now, as compared to, in the past, you don't deserve a payment. But in terms of rainfall, you do. So that's producers like that, of course, a lot more. You're going to get your forage you need.
01;07;37;25 - 01;07;54;17
Walker Davis
So you're not going to impact your financial health of your operation. But then you're getting a little, little chunk of change on top, too. So a little pocket money. So, it's interesting to see how both of those happen and how they both occur, which I'm sure we're about to talk about.
01;07;54;24 - 01;08;09;24
Dr. Hunter Biram
Yeah. So then, so then in what ways might a high, you know, false negative probability or false positive probability in the same region create conflicting incentives for producers, and how can this affect long term financial planning or even trust in the program?
01;08;09;26 - 01;08;31;15
Walker Davis
Now that's very, very strongly. So, of course, PRF is year-round product, like it's an annual product. You choose your policy for the year, but it's really an interval by interval product. Each interval is going to have a different premium rate. You're going to get paid out differently based on the interval in which you're enrolled in, based on how much of your policy you put in it.
01;08;31;17 - 01;08;56;22
Walker Davis
So, things happen different in January-February than they do March-April than they do in November-December. So, you are experiencing different things. So they're pretty much individual policies. And each of those individual policies are exposed to basis risk in a different amount. So your January-February is going to have a different FNP, false negative probability, and false positive probabilities.
01;08;56;24 - 01;09;28;14
Walker Davis
And the likelihood of those happening as opposed to other intervals. So how that can create conflicting incentives is a producer would hopefully know what rainfall they really need to ensure to be safe and actually cover their forage. However, PRF is a highly subsidized program. It's not really that expensive. If they're just like, hey, I know the false positive probabilities for these different intervals are higher,
01;09;28;17 - 01;09;51;11
Walker Davis
they could try to play the game, almost, and enroll in those and hope they're getting that extra payment, that extra change in their pocket. Conversely, if they know the FNP, your false negative probability are in really high, in the intervals, that they actually need to insure to properly cover their forage the best, that creates conflicting thoughts.
01;09;51;11 - 01;10;12;04
Walker Davis
I know that I really need March, April, May and June rain. However, if my FNPs for my grid are high at that time, that kind of makes me a little wary. Because, do I really want to take that risk? Is yes, I'm playing the policy right. But am I getting the actual coverage I'm paying for? And that, of course, impacts financial.
01;10;12;04 - 01;10;47;13
Walker Davis
If you're not getting that payment when you really need it. So that FNP strikes, even if you're getting false positive probabilities and you're getting extra money, we're not all going to save that money for a rainy day necessarily. That's, you know, go out for a nice dinner kind of money. So you got your FNP's happen, and then you're just up a creek without a paddle, impacting your financial health as well as your trust in the program, knowing that even though you're playing it right, you're insuring the intervals, that rainfall, you actually need and not trying to play a game with the program that you could still get the butt end of the stick.
01;10;47;16 - 01;11;06;08
Dr. Hunter Biram
Yeah. Walker, this is so interesting to me because, you know, I think one, I think someone listening could be like, wait a minute. Like it's just a lottery game, you know, 100% roulette, Walker’s saying lottery. And so, like, is even mitigating risk. But you know, this is just the best we can do right now. And I want to and I want to introduce a new way to reframe this.
01;11;06;11 - 01;11;31;02
Dr. Hunter Biram
You know, yes, maybe there are some false negatives in those intervals that we really do need to insure. Like those are the key growing seasons for, for forage, the key growing months for forage. But I think if the farmer knows the false negatives and the false positives, one way that I think about this is let's just take, let's just leverage that false positive, because it should be protecting me where the false negatives are high.
01;11;31;02 - 01;11;49;14
Dr. Hunter Biram
But they're not, if that makes sense. Like it's just kind of like we're swapping the intervals to still get the coverage that we need. It's not so much like just maximizing the program. I think it's just you want to get the risk protection that you need. And if, you know, you're faced with a high false negative because I well, shoot it didn’t rain, and I'm not getting any protection,
01;11;49;14 - 01;12;10;04
Dr. Hunter Biram
but you know there's another interval that has a high false positive. It's like, well, I know that I'm growing in you know, I know I'm growing mostly in this, you know, July-August window, but it has a high false negative. So I'm going to leverage maybe a, a March-April instead, just to kind of put it in the place just to be able to measure my risk appropriately.
01;12;10;04 - 01;12;12;16
Dr. Hunter Biram
Is that a fair way to think about this?
01;12;12;19 - 01;12;36;10
Walker Davis
Absolutely. And part of my thesis, I have a paper that we've already got accepted, it's coming out in the next month or two, and that's looking at how, is PRF profitable outside of the states that it's majorly consumed? Outside of the West? You have your big cattle and you have your Utah, your Arizona, your Texas, of course, Nevada, your Dakotas, Montana, Wyoming.
01;12;36;12 - 01;13;04;08
Walker Davis
That livestock is a lot different than Arkansas’, of course, or anywhere in the southeast. We got better dirt. We're growing crops. We can make more money off a per acre growing corn than you can cows here. However, so there's not that much, use of it. And historically, in the little time PRF's been out, it started in 2012 as a pilot program in Arkansas, but it came out nationwide in 2016, and it has not performed the best financially in terms of loss ratios.
01;13;04;08 - 01;13;26;24
Walker Davis
Because you’re paying in a lot more than you’re paid out, on average. So we wanted to look, is it that producers aren't making their policies right? Or are they trying it, not getting paid, and then quitting? Or is there something deeper happening? So how we did that is, we made different selection strategies. One of them, we called basis risk leveraging, which is kind of what you're talking about.
01;13;26;26 - 01;13;51;09
Walker Davis
Our goal with that one was to minimize our FNPs, so false negative probabilities, while maximizing our false positive probabilities. Same thing you're talking about. You choose your interval with the lowest FNP., maybe you put half your policy in there and then you choose half the policy for the one with the highest FPP. Or you really choose the second best interval with the lowest FNP.
01;13;51;09 - 01;14;12;22
Walker Davis
But it also has a pretty good, pretty high FPP and it plays a game. It was just using, linear programing, you’re minimizing one or maximizing the other, trying to have the least - minimax is what it was called. And you're trying to minimize your maximum deviation from the optimum of both.
01;14;12;25 - 01;14;13;24
Dr. Hunter Biram
That's your prediction.
01;14;13;26 - 01;14;39;14
Walker Davis
It was really cool to see how all that played out. It turns out it is profitable in Arkansas on average across the wettest median in the driest counties over the last 30 years, average across the years. And the program, all strategies were more profitable than not insuring in the program at a unsubsidized rate. So once you throw in that 51% subsidy, very much so recommend looking into the product
01;14;39;17 - 01;14;40;26
Walker Davis
is kind of what we found.
01;14;40;29 - 01;14;59;06
Dr. Hunter Biram
Well, that is super interesting. And so Walker, then, as we wrap up today, you know, what are well, what's advice that you would give to a producer? If, if they're looking to insure their, forage production, for their livestock operation, first off.
01;14;59;08 - 01;15;20;11
Walker Davis
Of course, like I said at the beginning, PRF is a forage product, but it's a rainfall product for forage. So you have to realize that. If I really care about my forage in going into August, September, October, if I'm trying to keep that 300 day grazing cycle happening, I'm trying to keep forage on the ground as long as possible. And of course, you need rainfall for that.
01;15;20;13 - 01;15;40;26
Walker Davis
That doesn't necessarily mean you need October rainfall. There's other stuff that builds up to that, of course, and we've done some work on that. And I think we'll have another, little paper out about that here in the coming weeks. This is kind of talking more about figuring out what rainfall is impacting your forage more. And that's the biggest thing.
01;15;40;26 - 01;16;16;16
Walker Davis
What's your rainfall happening. Your past rainfall, how does it compare to now? Some work we're doing now is looking at rainfall trends. Are you increasing in rainfall? Are you decreasing in rainfall? That's a big thing. And of course producers are smart, that's your livelihood, you know what's happening on your land. Just be proactive. Realize your rain. If you're decreasing, at a particular interval over time in rainfall and you’re just noticing that, it wouldn't be a bad idea to insure in that one, it's kind of, because, of course, that index is based off of 1948.
01;16;16;18 - 01;16;32;19
Walker Davis
So if your mean from that time is higher than what your mean would be for the last ten years in rainfall, probably wouldn't be a bad idea to look insuring that interval, especially if that is at a time of rainfall that you actually need.
01;16;32;21 - 01;17;01;19
Dr. Hunter Biram
That is so interesting, Walker. And I know that that's in your thesis. And, you know, whenever I think about this, it's it's really downside risk. It's downside rainfall risk is what you're talking about. And, you know, in places, we'll say, in counties, generally, where there is significant downside risk just because that rainfall so high historically. Absolutely. Like in that two month interval, like go all in. To me, I think about it from the, you know, it's very similar on the row crops side of things.
01;17;01;22 - 01;17;19;20
Dr. Hunter Biram
If you have a really high APH, you've got high downside risk. Like an APH yield. If you have a really high, you know, corn yield, if you had like, like a 250 bushel an acre average corn yield, you've got a pretty high downside risk because that's a pretty high yield. Same thing on price. You know, we're in we're in a very low price environment in the commodities, as I'm sure you're well aware of.
01;17;19;20 - 01;17;36;19
Dr. Hunter Biram
And you know, if we, you know, if if only we knew that the, the prices we're going to get this low. Whenever we saw those $15 beans, I mean, even $15 beans, that's just so high compared to history. And so it's like we know there's significant downside risk there. And so I think that's a great point to make, Walker.
01;17;36;19 - 01;17;54;15
Dr. Hunter Biram
Like, if you know that you've had a lot of rain historically, but you've been noticing the past few years, you haven't gotten as much rain, that's probably a good sign that, or a good indicator, that you probably have a high rainfall guarantee and a significant downside risk to be able to protect against that risk. And so with that, Walker, we are out of time.
01;17;54;19 - 01;17;57;10
Dr. Hunter Biram
But I sure appreciate your time. Appreciate you being here today.
01;17;57;12 - 01;18;08;15
Walker Davis
No, I appreciate you having me. It's a lot of fun getting to talk about this stuff, because this has been my life for the past two years. So I enjoy talking about it and hopefully it can help somebody understand it a little better.
01;18;08;18 - 01;18;12;24
Dr. Hunter Biram
Well, that's always the goal. Appreciate your time and stay tuned for the market report. Thanks, guys.
01;18;12;26 - 01;18;34;20
Speaker 3
All right guys. Back with your market report. September 25 corn current price is at $4.30 per bushel. Month ago’s price is at $4.42 per bushel. That's down $0.12. And a year ago’s price is at $4.72 per bushel. That's down $0.42. September 25 rice, current price is at $13.63 per 100 weight. A month ago’s price is at $13.04 per 100 weight, that's up $0.59.
01;18;34;23 - 01;19;01;12
Speaker 3
And a year ago’s price is at $15.56 per 100 weight, excuse me. That's down $1.93. November 25 soybeans current price is at $10.38 per bushel. Month ago’s price is at $10.35 per bushel. That's up $0.03 and a year ago’s price is at $12.11 per bushel. That's down $1.73. July 25 wheat current price is at $5.30 per bushel, a month ago’s price is at $5.31 per bushel.
01;19;01;12 - 01;19;24;21
Speaker 3
That's down $0.01, and a year ago’s price is at $7 per bushel. That's down $1.70. December 25 cotton current price is at $0.68 per pound. A month ago’s price is at $0.69 per pound. That's down $0.01, and a year ago’s price is at $0.79 per pound. That's down $0.11. And your weekly U.S. average for peanuts. Current prices at $466 per ton , a month ago’s price is at $496 per ton.
01;19;24;21 - 01;19;54;16
Speaker 3
That's down $30 in a year. Gas prices at $528 per ton. That's down $62. And that that is your weekly commodity futures this week. Your fertilizer prices this week. Urea $677.50 per ton. Ammonium nitrate is at $547.50 per ton. Ammonium sulfate is at $556 per ton. DAP is at $791 per ton, triple super phosphate is at $656 per ton. Potash is $457.50 per ton.
01;19;54;16 - 01;20;18;00
Speaker 3
Ag lime is $45 per ton. Pellet lime this week's $240 per ton. Your diesel prices this week. Off road diesel is $2.39 per gallon. Highway diesel $3.20 per gallon. And your Mississippi River level at Memphis, Tennessee, this week. Current levels at 17.6ft and a year ago’s at 20.23ft. Want to thank y'all guys again for tuning in to another episode of Morning Coffee and Ag Markets.
01;20;18;02 - 01;20;41;00
Speaker 3
This will be my last market report and last episode to join. It's truly been quite an honor and, quite the journey, moving on to greener pastures. But I've, truly enjoyed doing this and, starting this for these guys. And I know the team is going to carry it on further. So until next time, we'll catch y’all on the flip flop.
01;20;41;05 - 01;21;03;21
Speaker 3
Bye bye. Now.
01;21;03;21 - 01;21;26;14
Dr. Hunter Biram
So, Walker, we just, you know, Riley just got married, and he just had his honeymoon. There's just something in the water, because you're about to get married, and you're about to have your honeymoon.
01;21;26;17 - 01;21;32;24
Walker Davis
Yes, sir. Yes, sir. Memorial Day wedding and then the honeymoon phase.
01;21;32;29 - 01;21;36;14
Dr. Hunter Biram
But that's quite a thing to memorialize, I would say.
01;21;36;17 - 01;21;39;16
Walker Davis
Oh, yeah. Well, we get a permanent holiday for our anniversary.
01;21;39;23 - 01;21;42;25
Dr. Hunter Biram
I mean, it was made for y’all, it was made for y'all.
01;21;42;27 - 01;21;52;00
Walker Davis
Yeah. And so they remember., and us, along with the veterans, of course. We’re gonna walk out with sparklers and mini American flags for everybody.
01;21;52;01 - 01;21;59;06
Dr. Hunter Biram
As you should. As you should., the American way. Oh, yeah, the American way. I love that. So, where are you guys going to honeymoon at?
01;21;59;08 - 01;22;02;24
Walker Davis
We're going out to Bozeman, Montana, and then doing Yellowstone.
01;22;02;26 - 01;22;09;16
Dr. Hunter Biram
Oh, wow. That's going to be wonderful. That's going to be beautiful. So are you. Are you guys both? Would you call yourselves mountain people? More so than beach people?
01;22;09;16 - 01;22;11;11
Walker Davis
Yeah. I can't stand the beach.
01;22;11;17 - 01;22;14;21
Dr. Hunter Biram
Really can't stay on the beach.
01;22;14;23 - 01;22;25;07
Walker Davis
Mackenzie, she could do a day or two of it, but I can do about three hours. And after that... I like a pool fine. I think it's a sand thing more than anything else. I'm not a big fan.
01;22;25;14 - 01;22;43;19
Dr. Hunter Biram
Yeah, you know what? That's fair. Sand does get everywhere. If you're not careful. Because, like in most of these, like, beach club resorts, they've got places to rinse off your feet and stuff. But, I mean, even then. Right? Like, there's even gonna be a little bit that's going to trickle into your, suitcase coming home. So it's going to end up bringing some sand home.
01;22;43;19 - 01;23;11;18
Dr. Hunter Biram
But, Yeah, I think, Riley, he, he, he and his now wife kind of crazy thing about, I think that they got a little sunburn. They went to Cancun, so they went to the beach, and, they got a little too sunburned and, because, I mean... And listen, it's an honest mistake. So, Annie and I, we went to Hawaii a couple of years ago, and I didn't really think much about being closer to the equator, having that more direct sunlight.
01;23;11;18 - 01;23;30;14
Dr. Hunter Biram
But, dude, like, there was a day where, I mean, we both just got torched and we were putting sunscreen on every hour. But I just... I just guess we didn't cover ourselves well enough or didn't have the strongest SPF or what it is, but, yeah. Yeah, you definitely have got to be careful, with the beach and, be careful with those sunburns.
01;23;30;16 - 01;23;38;18
Walker Davis
I get burnt real bad, and I'm real pasty, just naturally. It's, just I try to stay covered up the best I can 100%.
01;23;38;18 - 01;23;56;18
Dr. Hunter Biram
Well, I'm with you. Well, let's go and dive in. Good morning. Good morning, and welcome to another episode of Morning Coffee Ag Markets. This is, your host for the day, Dr. Hunter Biram, and with me in the studio remotely, I've got Mr. Walker Davis. And, Walker. If I can, I'm going to claim you as one of my grad students.
01;23;56;23 - 01;24;15;22
Dr. Hunter Biram
I think that you've got some fantastic work. And, with, the pasture, rangeland, forage, rainfall index insurance, and, that's what we're going to talk about today, because, although we're going to release this at a later date, actually, in the week that we're recording this, on Friday, you're going to be defending your thesis and you are about to become a master.
01;24;15;25 - 01;24;17;23
Dr. Hunter Biram
How are you feeling about that?
01;24;17;25 - 01;24;36;02
Walker Davis
I feel real good. Real excited. It's been a really fun two years. And what a lot better than I ever could have expected. I wasn’t really too happy to be coming to Fayetteville. I wanted to stay at Arkansas State, but my mentors over there really pushed me, and, I really had fun. And I'm excited for the next chapter, though.
01;24;36;05 - 01;24;50;19
Dr. Hunter Biram
Well, and for those of our listeners who have not listened to the previous podcast, just a quick primer on Walker. Walker's an Arkansas boy through and through from southeast Arkansas. His mom is actually an instructor at the University of Arkansas at Monticello. Went to Hamburg High School?
01;24;50;22 - 01;24;51;14
Walker Davis
Yes, sir.
01;24;51;16 - 01;25;12;17
Dr. Hunter Biram
Correct? And so, and then he went to Arkansas State for his undergraduate in finance on just straight finance. And, went over to the University of Arkansas for his master's and probably going to get a couple papers out of this thesis. I mean, I just read it this week. I think it's fantastic work. And, so without further ado, let's just dive into today's topic, talking about interval selection.
01;25;12;17 - 01;25;26;16
Dr. Hunter Biram
So, Walker, what what makes interval selection under PRF insurance. and again that's pasture rangeland forage, a unique challenge for forage producers? And how does the timing mismatch between rainfall and forage growth contribute to this risk?
01;25;26;18 - 01;25;45;21
Walker Davis
Yeah. Well the first big thing about PRF is it is so different than your traditional crop insurance and how those policies are made and how you're choosing, because you're not necessarily insuring your corn crop from, let's say, hail or prevent plan or whatever. You're choosing what months throughout the year you want to cover, and you can choose what months you care about more.
01;25;45;22 - 01;26;07;11
Walker Davis
You can still cover each month, but care about your intervals because everything in PRF is in dual-month interval. So January-February, February-March, and so on and so forth. So you could actually, if you only care about, let's say, your April through August rainfall and forage, then that's all you have to cover. But if you want to cover year round you can do that.
01;26;07;14 - 01;26;28;26
Walker Davis
So you can choose what percent of your policy, of course, has to add up to 100. But what percent of policy goes in each interval. It can be zero. If it's more than zero, it has to be at least ten, and it can't be more than 60. So you have to choose at least two intervals, but you can choose as many as all 11, or, not all 11, because you can't cover the same thing.
01;26;28;26 - 01;26;51;28
Walker Davis
I think you can choose six, I guess is the most you could actually choose. Because you can't do January-February and February-March, because that double insures February. But so that, that creates a unique challenge because you have to know what time is most important to you. PRF, pasture, rangeland and forages insurance. While it is a forage insurance, it's really not a forage insurance.
01;26;51;28 - 01;27;12;15
Walker Davis
It's a rainfall insurance for forage. And it's more than that. It's a single parallel drought, rainfall insurance, or forage. It is that covering the chance you get too much rain, because of course that can hurt your ground just as much. You got cows out there and got a tearing up, drowning in your forage, but it's when you don't get enough forage or, sorry, enough rainfall.
01;27;12;20 - 01;27;39;01
Walker Davis
And when that affects your forage. So that's a unique challenge, because you have this timing mismatch of... rainfall and forage growth, of course, has a very strong relationship. But it is not an immediate relationship, is one big thing. So if I get rainfall today, I'm not going to get forage growth necessarily today. And I'm definitely not going to get to the full extent of what that rainfall is doing for me immediately.
01;27;39;04 - 01;27;56;22
Dr. Hunter Biram
Yeah. So what's interesting about this particular topic that, that, that we're going to dive deeper into today is just, you know, Walker, you mentioned that you got to get at least two intervals. And these are two month intervals. You have to select those. That has to add up to 100. So, you know, you could do 50/50 on say like a January-February and a March-April.
01;27;56;24 - 01;28;20;23
Dr. Hunter Biram
Right. So you can do like 50% Jan-Feb and then 50% in March-April and boom, you're covered and you're like, all right, well that's like all the first four months of the year. But you know, depending on how, how, how you as a producer would, raise your forage and what the growing season looks like, you know, you might choose a different set of intervals and, I'm not sure that that's going to get ahead of things, but Walker can.
01;28;20;24 - 01;28;32;03
Dr. Hunter Biram
Can you tell me which? Oh, let's say which buckets of intervals, tend to see the most, losses when it comes to triggering that rainfall index?
01;28;32;11 - 01;28;42;17
Walker Davis
No, definitely. And that's actually something that we we've looked into a lot. And it's typically of course, it's funny, the ones that are most expensive, the ones that trigger the most, which.
01;28;42;18 - 01;28;43;22
Dr. Hunter Biram
Absolutely. Of course.
01;28;43;22 - 01;29;02;15
Walker Davis
Intuitively, makes sense because if they're going to be more often to pay out, insurance programs are required to be rated this close, to where your payouts equal, what you pay in over time. So, the ones that are more likely to pay out and pay out more often, more amounts, the ones I know cost a pretty penny more.
01;29;02;19 - 01;29;26;10
Walker Davis
So, interestingly, it's actually the months you wouldn't think really in back forage. A lot of those in the fall beginning of winter months. Your September, October, November, December kind of consistently the ones that are the most variable, the most expensive ones to enroll in, as well as some of the most common policies that have been doing it.
01;29;26;10 - 01;29;40;08
Walker Davis
So that kind of raises the question, are producers using it as a straight up risk protection? Or are they risk protection, also, “Hey, let's see if we can luck out and hit the lottery” quote unquote this this year.
01;29;40;10 - 01;29;57;14
Dr. Hunter Biram
Yeah. You know, I like roulette, Walker. I'm not sure if you've ever been to a casino, but I do like roulette. And everyone says, Hunter, you're an economist and you're a risk management specialist, why do you do roulette, you know, the worst odds in the world? But I just like spreading out my chips on the board. And, you know, that's kind of how I view PRF, is like, you know, how do you want to spread out your chips?
01;29;57;14 - 01;30;27;07
Dr. Hunter Biram
How do you want to spread out that hundred percent on these two month intervals? And, and one thing that you've done a lot of study into is looking at when, is looking at basis for specifically and how maybe it'll rain, but you might get a payment that triggers, just because, just based on how that rainfall index is measured, based on where the weather stations are placed, or maybe, it doesn't rain, but because it might have rain closer to that weather station, you're not going to get a payment.
01;30;27;10 - 01;30;33;06
Dr. Hunter Biram
And so, can you talk about a couple concepts that you've introduced, in your, in your thesis in particular?
01;30;33;09 - 01;30;59;04
Walker Davis
Yeah. No, for sure. The basis risk, of course, and, this terminology. Interestingly, the PRF has a lot of different types of things you could classify as basis risk. But this way, it's just your rainfall that you receive is not matching up to your forage necessarily that you receive. And the inconsistencies in payments- overpayment and underpayment. So what we call that is a false negative probability or an FNP.
01;30;59;06 - 01;31;23;20
Walker Davis
And what that is, is you don't get the rainfall that you're supposed to have. However, you are not receiving a payment. So how we measure that is, you're not receiving the forage growth. So everything for PRF is based on a rainfall index. So that looks at rainfall all the way back to 1948 and looks at how that particular interval.
01;31;23;20 - 01;31;54;15
Walker Davis
So let's say January-February for your location, how rainfall January-February of that year compares to the historical average from 2024 to 1948. So, lots of years. And you get assigned a percentage, pretty much. If you got three inches, but historically you get four, then you would have 75 percent. Or your index would be 75. So if that falls below your coverage level, that's how you get your payment triggered.
01;31;54;17 - 01;32;26;27
Walker Davis
So, following that, we went and found the NDVI. So, your vegetation index, and looked at how vegetation in that current interval... So, let's keep January-February, how that compares to your historical average vegetation. So, what's your forage looking like, that interval as compared to the past? In that same couple months. And then we compare our two indexes, our forage index that we made, as well as the rainfall index that PRF uses.
01;32;26;29 - 01;32;45;18
Walker Davis
So we get our false negative probability, is how often our forage index says: hey, you deserve a payment, it's below your selected coverage level as compared to the historical average. But in terms of rainfall, you're above your excuse me, cover level.
01;32;45;20 - 01;32;51;22
Dr. Hunter Biram
And so, and so, at what level is this being measured? Is this at the grid cell level, even with the NDVI, too?
01;32;51;25 - 01;33;19;14
Walker Davis
Yes, it was actually in pixels, and then we averaged it across grid. So NDVI is a very, really big data set, you're getting, very, very small thing like 0.25 by 0.25km, little grid, grids, pretty much little cells inside the grids. And then we averaged all the land inside of each grid. And those grids are 0.25 longitude .25 latitude.
01;33;19;17 - 01;33;41;29
Walker Davis
So, 17 miles by 17 miles, or so as the equator. So, smaller than counties, but sizable enough that if you're at one corner, you are definitely going to at times experience different weather than the other corner. Yeah, but it is a grid based product, so it does the best to average all those chances together. Of course.
01;33;42;02 - 01;33;49;11
Dr. Hunter Biram
Yeah. So, so just to recap, go through false negative probability and false positive probability before we go to the next idea.
01;33;49;11 - 01;34;14;24
Walker Davis
Yeah. So, false negative probability, that is when our forage is telling us: hey, based on the past, you deserve a payment. However, your rainfall index, which is how you're actually paid through PRF, says: actually, you got enough rainfall. Or, your grid, on average, got enough rainfall that you actually do not deserve a trigger. You don't deserve an indemnity.
01;34;14;24 - 01;34;34;10
Walker Davis
Then, false positive probabilities. The opposite. You look at your forage index, and it's like, hey, we're good, you're above your coverage level in terms of how your forage is now, as compared to, in the past, you don't deserve a payment. But in terms of rainfall, you do. So that's producers like that, of course, a lot more. You're going to get your forage you need.
01;34;34;10 - 01;34;51;02
Walker Davis
So you're not going to impact your financial health of your operation. But then you're getting a little, little chunk of change on top, too. So a little pocket money. So, it's interesting to see how both of those happen and how they both occur, which I'm sure we're about to talk about.
01;34;51;09 - 01;35;06;09
Dr. Hunter Biram
Yeah. So then, so then in what ways might a high, you know, false negative probability or false positive probability in the same region create conflicting incentives for producers, and how can this affect long term financial planning or even trust in the program?
01;35;06;11 - 01;35;28;00
Walker Davis
Now that's very, very strongly. So, of course, PRF is year-round product, like it's an annual product. You choose your policy for the year, but it's really an interval by interval product. Each interval is going to have a different premium rate. You're going to get paid out differently based on the interval in which you're enrolled in, based on how much of your policy you put in it.
01;35;28;02 - 01;35;53;07
Walker Davis
So, things happen different in January-February than they do March-April than they do in November-December. So, you are experiencing different things. So they're pretty much individual policies. And each of those individual policies are exposed to basis risk in a different amount. So your January-February is going to have a different FNP, false negative probability, and false positive probabilities.
01;35;53;09 - 01;36;24;29
Walker Davis
And the likelihood of those happening as opposed to other intervals. So how that can create conflicting incentives is a producer would hopefully know what rainfall they really need to ensure to be safe and actually cover their forage. However, PRF is a highly subsidized program. It's not really that expensive. If they're just like, hey, I know the false positive probabilities for these different intervals are higher,
01;36;25;02 - 01;36;47;26
Walker Davis
they could try to play the game, almost, and enroll in those and hope they're getting that extra payment, that extra change in their pocket. Conversely, if they know the FNP, your false negative probability are in really high, in the intervals, that they actually need to insure to properly cover their forage the best, that creates conflicting thoughts.
01;36;47;26 - 01;37;08;21
Walker Davis
I know that I really need March, April, May and June rain. However, if my FNPs for my grid are high at that time, that kind of makes me a little wary. Because, do I really want to take that risk? Is yes, I'm playing the policy right. But am I getting the actual coverage I'm paying for? And that, of course, impacts financial.
01;37;08;21 - 01;37;44;00
Walker Davis
If you're not getting that payment when you really need it. So that FNP strikes, even if you're getting false positive probabilities and you're getting extra money, we're not all going to save that money for a rainy day necessarily. That's, you know, go out for a nice dinner kind of money. So you got your FNP's happen, and then you're just up a creek without a paddle, impacting your financial health as well as your trust in the program, knowing that even though you're playing it right, you're insuring the intervals, that rainfall, you actually need and not trying to play a game with the program that you could still get the butt end of the stick.
01;37;44;03 - 01;38;02;25
Dr. Hunter Biram
Yeah. Walker, this is so interesting to me because, you know, I think one, I think someone listening could be like, wait a minute. Like it's just a lottery game, you know, 100% roulette, Walker’s saying lottery. And so, like, is even mitigating risk. But you know, this is just the best we can do right now. And I want to and I want to introduce a new way to reframe this.
01;38;02;28 - 01;38;27;19
Dr. Hunter Biram
You know, yes, maybe there are some false negatives in those intervals that we really do need to insure. Like those are the key growing seasons for, for forage, the key growing months for forage. But I think if the farmer knows the false negatives and the false positives, one way that I think about this is let's just take, let's just leverage that false positive, because it should be protecting me where the false negatives are high.
01;38;27;19 - 01;38;46;01
Dr. Hunter Biram
But they're not, if that makes sense. Like it's just kind of like we're swapping the intervals to still get the coverage that we need. It's not so much like just maximizing the program. I think it's just you want to get the risk protection that you need. And if, you know, you're faced with a high false negative because I well, shoot it didn’t rain, and I'm not getting any protection,
01;38;46;01 - 01;39;06;21
Dr. Hunter Biram
but you know there's another interval that has a high false positive. It's like, well, I know that I'm growing in you know, I know I'm growing mostly in this, you know, July-August window, but it has a high false negative. So I'm going to leverage maybe a, a March-April instead, just to kind of put it in the place just to be able to measure my risk appropriately.
01;39;06;21 - 01;39;09;03
Dr. Hunter Biram
Is that a fair way to think about this?
01;39;09;06 - 01;39;32;27
Walker Davis
Absolutely. And part of my thesis, I have a paper that we've already got accepted, it's coming out in the next month or two, and that's looking at how, is PRF profitable outside of the states that it's majorly consumed? Outside of the West? You have your big cattle and you have your Utah, your Arizona, your Texas, of course, Nevada, your Dakotas, Montana, Wyoming.
01;39;32;29 - 01;40;00;23
Walker Davis
That livestock is a lot different than Arkansas’, of course, or anywhere in the southeast. We got better dirt. We're growing crops. We can make more money off a per acre growing corn than you can cows here. However, so there's not that much, use of it. And historically, in the little time PRF's been out, it started in 2012 as a pilot program in Arkansas, but it came out nationwide in 2016, and it has not performed the best financially in terms of loss ratios.
01;40;00;23 - 01;40;23;09
Walker Davis
Because you’re paying in a lot more than you’re paid out, on average. So we wanted to look, is it that producers aren't making their policies right? Or are they trying it, not getting paid, and then quitting? Or is there something deeper happening? So how we did that is, we made different selection strategies. One of them, we called basis risk leveraging, which is kind of what you're talking about.
01;40;23;11 - 01;40;47;24
Walker Davis
Our goal with that one was to minimize our FNPs, so false negative probabilities, while maximizing our false positive probabilities. Same thing you're talking about. You choose your interval with the lowest FNP., maybe you put half your policy in there and then you choose half the policy for the one with the highest FPP. Or you really choose the second best interval with the lowest FNP.
01;40;47;24 - 01;41;09;07
Walker Davis
But it also has a pretty good, pretty high FPP and it plays a game. It was just using, linear programing, you’re minimizing one or maximizing the other, trying to have the least - minimax is what it was called. And you're trying to minimize your maximum deviation from the optimum of both.
01;41;09;10 - 01;41;10;09
Dr. Hunter Biram
That's your prediction.
01;41;10;11 - 01;41;35;29
Walker Davis
It was really cool to see how all that played out. It turns out it is profitable in Arkansas on average across the wettest median in the driest counties over the last 30 years, average across the years. And the program, all strategies were more profitable than not insuring in the program at a unsubsidized rate. So once you throw in that 51% subsidy, very much so recommend looking into the product
01;41;36;02 - 01;41;37;11
Walker Davis
is kind of what we found.
01;41;37;14 - 01;41;55;21
Dr. Hunter Biram
Well, that is super interesting. And so Walker, then, as we wrap up today, you know, what are well, what's advice that you would give to a producer? If, if they're looking to insure their, forage production, for their livestock operation, first off.
01;41;55;23 - 01;42;16;26
Walker Davis
Of course, like I said at the beginning, PRF is a forage product, but it's a rainfall product for forage. So you have to realize that. If I really care about my forage in going into August, September, October, if I'm trying to keep that 300 day grazing cycle happening, I'm trying to keep forage on the ground as long as possible. And of course, you need rainfall for that.
01;42;16;28 - 01;42;37;11
Walker Davis
That doesn't necessarily mean you need October rainfall. There's other stuff that builds up to that, of course, and we've done some work on that. And I think we'll have another, little paper out about that here in the coming weeks. This is kind of talking more about figuring out what rainfall is impacting your forage more. And that's the biggest thing.
01;42;37;11 - 01;43;13;01
Walker Davis
What's your rainfall happening. Your past rainfall, how does it compare to now? Some work we're doing now is looking at rainfall trends. Are you increasing in rainfall? Are you decreasing in rainfall? That's a big thing. And of course producers are smart, that's your livelihood, you know what's happening on your land. Just be proactive. Realize your rain. If you're decreasing, at a particular interval over time in rainfall and you’re just noticing that, it wouldn't be a bad idea to insure in that one, it's kind of, because, of course, that index is based off of 1948.
01;43;13;03 - 01;43;29;04
Walker Davis
So if your mean from that time is higher than what your mean would be for the last ten years in rainfall, probably wouldn't be a bad idea to look insuring that interval, especially if that is at a time of rainfall that you actually need.
01;43;29;06 - 01;43;58;02
Dr. Hunter Biram
That is so interesting, Walker. And I know that that's in your thesis. And, you know, whenever I think about this, it's it's really downside risk. It's downside rainfall risk is what you're talking about. And, you know, in places, we'll say, in counties, generally, where there is significant downside risk just because that rainfall so high historically. Absolutely. Like in that two month interval, like go all in. To me, I think about it from the, you know, it's very similar on the row crops side of things.
01;43;58;05 - 01;44;16;05
Dr. Hunter Biram
If you have a really high APH, you've got high downside risk. Like an APH yield. If you have a really high, you know, corn yield, if you had like, like a 250 bushel an acre average corn yield, you've got a pretty high downside risk because that's a pretty high yield. Same thing on price. You know, we're in we're in a very low price environment in the commodities, as I'm sure you're well aware of.
01;44;16;05 - 01;44;33;04
Dr. Hunter Biram
And you know, if we, you know, if if only we knew that the, the prices we're going to get this low. Whenever we saw those $15 beans, I mean, even $15 beans, that's just so high compared to history. And so it's like we know there's significant downside risk there. And so I think that's a great point to make, Walker.
01;44;33;04 - 01;44;51;00
Dr. Hunter Biram
Like, if you know that you've had a lot of rain historically, but you've been noticing the past few years, you haven't gotten as much rain, that's probably a good sign that, or a good indicator, that you probably have a high rainfall guarantee and a significant downside risk to be able to protect against that risk. And so with that, Walker, we are out of time.
01;44;51;04 - 01;44;53;25
Dr. Hunter Biram
But I sure appreciate your time. Appreciate you being here today.
01;44;53;27 - 01;45;05;00
Walker Davis
No, I appreciate you having me. It's a lot of fun getting to talk about this stuff, because this has been my life for the past two years. So I enjoy talking about it and hopefully it can help somebody understand it a little better.
01;45;05;03 - 01;45;09;09
Dr. Hunter Biram
Well, that's always the goal. Appreciate your time and stay tuned for the market report. Thanks, guys.
01;45;09;11 - 01;45;31;05
Speaker 3
All right guys. Back with your market report. September 25 corn current price is at $4.30 per bushel. Month ago’s price is at $4.42 per bushel. That's down $0.12. And a year ago’s price is at $4.72 per bushel. That's down $0.42. September 25 rice, current price is at $13.63 per 100 weight. A month ago’s price is at $13.04 per 100 weight, that's up $0.59.
01;45;31;08 - 01;45;57;25
Speaker 3
And a year ago’s price is at $15.56 per 100 weight, excuse me. That's down $1.93. November 25 soybeans current price is at $10.38 per bushel. Month ago’s price is at $10.35 per bushel. That's up $0.03 and a year ago’s price is at $12.11 per bushel. That's down $1.73. July 25 wheat current price is at $5.30 per bushel, a month ago’s price is at $5.31 per bushel.
01;45;57;25 - 01;46;21;06
Speaker 3
That's down $0.01, and a year ago’s price is at $7 per bushel. That's down $1.70. December 25 cotton current price is at $0.68 per pound. A month ago’s price is at $0.69 per pound. That's down $0.01, and a year ago’s price is at $0.79 per pound. That's down $0.11. And your weekly U.S. average for peanuts. Current prices at $466 per ton , a month ago’s price is at $496 per ton.
01;46;21;06 - 01;46;51;01
Speaker 3
That's down $30 in a year. Gas prices at $528 per ton. That's down $62. And that that is your weekly commodity futures this week. Your fertilizer prices this week. Urea $677.50 per ton. Ammonium nitrate is at $547.50 per ton. Ammonium sulfate is at $556 per ton. DAP is at $791 per ton, triple super phosphate is at $656 per ton. Potash is $457.50 per ton.
01;46;51;01 - 01;47;14;17
Speaker 3
Ag lime is $45 per ton. Pellet lime this week's $240 per ton. Your diesel prices this week. Off road diesel is $2.39 per gallon. Highway diesel $3.20 per gallon. And your Mississippi River level at Memphis, Tennessee, this week. Current levels at 17.6ft and a year ago’s at 20.23ft. Want to thank y'all guys again for tuning in to another episode of Morning Coffee and Ag Markets.
01;47;14;19 - 01;47;37;17
Speaker 3
This will be my last market report and last episode to join. It's truly been quite an honor and, quite the journey, moving on to greener pastures. But I've, truly enjoyed doing this and, starting this for these guys. And I know the team is going to carry it on further. So until next time, we'll catch y’all on the flip flop.
01;47;37;22 - 01;48;00;08
Speaker 3
Bye bye. Now.
01;48;00;08 - 01;48;23;01
Dr. Hunter Biram
So, Walker, we just, you know, Riley just got married, and he just had his honeymoon. There's just something in the water, because you're about to get married, and you're about to have your honeymoon.
01;48;23;04 - 01;48;29;11
Walker Davis
Yes, sir. Yes, sir. Memorial Day wedding and then the honeymoon phase.
01;48;29;16 - 01;48;33;01
Dr. Hunter Biram
But that's quite a thing to memorialize, I would say.
01;48;33;04 - 01;48;36;03
Walker Davis
Oh, yeah. Well, we get a permanent holiday for our anniversary.
01;48;36;10 - 01;48;39;12
Dr. Hunter Biram
I mean, it was made for y’all, it was made for y'all.
01;48;39;14 - 01;48;48;17
Walker Davis
Yeah. And so they remember., and us, along with the veterans, of course. We’re gonna walk out with sparklers and mini American flags for everybody.
01;48;48;18 - 01;48;55;23
Dr. Hunter Biram
As you should. As you should., the American way. Oh, yeah, the American way. I love that. So, where are you guys going to honeymoon at?
01;48;55;25 - 01;48;59;09
Walker Davis
We're going out to Bozeman, Montana, and then doing Yellowstone.
01;48;59;11 - 01;49;06;03
Dr. Hunter Biram
Oh, wow. That's going to be wonderful. That's going to be beautiful. So are you. Are you guys both? Would you call yourselves mountain people? More so than beach people?
01;49;06;03 - 01;49;07;28
Walker Davis
Yeah. I can't stand the beach.
01;49;08;04 - 01;49;11;08
Dr. Hunter Biram
Really can't stay on the beach.
01;49;11;10 - 01;49;21;24
Walker Davis
Mackenzie, she could do a day or two of it, but I can do about three hours. And after that... I like a pool fine. I think it's a sand thing more than anything else. I'm not a big fan.
01;49;22;01 - 01;49;40;06
Dr. Hunter Biram
Yeah, you know what? That's fair. Sand does get everywhere. If you're not careful. Because, like in most of these, like, beach club resorts, they've got places to rinse off your feet and stuff. But, I mean, even then. Right? Like, there's even gonna be a little bit that's going to trickle into your, suitcase coming home. So it's going to end up bringing some sand home.
01;49;40;06 - 01;50;08;03
Dr. Hunter Biram
But, Yeah, I think, Riley, he, he, he and his now wife kind of crazy thing about, I think that they got a little sunburn. They went to Cancun, so they went to the beach, and, they got a little too sunburned and, because, I mean... And listen, it's an honest mistake. So, Annie and I, we went to Hawaii a couple of years ago, and I didn't really think much about being closer to the equator, having that more direct sunlight.
01;50;08;03 - 01;50;26;29
Dr. Hunter Biram
But, dude, like, there was a day where, I mean, we both just got torched and we were putting sunscreen on every hour. But I just... I just guess we didn't cover ourselves well enough or didn't have the strongest SPF or what it is, but, yeah. Yeah, you definitely have got to be careful, with the beach and, be careful with those sunburns.
01;50;27;01 - 01;50;35;03
Walker Davis
I get burnt real bad, and I'm real pasty, just naturally. It's, just I try to stay covered up the best I can 100%.
01;50;35;03 - 01;50;53;03
Dr. Hunter Biram
Well, I'm with you. Well, let's go and dive in. Good morning. Good morning, and welcome to another episode of Morning Coffee Ag Markets. This is, your host for the day, Dr. Hunter Biram, and with me in the studio remotely, I've got Mr. Walker Davis. And, Walker. If I can, I'm going to claim you as one of my grad students.
01;50;53;08 - 01;51;12;07
Dr. Hunter Biram
I think that you've got some fantastic work. And, with, the pasture, rangeland, forage, rainfall index insurance, and, that's what we're going to talk about today, because, although we're going to release this at a later date, actually, in the week that we're recording this, on Friday, you're going to be defending your thesis and you are about to become a master.
01;51;12;10 - 01;51;14;08
Dr. Hunter Biram
How are you feeling about that?
01;51;14;10 - 01;51;32;17
Walker Davis
I feel real good. Real excited. It's been a really fun two years. And what a lot better than I ever could have expected. I wasn’t really too happy to be coming to Fayetteville. I wanted to stay at Arkansas State, but my mentors over there really pushed me, and, I really had fun. And I'm excited for the next chapter, though.
01;51;32;20 - 01;51;47;04
Dr. Hunter Biram
Well, and for those of our listeners who have not listened to the previous podcast, just a quick primer on Walker. Walker's an Arkansas boy through and through from southeast Arkansas. His mom is actually an instructor at the University of Arkansas at Monticello. Went to Hamburg High School?
01;51;47;07 - 01;51;47;29
Walker Davis
Yes, sir.
01;51;48;01 - 01;52;09;02
Dr. Hunter Biram
Correct? And so, and then he went to Arkansas State for his undergraduate in finance on just straight finance. And, went over to the University of Arkansas for his master's and probably going to get a couple papers out of this thesis. I mean, I just read it this week. I think it's fantastic work. And, so without further ado, let's just dive into today's topic, talking about interval selection.
01;52;09;02 - 01;52;23;01
Dr. Hunter Biram
So, Walker, what what makes interval selection under PRF insurance. and again that's pasture rangeland forage, a unique challenge for forage producers? And how does the timing mismatch between rainfall and forage growth contribute to this risk?
01;52;23;03 - 01;52;42;06
Walker Davis
Yeah. Well the first big thing about PRF is it is so different than your traditional crop insurance and how those policies are made and how you're choosing, because you're not necessarily insuring your corn crop from, let's say, hail or prevent plan or whatever. You're choosing what months throughout the year you want to cover, and you can choose what months you care about more.
01;52;42;07 - 01;53;03;26
Walker Davis
You can still cover each month, but care about your intervals because everything in PRF is in dual-month interval. So January-February, February-March, and so on and so forth. So you could actually, if you only care about, let's say, your April through August rainfall and forage, then that's all you have to cover. But if you want to cover year round you can do that.
01;53;03;29 - 01;53;25;11
Walker Davis
So you can choose what percent of your policy, of course, has to add up to 100. But what percent of policy goes in each interval. It can be zero. If it's more than zero, it has to be at least ten, and it can't be more than 60. So you have to choose at least two intervals, but you can choose as many as all 11, or, not all 11, because you can't cover the same thing.
01;53;25;11 - 01;53;48;13
Walker Davis
I think you can choose six, I guess is the most you could actually choose. Because you can't do January-February and February-March, because that double insures February. But so that, that creates a unique challenge because you have to know what time is most important to you. PRF, pasture, rangeland and forages insurance. While it is a forage insurance, it's really not a forage insurance.
01;53;48;13 - 01;54;09;00
Walker Davis
It's a rainfall insurance for forage. And it's more than that. It's a single parallel drought, rainfall insurance, or forage. It is that covering the chance you get too much rain, because of course that can hurt your ground just as much. You got cows out there and got a tearing up, drowning in your forage, but it's when you don't get enough forage or, sorry, enough rainfall.
01;54;09;05 - 01;54;35;16
Walker Davis
And when that affects your forage. So that's a unique challenge, because you have this timing mismatch of... rainfall and forage growth, of course, has a very strong relationship. But it is not an immediate relationship, is one big thing. So if I get rainfall today, I'm not going to get forage growth necessarily today. And I'm definitely not going to get to the full extent of what that rainfall is doing for me immediately.
01;54;35;19 - 01;54;53;07
Dr. Hunter Biram
Yeah. So what's interesting about this particular topic that, that, that we're going to dive deeper into today is just, you know, Walker, you mentioned that you got to get at least two intervals. And these are two month intervals. You have to select those. That has to add up to 100. So, you know, you could do 50/50 on say like a January-February and a March-April.
01;54;53;09 - 01;55;17;08
Dr. Hunter Biram
Right. So you can do like 50% Jan-Feb and then 50% in March-April and boom, you're covered and you're like, all right, well that's like all the first four months of the year. But you know, depending on how, how, how you as a producer would, raise your forage and what the growing season looks like, you know, you might choose a different set of intervals and, I'm not sure that that's going to get ahead of things, but Walker can.
01;55;17;09 - 01;55;28;18
Dr. Hunter Biram
Can you tell me which? Oh, let's say which buckets of intervals, tend to see the most, losses when it comes to triggering that rainfall index?
01;55;28;26 - 01;55;39;02
Walker Davis
No, definitely. And that's actually something that we we've looked into a lot. And it's typically of course, it's funny, the ones that are most expensive, the ones that trigger the most, which.
01;55;39;03 - 01;55;40;07
Dr. Hunter Biram
Absolutely. Of course.
01;55;40;07 - 01;55;58;28
Walker Davis
Intuitively, makes sense because if they're going to be more often to pay out, insurance programs are required to be rated this close, to where your payouts equal, what you pay in over time. So, the ones that are more likely to pay out and pay out more often, more amounts, the ones I know cost a pretty penny more.
01;55;59;02 - 01;56;22;25
Walker Davis
So, interestingly, it's actually the months you wouldn't think really in back forage. A lot of those in the fall beginning of winter months. Your September, October, November, December kind of consistently the ones that are the most variable, the most expensive ones to enroll in, as well as some of the most common policies that have been doing it.
01;56;22;25 - 01;56;36;23
Walker Davis
So that kind of raises the question, are producers using it as a straight up risk protection? Or are they risk protection, also, “Hey, let's see if we can luck out and hit the lottery” quote unquote this this year.
01;56;36;25 - 01;56;53;29
Dr. Hunter Biram
Yeah. You know, I like roulette, Walker. I'm not sure if you've ever been to a casino, but I do like roulette. And everyone says, Hunter, you're an economist and you're a risk management specialist, why do you do roulette, you know, the worst odds in the world? But I just like spreading out my chips on the board. And, you know, that's kind of how I view PRF, is like, you know, how do you want to spread out your chips?
01;56;53;29 - 01;57;23;24
Dr. Hunter Biram
How do you want to spread out that hundred percent on these two month intervals? And, and one thing that you've done a lot of study into is looking at when, is looking at basis for specifically and how maybe it'll rain, but you might get a payment that triggers, just because, just based on how that rainfall index is measured, based on where the weather stations are placed, or maybe, it doesn't rain, but because it might have rain closer to that weather station, you're not going to get a payment.
01;57;23;27 - 01;57;29;23
Dr. Hunter Biram
And so, can you talk about a couple concepts that you've introduced, in your, in your thesis in particular?
01;57;29;26 - 01;57;55;21
Walker Davis
Yeah. No, for sure. The basis risk, of course, and, this terminology. Interestingly, the PRF has a lot of different types of things you could classify as basis risk. But this way, it's just your rainfall that you receive is not matching up to your forage necessarily that you receive. And the inconsistencies in payments- overpayment and underpayment. So what we call that is a false negative probability or an FNP.
01;57;55;23 - 01;58;20;07
Walker Davis
And what that is, is you don't get the rainfall that you're supposed to have. However, you are not receiving a payment. So how we measure that is, you're not receiving the forage growth. So everything for PRF is based on a rainfall index. So that looks at rainfall all the way back to 1948 and looks at how that particular interval.
01;58;20;07 - 01;58;51;02
Walker Davis
So let's say January-February for your location, how rainfall January-February of that year compares to the historical average from 2024 to 1948. So, lots of years. And you get assigned a percentage, pretty much. If you got three inches, but historically you get four, then you would have 75 percent. Or your index would be 75. So if that falls below your coverage level, that's how you get your payment triggered.
01;58;51;04 - 01;59;23;14
Walker Davis
So, following that, we went and found the NDVI. So, your vegetation index, and looked at how vegetation in that current interval... So, let's keep January-February, how that compares to your historical average vegetation. So, what's your forage looking like, that interval as compared to the past? In that same couple months. And then we compare our two indexes, our forage index that we made, as well as the rainfall index that PRF uses.
01;59;23;16 - 01;59;42;05
Walker Davis
So we get our false negative probability, is how often our forage index says: hey, you deserve a payment, it's below your selected coverage level as compared to the historical average. But in terms of rainfall, you're above your excuse me, cover level.
01;59;42;07 - 01;59;48;09
Dr. Hunter Biram
And so, and so, at what level is this being measured? Is this at the grid cell level, even with the NDVI, too?
01;59;48;12 - 02;00;15;29
Walker Davis
Yes, it was actually in pixels, and then we averaged it across grid. So NDVI is a very, really big data set, you're getting, very, very small thing like 0.25 by 0.25km, little grid, grids, pretty much little cells inside the grids. And then we averaged all the land inside of each grid. And those grids are 0.25 longitude .25 latitude.
02;00;16;02 - 02;00;38;14
Walker Davis
So, 17 miles by 17 miles, or so as the equator. So, smaller than counties, but sizable enough that if you're at one corner, you are definitely going to at times experience different weather than the other corner. Yeah, but it is a grid based product, so it does the best to average all those chances together. Of course.
02;00;38;17 - 02;00;45;26
Dr. Hunter Biram
Yeah. So, so just to recap, go through false negative probability and false positive probability before we go to the next idea.
02;00;45;26 - 02;01;11;09
Walker Davis
Yeah. So, false negative probability, that is when our forage is telling us: hey, based on the past, you deserve a payment. However, your rainfall index, which is how you're actually paid through PRF, says: actually, you got enough rainfall. Or, your grid, on average, got enough rainfall that you actually do not deserve a trigger. You don't deserve an indemnity.
02;01;11;09 - 02;01;30;25
Walker Davis
Then, false positive probabilities. The opposite. You look at your forage index, and it's like, hey, we're good, you're above your coverage level in terms of how your forage is now, as compared to, in the past, you don't deserve a payment. But in terms of rainfall, you do. So that's producers like that, of course, a lot more. You're going to get your forage you need.
02;01;30;25 - 02;01;47;17
Walker Davis
So you're not going to impact your financial health of your operation. But then you're getting a little, little chunk of change on top, too. So a little pocket money. So, it's interesting to see how both of those happen and how they both occur, which I'm sure we're about to talk about.
02;01;47;24 - 02;02;02;24
Dr. Hunter Biram
Yeah. So then, so then in what ways might a high, you know, false negative probability or false positive probability in the same region create conflicting incentives for producers, and how can this affect long term financial planning or even trust in the program?
02;02;02;26 - 02;02;24;15
Walker Davis
Now that's very, very strongly. So, of course, PRF is year-round product, like it's an annual product. You choose your policy for the year, but it's really an interval by interval product. Each interval is going to have a different premium rate. You're going to get paid out differently based on the interval in which you're enrolled in, based on how much of your policy you put in it.
02;02;24;17 - 02;02;49;22
Walker Davis
So, things happen different in January-February than they do March-April than they do in November-December. So, you are experiencing different things. So they're pretty much individual policies. And each of those individual policies are exposed to basis risk in a different amount. So your January-February is going to have a different FNP, false negative probability, and false positive probabilities.
02;02;49;24 - 02;03;21;14
Walker Davis
And the likelihood of those happening as opposed to other intervals. So how that can create conflicting incentives is a producer would hopefully know what rainfall they really need to ensure to be safe and actually cover their forage. However, PRF is a highly subsidized program. It's not really that expensive. If they're just like, hey, I know the false positive probabilities for these different intervals are higher,
02;03;21;17 - 02;03;44;11
Walker Davis
they could try to play the game, almost, and enroll in those and hope they're getting that extra payment, that extra change in their pocket. Conversely, if they know the FNP, your false negative probability are in really high, in the intervals, that they actually need to insure to properly cover their forage the best, that creates conflicting thoughts.
02;03;44;11 - 02;04;05;06
Walker Davis
I know that I really need March, April, May and June rain. However, if my FNPs for my grid are high at that time, that kind of makes me a little wary. Because, do I really want to take that risk? Is yes, I'm playing the policy right. But am I getting the actual coverage I'm paying for? And that, of course, impacts financial.
02;04;05;06 - 02;04;40;15
Walker Davis
If you're not getting that payment when you really need it. So that FNP strikes, even if you're getting false positive probabilities and you're getting extra money, we're not all going to save that money for a rainy day necessarily. That's, you know, go out for a nice dinner kind of money. So you got your FNP's happen, and then you're just up a creek without a paddle, impacting your financial health as well as your trust in the program, knowing that even though you're playing it right, you're insuring the intervals, that rainfall, you actually need and not trying to play a game with the program that you could still get the butt end of the stick.
02;04;40;18 - 02;04;59;08
Dr. Hunter Biram
Yeah. Walker, this is so interesting to me because, you know, I think one, I think someone listening could be like, wait a minute. Like it's just a lottery game, you know, 100% roulette, Walker’s saying lottery. And so, like, is even mitigating risk. But you know, this is just the best we can do right now. And I want to and I want to introduce a new way to reframe this.
02;04;59;11 - 02;05;24;04
Dr. Hunter Biram
You know, yes, maybe there are some false negatives in those intervals that we really do need to insure. Like those are the key growing seasons for, for forage, the key growing months for forage. But I think if the farmer knows the false negatives and the false positives, one way that I think about this is let's just take, let's just leverage that false positive, because it should be protecting me where the false negatives are high.
02;05;24;04 - 02;05;42;16
Dr. Hunter Biram
But they're not, if that makes sense. Like it's just kind of like we're swapping the intervals to still get the coverage that we need. It's not so much like just maximizing the program. I think it's just you want to get the risk protection that you need. And if, you know, you're faced with a high false negative because I well, shoot it didn’t rain, and I'm not getting any protection,
02;05;42;16 - 02;06;03;06
Dr. Hunter Biram
but you know there's another interval that has a high false positive. It's like, well, I know that I'm growing in you know, I know I'm growing mostly in this, you know, July-August window, but it has a high false negative. So I'm going to leverage maybe a, a March-April instead, just to kind of put it in the place just to be able to measure my risk appropriately.
02;06;03;06 - 02;06;05;18
Dr. Hunter Biram
Is that a fair way to think about this?
02;06;05;21 - 02;06;29;12
Walker Davis
Absolutely. And part of my thesis, I have a paper that we've already got accepted, it's coming out in the next month or two, and that's looking at how, is PRF profitable outside of the states that it's majorly consumed? Outside of the West? You have your big cattle and you have your Utah, your Arizona, your Texas, of course, Nevada, your Dakotas, Montana, Wyoming.
02;06;29;14 - 02;06;57;08
Walker Davis
That livestock is a lot different than Arkansas’, of course, or anywhere in the southeast. We got better dirt. We're growing crops. We can make more money off a per acre growing corn than you can cows here. However, so there's not that much, use of it. And historically, in the little time PRF's been out, it started in 2012 as a pilot program in Arkansas, but it came out nationwide in 2016, and it has not performed the best financially in terms of loss ratios.
02;06;57;08 - 02;07;19;26
Walker Davis
Because you’re paying in a lot more than you’re paid out, on average. So we wanted to look, is it that producers aren't making their policies right? Or are they trying it, not getting paid, and then quitting? Or is there something deeper happening? So how we did that is, we made different selection strategies. One of them, we called basis risk leveraging, which is kind of what you're talking about.
02;07;19;28 - 02;07;44;11
Walker Davis
Our goal with that one was to minimize our FNPs, so false negative probabilities, while maximizing our false positive probabilities. Same thing you're talking about. You choose your interval with the lowest FNP., maybe you put half your policy in there and then you choose half the policy for the one with the highest FPP. Or you really choose the second best interval with the lowest FNP.
02;07;44;11 - 02;08;05;24
Walker Davis
But it also has a pretty good, pretty high FPP and it plays a game. It was just using, linear programing, you’re minimizing one or maximizing the other, trying to have the least - minimax is what it was called. And you're trying to minimize your maximum deviation from the optimum of both.
02;08;05;27 - 02;08;06;26
Dr. Hunter Biram
That's your prediction.
02;08;06;28 - 02;08;32;16
Walker Davis
It was really cool to see how all that played out. It turns out it is profitable in Arkansas on average across the wettest median in the driest counties over the last 30 years, average across the years. And the program, all strategies were more profitable than not insuring in the program at a unsubsidized rate. So once you throw in that 51% subsidy, very much so recommend looking into the product
02;08;32;19 - 02;08;33;28
Walker Davis
is kind of what we found.
02;08;34;01 - 02;08;52;08
Dr. Hunter Biram
Well, that is super interesting. And so Walker, then, as we wrap up today, you know, what are well, what's advice that you would give to a producer? If, if they're looking to insure their, forage production, for their livestock operation, first off.
02;08;52;10 - 02;09;13;13
Walker Davis
Of course, like I said at the beginning, PRF is a forage product, but it's a rainfall product for forage. So you have to realize that. If I really care about my forage in going into August, September, October, if I'm trying to keep that 300 day grazing cycle happening, I'm trying to keep forage on the ground as long as possible. And of course, you need rainfall for that.
02;09;13;15 - 02;09;33;28
Walker Davis
That doesn't necessarily mean you need October rainfall. There's other stuff that builds up to that, of course, and we've done some work on that. And I think we'll have another, little paper out about that here in the coming weeks. This is kind of talking more about figuring out what rainfall is impacting your forage more. And that's the biggest thing.
02;09;33;28 - 02;10;09;16
Walker Davis
What's your rainfall happening. Your past rainfall, how does it compare to now? Some work we're doing now is looking at rainfall trends. Are you increasing in rainfall? Are you decreasing in rainfall? That's a big thing. And of course producers are smart, that's your livelihood, you know what's happening on your land. Just be proactive. Realize your rain. If you're decreasing, at a particular interval over time in rainfall and you’re just noticing that, it wouldn't be a bad idea to insure in that one, it's kind of, because, of course, that index is based off of 1948.
02;10;09;18 - 02;10;25;19
Walker Davis
So if your mean from that time is higher than what your mean would be for the last ten years in rainfall, probably wouldn't be a bad idea to look insuring that interval, especially if that is at a time of rainfall that you actually need.
02;10;25;21 - 02;10;54;17
Dr. Hunter Biram
That is so interesting, Walker. And I know that that's in your thesis. And, you know, whenever I think about this, it's it's really downside risk. It's downside rainfall risk is what you're talking about. And, you know, in places, we'll say, in counties, generally, where there is significant downside risk just because that rainfall so high historically. Absolutely. Like in that two month interval, like go all in. To me, I think about it from the, you know, it's very similar on the row crops side of things.
02;10;54;20 - 02;11;12;20
Dr. Hunter Biram
If you have a really high APH, you've got high downside risk. Like an APH yield. If you have a really high, you know, corn yield, if you had like, like a 250 bushel an acre average corn yield, you've got a pretty high downside risk because that's a pretty high yield. Same thing on price. You know, we're in we're in a very low price environment in the commodities, as I'm sure you're well aware of.
02;11;12;20 - 02;11;29;19
Dr. Hunter Biram
And you know, if we, you know, if if only we knew that the, the prices we're going to get this low. Whenever we saw those $15 beans, I mean, even $15 beans, that's just so high compared to history. And so it's like we know there's significant downside risk there. And so I think that's a great point to make, Walker.
02;11;29;19 - 02;11;47;15
Dr. Hunter Biram
Like, if you know that you've had a lot of rain historically, but you've been noticing the past few years, you haven't gotten as much rain, that's probably a good sign that, or a good indicator, that you probably have a high rainfall guarantee and a significant downside risk to be able to protect against that risk. And so with that, Walker, we are out of time.
02;11;47;19 - 02;11;50;10
Dr. Hunter Biram
But I sure appreciate your time. Appreciate you being here today.
02;11;50;12 - 02;12;01;15
Walker Davis
No, I appreciate you having me. It's a lot of fun getting to talk about this stuff, because this has been my life for the past two years. So I enjoy talking about it and hopefully it can help somebody understand it a little better.
02;12;01;18 - 02;12;05;24
Dr. Hunter Biram
Well, that's always the goal. Appreciate your time and stay tuned for the market report. Thanks, guys.
02;12;05;26 - 02;12;27;20
Speaker 3
All right guys. Back with your market report. September 25 corn current price is at $4.30 per bushel. Month ago’s price is at $4.42 per bushel. That's down $0.12. And a year ago’s price is at $4.72 per bushel. That's down $0.42. September 25 rice, current price is at $13.63 per 100 weight. A month ago’s price is at $13.04 per 100 weight, that's up $0.59.
02;12;27;23 - 02;12;54;10
Speaker 3
And a year ago’s price is at $15.56 per 100 weight, excuse me. That's down $1.93. November 25 soybeans current price is at $10.38 per bushel. Month ago’s price is at $10.35 per bushel. That's up $0.03 and a year ago’s price is at $12.11 per bushel. That's down $1.73. July 25 wheat current price is at $5.30 per bushel, a month ago’s price is at $5.31 per bushel.
02;12;54;10 - 02;13;17;21
Speaker 3
That's down $0.01, and a year ago’s price is at $7 per bushel. That's down $1.70. December 25 cotton current price is at $0.68 per pound. A month ago’s price is at $0.69 per pound. That's down $0.01, and a year ago’s price is at $0.79 per pound. That's down $0.11. And your weekly U.S. average for peanuts. Current prices at $466 per ton , a month ago’s price is at $496 per ton.
02;13;17;21 - 02;13;47;16
Speaker 3
That's down $30 in a year. Gas prices at $528 per ton. That's down $62. And that that is your weekly commodity futures this week. Your fertilizer prices this week. Urea $677.50 per ton. Ammonium nitrate is at $547.50 per ton. Ammonium sulfate is at $556 per ton. DAP is at $791 per ton, triple super phosphate is at $656 per ton. Potash is $457.50 per ton.
02;13;47;16 - 02;14;11;02
Speaker 3
Ag lime is $45 per ton. Pellet lime this week's $240 per ton. Your diesel prices this week. Off road diesel is $2.39 per gallon. Highway diesel $3.20 per gallon. And your Mississippi River level at Memphis, Tennessee, this week. Current levels at 17.6ft and a year ago’s at 20.23ft. Want to thank y'all guys again for tuning in to another episode of Morning Coffee and Ag Markets.
02;14;11;04 - 02;14;34;02
Speaker 3
This will be my last market report and last episode to join. It's truly been quite an honor and, quite the journey, moving on to greener pastures. But I've, truly enjoyed doing this and, starting this for these guys. And I know the team is going to carry it on further. So until next time, we'll catch y’all on the flip flop.
02;14;34;07 - 02;14;56;21
Speaker 3
Bye bye. Now.
02;14;56;21 - 02;15;19;16
Dr. Hunter Biram
So, Walker, we just, you know, Riley just got married, and he just had his honeymoon. There's just something in the water, because you're about to get married, and you're about to have your honeymoon.
02;15;19;19 - 02;15;25;26
Walker Davis
Yes, sir. Yes, sir. Memorial Day wedding and then the honeymoon phase.
02;15;26;01 - 02;15;29;16
Dr. Hunter Biram
But that's quite a thing to memorialize, I would say.
02;15;29;19 - 02;15;32;18
Walker Davis
Oh, yeah. Well, we get a permanent holiday for our anniversary.
02;15;32;25 - 02;15;35;27
Dr. Hunter Biram
I mean, it was made for y’all, it was made for y'all.
02;15;35;29 - 02;15;45;02
Walker Davis
Yeah. And so they remember., and us, along with the veterans, of course. We’re gonna walk out with sparklers and mini American flags for everybody.
02;15;45;03 - 02;15;52;08
Dr. Hunter Biram
As you should. As you should., the American way. Oh, yeah, the American way. I love that. So, where are you guys going to honeymoon at?
02;15;52;10 - 02;15;55;24
Walker Davis
We're going out to Bozeman, Montana, and then doing Yellowstone.
02;15;55;26 - 02;16;02;18
Dr. Hunter Biram
Oh, wow. That's going to be wonderful. That's going to be beautiful. So are you. Are you guys both? Would you call yourselves mountain people? More so than beach people?
02;16;02;18 - 02;16;04;13
Walker Davis
Yeah. I can't stand the beach.
02;16;04;19 - 02;16;07;23
Dr. Hunter Biram
Really can't stay on the beach.
02;16;07;25 - 02;16;18;09
Walker Davis
Mackenzie, she could do a day or two of it, but I can do about three hours. And after that... I like a pool fine. I think it's a sand thing more than anything else. I'm not a big fan.
02;16;18;16 - 02;16;36;21
Dr. Hunter Biram
Yeah, you know what? That's fair. Sand does get everywhere. If you're not careful. Because, like in most of these, like, beach club resorts, they've got places to rinse off your feet and stuff. But, I mean, even then. Right? Like, there's even gonna be a little bit that's going to trickle into your, suitcase coming home. So it's going to end up bringing some sand home.
02;16;36;21 - 02;17;04;20
Dr. Hunter Biram
But, Yeah, I think, Riley, he, he, he and his now wife kind of crazy thing about, I think that they got a little sunburn. They went to Cancun, so they went to the beach, and, they got a little too sunburned and, because, I mean... And listen, it's an honest mistake. So, Annie and I, we went to Hawaii a couple of years ago, and I didn't really think much about being closer to the equator, having that more direct sunlight.
02;17;04;20 - 02;17;23;16
Dr. Hunter Biram
But, dude, like, there was a day where, I mean, we both just got torched and we were putting sunscreen on every hour. But I just... I just guess we didn't cover ourselves well enough or didn't have the strongest SPF or what it is, but, yeah. Yeah, you definitely have got to be careful, with the beach and, be careful with those sunburns.
02;17;23;18 - 02;17;31;20
Walker Davis
I get burnt real bad, and I'm real pasty, just naturally. It's, just I try to stay covered up the best I can 100%.
02;17;31;20 - 02;17;49;20
Dr. Hunter Biram
Well, I'm with you. Well, let's go and dive in. Good morning. Good morning, and welcome to another episode of Morning Coffee Ag Markets. This is, your host for the day, Dr. Hunter Biram, and with me in the studio remotely, I've got Mr. Walker Davis. And, Walker. If I can, I'm going to claim you as one of my grad students.
02;17;49;25 - 02;18;08;24
Dr. Hunter Biram
I think that you've got some fantastic work. And, with, the pasture, rangeland, forage, rainfall index insurance, and, that's what we're going to talk about today, because, although we're going to release this at a later date, actually, in the week that we're recording this, on Friday, you're going to be defending your thesis and you are about to become a master.
02;18;08;27 - 02;18;10;25
Dr. Hunter Biram
How are you feeling about that?
02;18;10;27 - 02;18;29;04
Walker Davis
I feel real good. Real excited. It's been a really fun two years. And what a lot better than I ever could have expected. I wasn’t really too happy to be coming to Fayetteville. I wanted to stay at Arkansas State, but my mentors over there really pushed me, and, I really had fun. And I'm excited for the next chapter, though.
02;18;29;07 - 02;18;43;21
Dr. Hunter Biram
Well, and for those of our listeners who have not listened to the previous podcast, just a quick primer on Walker. Walker's an Arkansas boy through and through from southeast Arkansas. His mom is actually an instructor at the University of Arkansas at Monticello. Went to Hamburg High School?
02;18;43;24 - 02;18;44;16
Walker Davis
Yes, sir.
02;18;44;18 - 02;19;05;19
Dr. Hunter Biram
Correct? And so, and then he went to Arkansas State for his undergraduate in finance on just straight finance. And, went over to the University of Arkansas for his master's and probably going to get a couple papers out of this thesis. I mean, I just read it this week. I think it's fantastic work. And, so without further ado, let's just dive into today's topic, talking about interval selection.
02;19;05;19 - 02;19;19;18
Dr. Hunter Biram
So, Walker, what what makes interval selection under PRF insurance. and again that's pasture rangeland forage, a unique challenge for forage producers? And how does the timing mismatch between rainfall and forage growth contribute to this risk?
02;19;19;20 - 02;19;38;23
Walker Davis
Yeah. Well the first big thing about PRF is it is so different than your traditional crop insurance and how those policies are made and how you're choosing, because you're not necessarily insuring your corn crop from, let's say, hail or prevent plan or whatever. You're choosing what months throughout the year you want to cover, and you can choose what months you care about more.
02;19;38;24 - 02;20;00;11
Walker Davis
You can still cover each month, but care about your intervals because everything in PRF is in dual-month interval. So January-February, February-March, and so on and so forth. So you could actually, if you only care about, let's say, your April through August rainfall and forage, then that's all you have to cover. But if you want to cover year round you can do that.
02;20;00;14 - 02;20;21;26
Walker Davis
So you can choose what percent of your policy, of course, has to add up to 100. But what percent of policy goes in each interval. It can be zero. If it's more than zero, it has to be at least ten, and it can't be more than 60. So you have to choose at least two intervals, but you can choose as many as all 11, or, not all 11, because you can't cover the same thing.
02;20;21;26 - 02;20;44;28
Walker Davis
I think you can choose six, I guess is the most you could actually choose. Because you can't do January-February and February-March, because that double insures February. But so that, that creates a unique challenge because you have to know what time is most important to you. PRF, pasture, rangeland and forages insurance. While it is a forage insurance, it's really not a forage insurance.
02;20;44;28 - 02;21;05;15
Walker Davis
It's a rainfall insurance for forage. And it's more than that. It's a single parallel drought, rainfall insurance, or forage. It is that covering the chance you get too much rain, because of course that can hurt your ground just as much. You got cows out there and got a tearing up, drowning in your forage, but it's when you don't get enough forage or, sorry, enough rainfall.
02;21;05;20 - 02;21;32;01
Walker Davis
And when that affects your forage. So that's a unique challenge, because you have this timing mismatch of... rainfall and forage growth, of course, has a very strong relationship. But it is not an immediate relationship, is one big thing. So if I get rainfall today, I'm not going to get forage growth necessarily today. And I'm definitely not going to get to the full extent of what that rainfall is doing for me immediately.
02;21;32;04 - 02;21;49;22
Dr. Hunter Biram
Yeah. So what's interesting about this particular topic that, that, that we're going to dive deeper into today is just, you know, Walker, you mentioned that you got to get at least two intervals. And these are two month intervals. You have to select those. That has to add up to 100. So, you know, you could do 50/50 on say like a January-February and a March-April.
02;21;49;24 - 02;22;13;23
Dr. Hunter Biram
Right. So you can do like 50% Jan-Feb and then 50% in March-April and boom, you're covered and you're like, all right, well that's like all the first four months of the year. But you know, depending on how, how, how you as a producer would, raise your forage and what the growing season looks like, you know, you might choose a different set of intervals and, I'm not sure that that's going to get ahead of things, but Walker can.
02;22;13;24 - 02;22;25;03
Dr. Hunter Biram
Can you tell me which? Oh, let's say which buckets of intervals, tend to see the most, losses when it comes to triggering that rainfall index?
02;22;25;11 - 02;22;35;17
Walker Davis
No, definitely. And that's actually something that we we've looked into a lot. And it's typically of course, it's funny, the ones that are most expensive, the ones that trigger the most, which.
02;22;35;18 - 02;22;36;22
Dr. Hunter Biram
Absolutely. Of course.
02;22;36;22 - 02;22;55;13
Walker Davis
Intuitively, makes sense because if they're going to be more often to pay out, insurance programs are required to be rated this close, to where your payouts equal, what you pay in over time. So, the ones that are more likely to pay out and pay out more often, more amounts, the ones I know cost a pretty penny more.
02;22;55;17 - 02;23;19;10
Walker Davis
So, interestingly, it's actually the months you wouldn't think really in back forage. A lot of those in the fall beginning of winter months. Your September, October, November, December kind of consistently the ones that are the most variable, the most expensive ones to enroll in, as well as some of the most common policies that have been doing it.
02;23;19;10 - 02;23;33;08
Walker Davis
So that kind of raises the question, are producers using it as a straight up risk protection? Or are they risk protection, also, “Hey, let's see if we can luck out and hit the lottery” quote unquote this this year.
02;23;33;10 - 02;23;50;14
Dr. Hunter Biram
Yeah. You know, I like roulette, Walker. I'm not sure if you've ever been to a casino, but I do like roulette. And everyone says, Hunter, you're an economist and you're a risk management specialist, why do you do roulette, you know, the worst odds in the world? But I just like spreading out my chips on the board. And, you know, that's kind of how I view PRF, is like, you know, how do you want to spread out your chips?
02;23;50;14 - 02;24;20;09
Dr. Hunter Biram
How do you want to spread out that hundred percent on these two month intervals? And, and one thing that you've done a lot of study into is looking at when, is looking at basis for specifically and how maybe it'll rain, but you might get a payment that triggers, just because, just based on how that rainfall index is measured, based on where the weather stations are placed, or maybe, it doesn't rain, but because it might have rain closer to that weather station, you're not going to get a payment.
02;24;20;12 - 02;24;26;08
Dr. Hunter Biram
And so, can you talk about a couple concepts that you've introduced, in your, in your thesis in particular?
02;24;26;11 - 02;24;52;06
Walker Davis
Yeah. No, for sure. The basis risk, of course, and, this terminology. Interestingly, the PRF has a lot of different types of things you could classify as basis risk. But this way, it's just your rainfall that you receive is not matching up to your forage necessarily that you receive. And the inconsistencies in payments- overpayment and underpayment. So what we call that is a false negative probability or an FNP.
02;24;52;08 - 02;25;16;22
Walker Davis
And what that is, is you don't get the rainfall that you're supposed to have. However, you are not receiving a payment. So how we measure that is, you're not receiving the forage growth. So everything for PRF is based on a rainfall index. So that looks at rainfall all the way back to 1948 and looks at how that particular interval.
02;25;16;22 - 02;25;47;17
Walker Davis
So let's say January-February for your location, how rainfall January-February of that year compares to the historical average from 2024 to 1948. So, lots of years. And you get assigned a percentage, pretty much. If you got three inches, but historically you get four, then you would have 75 percent. Or your index would be 75. So if that falls below your coverage level, that's how you get your payment triggered.
02;25;47;19 - 02;26;19;29
Walker Davis
So, following that, we went and found the NDVI. So, your vegetation index, and looked at how vegetation in that current interval... So, let's keep January-February, how that compares to your historical average vegetation. So, what's your forage looking like, that interval as compared to the past? In that same couple months. And then we compare our two indexes, our forage index that we made, as well as the rainfall index that PRF uses.
02;26;20;01 - 02;26;38;20
Walker Davis
So we get our false negative probability, is how often our forage index says: hey, you deserve a payment, it's below your selected coverage level as compared to the historical average. But in terms of rainfall, you're above your excuse me, cover level.
02;26;38;22 - 02;26;44;24
Dr. Hunter Biram
And so, and so, at what level is this being measured? Is this at the grid cell level, even with the NDVI, too?
02;26;44;27 - 02;27;12;16
Walker Davis
Yes, it was actually in pixels, and then we averaged it across grid. So NDVI is a very, really big data set, you're getting, very, very small thing like 0.25 by 0.25km, little grid, grids, pretty much little cells inside the grids. And then we averaged all the land inside of each grid. And those grids are 0.25 longitude .25 latitude.
02;27;12;19 - 02;27;35;01
Walker Davis
So, 17 miles by 17 miles, or so as the equator. So, smaller than counties, but sizable enough that if you're at one corner, you are definitely going to at times experience different weather than the other corner. Yeah, but it is a grid based product, so it does the best to average all those chances together. Of course.
02;27;35;04 - 02;27;42;13
Dr. Hunter Biram
Yeah. So, so just to recap, go through false negative probability and false positive probability before we go to the next idea.
02;27;42;13 - 02;28;07;26
Walker Davis
Yeah. So, false negative probability, that is when our forage is telling us: hey, based on the past, you deserve a payment. However, your rainfall index, which is how you're actually paid through PRF, says: actually, you got enough rainfall. Or, your grid, on average, got enough rainfall that you actually do not deserve a trigger. You don't deserve an indemnity.
02;28;07;26 - 02;28;27;12
Walker Davis
Then, false positive probabilities. The opposite. You look at your forage index, and it's like, hey, we're good, you're above your coverage level in terms of how your forage is now, as compared to, in the past, you don't deserve a payment. But in terms of rainfall, you do. So that's producers like that, of course, a lot more. You're going to get your forage you need.
02;28;27;12 - 02;28;44;04
Walker Davis
So you're not going to impact your financial health of your operation. But then you're getting a little, little chunk of change on top, too. So a little pocket money. So, it's interesting to see how both of those happen and how they both occur, which I'm sure we're about to talk about.
02;28;44;11 - 02;28;59;09
Dr. Hunter Biram
Yeah. So then, so then in what ways might a high, you know, false negative probability or false positive probability in the same region create conflicting incentives for producers, and how can this affect long term financial planning or even trust in the program?
02;28;59;11 - 02;29;21;02
Walker Davis
Now that's very, very strongly. So, of course, PRF is year-round product, like it's an annual product. You choose your policy for the year, but it's really an interval by interval product. Each interval is going to have a different premium rate. You're going to get paid out differently based on the interval in which you're enrolled in, based on how much of your policy you put in it.
02;29;21;04 - 02;29;46;09
Walker Davis
So, things happen different in January-February than they do March-April than they do in November-December. So, you are experiencing different things. So they're pretty much individual policies. And each of those individual policies are exposed to basis risk in a different amount. So your January-February is going to have a different FNP, false negative probability, and false positive probabilities.
02;29;46;11 - 02;30;17;29
Walker Davis
And the likelihood of those happening as opposed to other intervals. So how that can create conflicting incentives is a producer would hopefully know what rainfall they really need to ensure to be safe and actually cover their forage. However, PRF is a highly subsidized program. It's not really that expensive. If they're just like, hey, I know the false positive probabilities for these different intervals are higher,
02;30;18;02 - 02;30;40;26
Walker Davis
they could try to play the game, almost, and enroll in those and hope they're getting that extra payment, that extra change in their pocket. Conversely, if they know the FNP, your false negative probability are in really high, in the intervals, that they actually need to insure to properly cover their forage the best, that creates conflicting thoughts.
02;30;40;26 - 02;31;01;21
Walker Davis
I know that I really need March, April, May and June rain. However, if my FNPs for my grid are high at that time, that kind of makes me a little wary. Because, do I really want to take that risk? Is yes, I'm playing the policy right. But am I getting the actual coverage I'm paying for? And that, of course, impacts financial.
02;31;01;21 - 02;31;37;00
Walker Davis
If you're not getting that payment when you really need it. So that FNP strikes, even if you're getting false positive probabilities and you're getting extra money, we're not all going to save that money for a rainy day necessarily. That's, you know, go out for a nice dinner kind of money. So you got your FNP's happen, and then you're just up a creek without a paddle, impacting your financial health as well as your trust in the program, knowing that even though you're playing it right, you're insuring the intervals, that rainfall, you actually need and not trying to play a game with the program that you could still get the butt end of the stick.
02;31;37;03 - 02;31;55;23
Dr. Hunter Biram
Yeah. Walker, this is so interesting to me because, you know, I think one, I think someone listening could be like, wait a minute. Like it's just a lottery game, you know, 100% roulette, Walker’s saying lottery. And so, like, is even mitigating risk. But you know, this is just the best we can do right now. And I want to and I want to introduce a new way to reframe this.
02;31;55;26 - 02;32;20;19
Dr. Hunter Biram
You know, yes, maybe there are some false negatives in those intervals that we really do need to insure. Like those are the key growing seasons for, for forage, the key growing months for forage. But I think if the farmer knows the false negatives and the false positives, one way that I think about this is let's just take, let's just leverage that false positive, because it should be protecting me where the false negatives are high.
02;32;20;19 - 02;32;39;01
Dr. Hunter Biram
But they're not, if that makes sense. Like it's just kind of like we're swapping the intervals to still get the coverage that we need. It's not so much like just maximizing the program. I think it's just you want to get the risk protection that you need. And if, you know, you're faced with a high false negative because I well, shoot it didn’t rain, and I'm not getting any protection,
02;32;39;01 - 02;32;59;19
Dr. Hunter Biram
but you know there's another interval that has a high false positive. It's like, well, I know that I'm growing in you know, I know I'm growing mostly in this, you know, July-August window, but it has a high false negative. So I'm going to leverage maybe a, a March-April instead, just to kind of put it in the place just to be able to measure my risk appropriately.
02;32;59;19 - 02;33;02;03
Dr. Hunter Biram
Is that a fair way to think about this?
02;33;02;06 - 02;33;25;27
Walker Davis
Absolutely. And part of my thesis, I have a paper that we've already got accepted, it's coming out in the next month or two, and that's looking at how, is PRF profitable outside of the states that it's majorly consumed? Outside of the West? You have your big cattle and you have your Utah, your Arizona, your Texas, of course, Nevada, your Dakotas, Montana, Wyoming.
02;33;25;29 - 02;33;53;23
Walker Davis
That livestock is a lot different than Arkansas’, of course, or anywhere in the southeast. We got better dirt. We're growing crops. We can make more money off a per acre growing corn than you can cows here. However, so there's not that much, use of it. And historically, in the little time PRF's been out, it started in 2012 as a pilot program in Arkansas, but it came out nationwide in 2016, and it has not performed the best financially in terms of loss ratios.
02;33;53;23 - 02;34;16;11
Walker Davis
Because you’re paying in a lot more than you’re paid out, on average. So we wanted to look, is it that producers aren't making their policies right? Or are they trying it, not getting paid, and then quitting? Or is there something deeper happening? So how we did that is, we made different selection strategies. One of them, we called basis risk leveraging, which is kind of what you're talking about.
02;34;16;13 - 02;34;40;26
Walker Davis
Our goal with that one was to minimize our FNPs, so false negative probabilities, while maximizing our false positive probabilities. Same thing you're talking about. You choose your interval with the lowest FNP., maybe you put half your policy in there and then you choose half the policy for the one with the highest FPP. Or you really choose the second best interval with the lowest FNP.
02;34;40;26 - 02;35;02;09
Walker Davis
But it also has a pretty good, pretty high FPP and it plays a game. It was just using, linear programing, you’re minimizing one or maximizing the other, trying to have the least - minimax is what it was called. And you're trying to minimize your maximum deviation from the optimum of both.
02;35;02;12 - 02;35;03;11
Dr. Hunter Biram
That's your prediction.
02;35;03;13 - 02;35;29;01
Walker Davis
It was really cool to see how all that played out. It turns out it is profitable in Arkansas on average across the wettest median in the driest counties over the last 30 years, average across the years. And the program, all strategies were more profitable than not insuring in the program at a unsubsidized rate. So once you throw in that 51% subsidy, very much so recommend looking into the product
02;35;29;04 - 02;35;30;13
Walker Davis
is kind of what we found.
02;35;30;16 - 02;35;48;23
Dr. Hunter Biram
Well, that is super interesting. And so Walker, then, as we wrap up today, you know, what are well, what's advice that you would give to a producer? If, if they're looking to insure their, forage production, for their livestock operation, first off.
02;35;48;25 - 02;36;09;28
Walker Davis
Of course, like I said at the beginning, PRF is a forage product, but it's a rainfall product for forage. So you have to realize that. If I really care about my forage in going into August, September, October, if I'm trying to keep that 300 day grazing cycle happening, I'm trying to keep forage on the ground as long as possible. And of course, you need rainfall for that.
02;36;10;00 - 02;36;30;13
Walker Davis
That doesn't necessarily mean you need October rainfall. There's other stuff that builds up to that, of course, and we've done some work on that. And I think we'll have another, little paper out about that here in the coming weeks. This is kind of talking more about figuring out what rainfall is impacting your forage more. And that's the biggest thing.
02;36;30;13 - 02;37;06;03
Walker Davis
What's your rainfall happening. Your past rainfall, how does it compare to now? Some work we're doing now is looking at rainfall trends. Are you increasing in rainfall? Are you decreasing in rainfall? That's a big thing. And of course producers are smart, that's your livelihood, you know what's happening on your land. Just be proactive. Realize your rain. If you're decreasing, at a particular interval over time in rainfall and you’re just noticing that, it wouldn't be a bad idea to insure in that one, it's kind of, because, of course, that index is based off of 1948.
02;37;06;05 - 02;37;22;06
Walker Davis
So if your mean from that time is higher than what your mean would be for the last ten years in rainfall, probably wouldn't be a bad idea to look insuring that interval, especially if that is at a time of rainfall that you actually need.
02;37;22;08 - 02;37;51;04
Dr. Hunter Biram
That is so interesting, Walker. And I know that that's in your thesis. And, you know, whenever I think about this, it's it's really downside risk. It's downside rainfall risk is what you're talking about. And, you know, in places, we'll say, in counties, generally, where there is significant downside risk just because that rainfall so high historically. Absolutely. Like in that two month interval, like go all in. To me, I think about it from the, you know, it's very similar on the row crops side of things.
02;37;51;07 - 02;38;09;07
Dr. Hunter Biram
If you have a really high APH, you've got high downside risk. Like an APH yield. If you have a really high, you know, corn yield, if you had like, like a 250 bushel an acre average corn yield, you've got a pretty high downside risk because that's a pretty high yield. Same thing on price. You know, we're in we're in a very low price environment in the commodities, as I'm sure you're well aware of.
02;38;09;07 - 02;38;26;06
Dr. Hunter Biram
And you know, if we, you know, if if only we knew that the, the prices we're going to get this low. Whenever we saw those $15 beans, I mean, even $15 beans, that's just so high compared to history. And so it's like we know there's significant downside risk there. And so I think that's a great point to make, Walker.
02;38;26;06 - 02;38;44;02
Dr. Hunter Biram
Like, if you know that you've had a lot of rain historically, but you've been noticing the past few years, you haven't gotten as much rain, that's probably a good sign that, or a good indicator, that you probably have a high rainfall guarantee and a significant downside risk to be able to protect against that risk. And so with that, Walker, we are out of time.
02;38;44;06 - 02;38;46;27
Dr. Hunter Biram
But I sure appreciate your time. Appreciate you being here today.
02;38;46;29 - 02;38;58;00
Walker Davis
No, I appreciate you having me. It's a lot of fun getting to talk about this stuff, because this has been my life for the past two years. So I enjoy talking about it and hopefully it can help somebody understand it a little better.
02;38;58;03 - 02;39;02;11
Dr. Hunter Biram
Well, that's always the goal. Appreciate your time and stay tuned for the market report. Thanks, guys.
02;39;02;13 - 02;39;24;07
Speaker 3
All right guys. Back with your market report. September 25 corn current price is at $4.30 per bushel. Month ago’s price is at $4.42 per bushel. That's down $0.12. And a year ago’s price is at $4.72 per bushel. That's down $0.42. September 25 rice, current price is at $13.63 per 100 weight. A month ago’s price is at $13.04 per 100 weight, that's up $0.59.
02;39;24;10 - 02;39;50;27
Speaker 3
And a year ago’s price is at $15.56 per 100 weight, excuse me. That's down $1.93. November 25 soybeans current price is at $10.38 per bushel. Month ago’s price is at $10.35 per bushel. That's up $0.03 and a year ago’s price is at $12.11 per bushel. That's down $1.73. July 25 wheat current price is at $5.30 per bushel, a month ago’s price is at $5.31 per bushel.
02;39;50;27 - 02;40;14;06
Speaker 3
That's down $0.01, and a year ago’s price is at $7 per bushel. That's down $1.70. December 25 cotton current price is at $0.68 per pound. A month ago’s price is at $0.69 per pound. That's down $0.01, and a year ago’s price is at $0.79 per pound. That's down $0.11. And your weekly U.S. average for peanuts. Current prices at $466 per ton , a month ago’s price is at $496 per ton.
02;40;14;06 - 02;40;44;01
Speaker 3
That's down $30 in a year. Gas prices at $528 per ton. That's down $62. And that that is your weekly commodity futures this week. Your fertilizer prices this week. Urea $677.50 per ton. Ammonium nitrate is at $547.50 per ton. Ammonium sulfate is at $556 per ton. DAP is at $791 per ton, triple super phosphate is at $656 per ton. Potash is $457.50 per ton.
02;40;44;01 - 02;41;07;17
Speaker 3
Ag lime is $45 per ton. Pellet lime this week's $240 per ton. Your diesel prices this week. Off road diesel is $2.39 per gallon. Highway diesel $3.20 per gallon. And your Mississippi River level at Memphis, Tennessee, this week. Current levels at 17.6ft and a year ago’s at 20.23ft. Want to thank y'all guys again for tuning in to another episode of Morning Coffee and Ag Markets.
02;41;07;19 - 02;41;30;17
Speaker 3
This will be my last market report and last episode to join. It's truly been quite an honor and, quite the journey, moving on to greener pastures. But I've, truly enjoyed doing this and, starting this for these guys. And I know the team is going to carry it on further. So until next time, we'll catch y’all on the flip flop.
02;41;30;22 - 02;41;53;06
Speaker 3
Bye bye. Now.
02;41;53;06 - 02;42;16;01
Dr. Hunter Biram
So, Walker, we just, you know, Riley just got married, and he just had his honeymoon. There's just something in the water, because you're about to get married, and you're about to have your honeymoon.
02;42;16;04 - 02;42;22;11
Walker Davis
Yes, sir. Yes, sir. Memorial Day wedding and then the honeymoon phase.
02;42;22;16 - 02;42;26;01
Dr. Hunter Biram
But that's quite a thing to memorialize, I would say.
02;42;26;04 - 02;42;29;03
Walker Davis
Oh, yeah. Well, we get a permanent holiday for our anniversary.
02;42;29;10 - 02;42;32;12
Dr. Hunter Biram
I mean, it was made for y’all, it was made for y'all.
02;42;32;14 - 02;42;41;17
Walker Davis
Yeah. And so they remember., and us, along with the veterans, of course. We’re gonna walk out with sparklers and mini American flags for everybody.
02;42;41;18 - 02;42;48;23
Dr. Hunter Biram
As you should. As you should., the American way. Oh, yeah, the American way. I love that. So, where are you guys going to honeymoon at?
02;42;48;25 - 02;42;52;09
Walker Davis
We're going out to Bozeman, Montana, and then doing Yellowstone.
02;42;52;11 - 02;42;59;01
Dr. Hunter Biram
Oh, wow. That's going to be wonderful. That's going to be beautiful. So are you. Are you guys both? Would you call yourselves mountain people? More so than beach people?
02;42;59;01 - 02;43;00;28
Walker Davis
Yeah. I can't stand the beach.
02;43;01;04 - 02;43;04;08
Dr. Hunter Biram
Really can't stay on the beach.
02;43;04;10 - 02;43;14;24
Walker Davis
Mackenzie, she could do a day or two of it, but I can do about three hours. And after that... I like a pool fine. I think it's a sand thing more than anything else. I'm not a big fan.
02;43;15;01 - 02;43;33;06
Dr. Hunter Biram
Yeah, you know what? That's fair. Sand does get everywhere. If you're not careful. Because, like in most of these, like, beach club resorts, they've got places to rinse off your feet and stuff. But, I mean, even then. Right? Like, there's even gonna be a little bit that's going to trickle into your, suitcase coming home. So it's going to end up bringing some sand home.
02;43;33;06 - 02;44;01;05
Dr. Hunter Biram
But, Yeah, I think, Riley, he, he, he and his now wife kind of crazy thing about, I think that they got a little sunburn. They went to Cancun, so they went to the beach, and, they got a little too sunburned and, because, I mean... And listen, it's an honest mistake. So, Annie and I, we went to Hawaii a couple of years ago, and I didn't really think much about being closer to the equator, having that more direct sunlight.
02;44;01;05 - 02;44;20;01
Dr. Hunter Biram
But, dude, like, there was a day where, I mean, we both just got torched and we were putting sunscreen on every hour. But I just... I just guess we didn't cover ourselves well enough or didn't have the strongest SPF or what it is, but, yeah. Yeah, you definitely have got to be careful, with the beach and, be careful with those sunburns.
02;44;20;03 - 02;44;28;05
Walker Davis
I get burnt real bad, and I'm real pasty, just naturally. It's, just I try to stay covered up the best I can 100%.
02;44;28;05 - 02;44;46;05
Dr. Hunter Biram
Well, I'm with you. Well, let's go and dive in. Good morning. Good morning, and welcome to another episode of Morning Coffee Ag Markets. This is, your host for the day, Dr. Hunter Biram, and with me in the studio remotely, I've got Mr. Walker Davis. And, Walker. If I can, I'm going to claim you as one of my grad students.
02;44;46;10 - 02;45;05;09
Dr. Hunter Biram
I think that you've got some fantastic work. And, with, the pasture, rangeland, forage, rainfall index insurance, and, that's what we're going to talk about today, because, although we're going to release this at a later date, actually, in the week that we're recording this, on Friday, you're going to be defending your thesis and you are about to become a master.
02;45;05;12 - 02;45;07;10
Dr. Hunter Biram
How are you feeling about that?
02;45;07;12 - 02;45;25;19
Walker Davis
I feel real good. Real excited. It's been a really fun two years. And what a lot better than I ever could have expected. I wasn’t really too happy to be coming to Fayetteville. I wanted to stay at Arkansas State, but my mentors over there really pushed me, and, I really had fun. And I'm excited for the next chapter, though.
02;45;25;22 - 02;45;40;06
Dr. Hunter Biram
Well, and for those of our listeners who have not listened to the previous podcast, just a quick primer on Walker. Walker's an Arkansas boy through and through from southeast Arkansas. His mom is actually an instructor at the University of Arkansas at Monticello. Went to Hamburg High School?
02;45;40;09 - 02;45;41;01
Walker Davis
Yes, sir.
02;45;41;03 - 02;46;02;04
Dr. Hunter Biram
Correct? And so, and then he went to Arkansas State for his undergraduate in finance on just straight finance. And, went over to the University of Arkansas for his master's and probably going to get a couple papers out of this thesis. I mean, I just read it this week. I think it's fantastic work. And, so without further ado, let's just dive into today's topic, talking about interval selection.
02;46;02;04 - 02;46;16;03
Dr. Hunter Biram
So, Walker, what what makes interval selection under PRF insurance. and again that's pasture rangeland forage, a unique challenge for forage producers? And how does the timing mismatch between rainfall and forage growth contribute to this risk?
02;46;16;05 - 02;46;35;08
Walker Davis
Yeah. Well the first big thing about PRF is it is so different than your traditional crop insurance and how those policies are made and how you're choosing, because you're not necessarily insuring your corn crop from, let's say, hail or prevent plan or whatever. You're choosing what months throughout the year you want to cover, and you can choose what months you care about more.
02;46;35;09 - 02;46;56;26
Walker Davis
You can still cover each month, but care about your intervals because everything in PRF is in dual-month interval. So January-February, February-March, and so on and so forth. So you could actually, if you only care about, let's say, your April through August rainfall and forage, then that's all you have to cover. But if you want to cover year round you can do that.
02;46;56;29 - 02;47;18;13
Walker Davis
So you can choose what percent of your policy, of course, has to add up to 100. But what percent of policy goes in each interval. It can be zero. If it's more than zero, it has to be at least ten, and it can't be more than 60. So you have to choose at least two intervals, but you can choose as many as all 11, or, not all 11, because you can't cover the same thing.
02;47;18;13 - 02;47;41;15
Walker Davis
I think you can choose six, I guess is the most you could actually choose. Because you can't do January-February and February-March, because that double insures February. But so that, that creates a unique challenge because you have to know what time is most important to you. PRF, pasture, rangeland and forages insurance. While it is a forage insurance, it's really not a forage insurance.
02;47;41;15 - 02;48;02;02
Walker Davis
It's a rainfall insurance for forage. And it's more than that. It's a single parallel drought, rainfall insurance, or forage. It is that covering the chance you get too much rain, because of course that can hurt your ground just as much. You got cows out there and got a tearing up, drowning in your forage, but it's when you don't get enough forage or, sorry, enough rainfall.
02;48;02;07 - 02;48;28;18
Walker Davis
And when that affects your forage. So that's a unique challenge, because you have this timing mismatch of... rainfall and forage growth, of course, has a very strong relationship. But it is not an immediate relationship, is one big thing. So if I get rainfall today, I'm not going to get forage growth necessarily today. And I'm definitely not going to get to the full extent of what that rainfall is doing for me immediately.
02;48;28;21 - 02;48;46;09
Dr. Hunter Biram
Yeah. So what's interesting about this particular topic that, that, that we're going to dive deeper into today is just, you know, Walker, you mentioned that you got to get at least two intervals. And these are two month intervals. You have to select those. That has to add up to 100. So, you know, you could do 50/50 on say like a January-February and a March-April.
02;48;46;11 - 02;49;10;10
Dr. Hunter Biram
Right. So you can do like 50% Jan-Feb and then 50% in March-April and boom, you're covered and you're like, all right, well that's like all the first four months of the year. But you know, depending on how, how, how you as a producer would, raise your forage and what the growing season looks like, you know, you might choose a different set of intervals and, I'm not sure that that's going to get ahead of things, but Walker can.
02;49;10;11 - 02;49;21;20
Dr. Hunter Biram
Can you tell me which? Oh, let's say which buckets of intervals, tend to see the most, losses when it comes to triggering that rainfall index?
02;49;21;28 - 02;49;32;04
Walker Davis
No, definitely. And that's actually something that we we've looked into a lot. And it's typically of course, it's funny, the ones that are most expensive, the ones that trigger the most, which.
02;49;32;05 - 02;49;33;09
Dr. Hunter Biram
Absolutely. Of course.
02;49;33;09 - 02;49;52;00
Walker Davis
Intuitively, makes sense because if they're going to be more often to pay out, insurance programs are required to be rated this close, to where your payouts equal, what you pay in over time. So, the ones that are more likely to pay out and pay out more often, more amounts, the ones I know cost a pretty penny more.
02;49;52;04 - 02;50;15;25
Walker Davis
So, interestingly, it's actually the months you wouldn't think really in back forage. A lot of those in the fall beginning of winter months. Your September, October, November, December kind of consistently the ones that are the most variable, the most expensive ones to enroll in, as well as some of the most common policies that have been doing it.
02;50;15;25 - 02;50;29;23
Walker Davis
So that kind of raises the question, are producers using it as a straight up risk protection? Or are they risk protection, also, “Hey, let's see if we can luck out and hit the lottery” quote unquote this this year.
02;50;29;25 - 02;50;46;29
Dr. Hunter Biram
Yeah. You know, I like roulette, Walker. I'm not sure if you've ever been to a casino, but I do like roulette. And everyone says, Hunter, you're an economist and you're a risk management specialist, why do you do roulette, you know, the worst odds in the world? But I just like spreading out my chips on the board. And, you know, that's kind of how I view PRF, is like, you know, how do you want to spread out your chips?
02;50;46;29 - 02;51;16;24
Dr. Hunter Biram
How do you want to spread out that hundred percent on these two month intervals? And, and one thing that you've done a lot of study into is looking at when, is looking at basis for specifically and how maybe it'll rain, but you might get a payment that triggers, just because, just based on how that rainfall index is measured, based on where the weather stations are placed, or maybe, it doesn't rain, but because it might have rain closer to that weather station, you're not going to get a payment.
02;51;16;27 - 02;51;22;23
Dr. Hunter Biram
And so, can you talk about a couple concepts that you've introduced, in your, in your thesis in particular?
02;51;22;26 - 02;51;48;21
Walker Davis
Yeah. No, for sure. The basis risk, of course, and, this terminology. Interestingly, the PRF has a lot of different types of things you could classify as basis risk. But this way, it's just your rainfall that you receive is not matching up to your forage necessarily that you receive. And the inconsistencies in payments- overpayment and underpayment. So what we call that is a false negative probability or an FNP.
02;51;48;23 - 02;52;13;07
Walker Davis
And what that is, is you don't get the rainfall that you're supposed to have. However, you are not receiving a payment. So how we measure that is, you're not receiving the forage growth. So everything for PRF is based on a rainfall index. So that looks at rainfall all the way back to 1948 and looks at how that particular interval.
02;52;13;07 - 02;52;44;02
Walker Davis
So let's say January-February for your location, how rainfall January-February of that year compares to the historical average from 2024 to 1948. So, lots of years. And you get assigned a percentage, pretty much. If you got three inches, but historically you get four, then you would have 75 percent. Or your index would be 75. So if that falls below your coverage level, that's how you get your payment triggered.
02;52;44;04 - 02;53;16;14
Walker Davis
So, following that, we went and found the NDVI. So, your vegetation index, and looked at how vegetation in that current interval... So, let's keep January-February, how that compares to your historical average vegetation. So, what's your forage looking like, that interval as compared to the past? In that same couple months. And then we compare our two indexes, our forage index that we made, as well as the rainfall index that PRF uses.
02;53;16;16 - 02;53;35;05
Walker Davis
So we get our false negative probability, is how often our forage index says: hey, you deserve a payment, it's below your selected coverage level as compared to the historical average. But in terms of rainfall, you're above your excuse me, cover level.
02;53;35;07 - 02;53;41;09
Dr. Hunter Biram
And so, and so, at what level is this being measured? Is this at the grid cell level, even with the NDVI, too?
02;53;41;12 - 02;54;09;01
Walker Davis
Yes, it was actually in pixels, and then we averaged it across grid. So NDVI is a very, really big data set, you're getting, very, very small thing like 0.25 by 0.25km, little grid, grids, pretty much little cells inside the grids. And then we averaged all the land inside of each grid. And those grids are 0.25 longitude .25 latitude.
02;54;09;04 - 02;54;31;16
Walker Davis
So, 17 miles by 17 miles, or so as the equator. So, smaller than counties, but sizable enough that if you're at one corner, you are definitely going to at times experience different weather than the other corner. Yeah, but it is a grid based product, so it does the best to average all those chances together. Of course.
02;54;31;19 - 02;54;38;28
Dr. Hunter Biram
Yeah. So, so just to recap, go through false negative probability and false positive probability before we go to the next idea.
02;54;38;28 - 02;55;04;11
Walker Davis
Yeah. So, false negative probability, that is when our forage is telling us: hey, based on the past, you deserve a payment. However, your rainfall index, which is how you're actually paid through PRF, says: actually, you got enough rainfall. Or, your grid, on average, got enough rainfall that you actually do not deserve a trigger. You don't deserve an indemnity.
02;55;04;11 - 02;55;23;27
Walker Davis
Then, false positive probabilities. The opposite. You look at your forage index, and it's like, hey, we're good, you're above your coverage level in terms of how your forage is now, as compared to, in the past, you don't deserve a payment. But in terms of rainfall, you do. So that's producers like that, of course, a lot more. You're going to get your forage you need.
02;55;23;27 - 02;55;40;19
Walker Davis
So you're not going to impact your financial health of your operation. But then you're getting a little, little chunk of change on top, too. So a little pocket money. So, it's interesting to see how both of those happen and how they both occur, which I'm sure we're about to talk about.
02;55;40;26 - 02;55;55;24
Dr. Hunter Biram
Yeah. So then, so then in what ways might a high, you know, false negative probability or false positive probability in the same region create conflicting incentives for producers, and how can this affect long term financial planning or even trust in the program?
02;55;55;26 - 02;56;17;17
Walker Davis
Now that's very, very strongly. So, of course, PRF is year-round product, like it's an annual product. You choose your policy for the year, but it's really an interval by interval product. Each interval is going to have a different premium rate. You're going to get paid out differently based on the interval in which you're enrolled in, based on how much of your policy you put in it.
02;56;17;19 - 02;56;42;24
Walker Davis
So, things happen different in January-February than they do March-April than they do in November-December. So, you are experiencing different things. So they're pretty much individual policies. And each of those individual policies are exposed to basis risk in a different amount. So your January-February is going to have a different FNP, false negative probability, and false positive probabilities.
02;56;42;26 - 02;57;14;16
Walker Davis
And the likelihood of those happening as opposed to other intervals. So how that can create conflicting incentives is a producer would hopefully know what rainfall they really need to ensure to be safe and actually cover their forage. However, PRF is a highly subsidized program. It's not really that expensive. If they're just like, hey, I know the false positive probabilities for these different intervals are higher,
02;57;14;19 - 02;57;37;13
Walker Davis
they could try to play the game, almost, and enroll in those and hope they're getting that extra payment, that extra change in their pocket. Conversely, if they know the FNP, your false negative probability are in really high, in the intervals, that they actually need to insure to properly cover their forage the best, that creates conflicting thoughts.
02;57;37;13 - 02;57;58;06
Walker Davis
I know that I really need March, April, May and June rain. However, if my FNPs for my grid are high at that time, that kind of makes me a little wary. Because, do I really want to take that risk? Is yes, I'm playing the policy right. But am I getting the actual coverage I'm paying for? And that, of course, impacts financial.
02;57;58;06 - 02;58;33;17
Walker Davis
If you're not getting that payment when you really need it. So that FNP strikes, even if you're getting false positive probabilities and you're getting extra money, we're not all going to save that money for a rainy day necessarily. That's, you know, go out for a nice dinner kind of money. So you got your FNP's happen, and then you're just up a creek without a paddle, impacting your financial health as well as your trust in the program, knowing that even though you're playing it right, you're insuring the intervals, that rainfall, you actually need and not trying to play a game with the program that you could still get the butt end of the stick.
02;58;33;20 - 02;58;52;10
Dr. Hunter Biram
Yeah. Walker, this is so interesting to me because, you know, I think one, I think someone listening could be like, wait a minute. Like it's just a lottery game, you know, 100% roulette, Walker’s saying lottery. And so, like, is even mitigating risk. But you know, this is just the best we can do right now. And I want to and I want to introduce a new way to reframe this.
02;58;52;13 - 02;59;17;06
Dr. Hunter Biram
You know, yes, maybe there are some false negatives in those intervals that we really do need to insure. Like those are the key growing seasons for, for forage, the key growing months for forage. But I think if the farmer knows the false negatives and the false positives, one way that I think about this is let's just take, let's just leverage that false positive, because it should be protecting me where the false negatives are high.
02;59;17;06 - 02;59;35;18
Dr. Hunter Biram
But they're not, if that makes sense. Like it's just kind of like we're swapping the intervals to still get the coverage that we need. It's not so much like just maximizing the program. I think it's just you want to get the risk protection that you need. And if, you know, you're faced with a high false negative because I well, shoot it didn’t rain, and I'm not getting any protection,
02;59;35;18 - 02;59;56;06
Dr. Hunter Biram
but you know there's another interval that has a high false positive. It's like, well, I know that I'm growing in you know, I know I'm growing mostly in this, you know, July-August window, but it has a high false negative. So I'm going to leverage maybe a, a March-April instead, just to kind of put it in the place just to be able to measure my risk appropriately.
02;59;56;06 - 02;59;58;18
Dr. Hunter Biram
Is that a fair way to think about this?
02;59;58;21 - 03;00;22;12
Walker Davis
Absolutely. And part of my thesis, I have a paper that we've already got accepted, it's coming out in the next month or two, and that's looking at how, is PRF profitable outside of the states that it's majorly consumed? Outside of the West? You have your big cattle and you have your Utah, your Arizona, your Texas, of course, Nevada, your Dakotas, Montana, Wyoming.
03;00;22;14 - 03;00;50;08
Walker Davis
That livestock is a lot different than Arkansas’, of course, or anywhere in the southeast. We got better dirt. We're growing crops. We can make more money off a per acre growing corn than you can cows here. However, so there's not that much, use of it. And historically, in the little time PRF's been out, it started in 2012 as a pilot program in Arkansas, but it came out nationwide in 2016, and it has not performed the best financially in terms of loss ratios.
03;00;50;08 - 03;01;12;26
Walker Davis
Because you’re paying in a lot more than you’re paid out, on average. So we wanted to look, is it that producers aren't making their policies right? Or are they trying it, not getting paid, and then quitting? Or is there something deeper happening? So how we did that is, we made different selection strategies. One of them, we called basis risk leveraging, which is kind of what you're talking about.
03;01;12;28 - 03;01;37;11
Walker Davis
Our goal with that one was to minimize our FNPs, so false negative probabilities, while maximizing our false positive probabilities. Same thing you're talking about. You choose your interval with the lowest FNP., maybe you put half your policy in there and then you choose half the policy for the one with the highest FPP. Or you really choose the second best interval with the lowest FNP.
03;01;37;11 - 03;01;58;22
Walker Davis
But it also has a pretty good, pretty high FPP and it plays a game. It was just using, linear programing, you’re minimizing one or maximizing the other, trying to have the least - minimax is what it was called. And you're trying to minimize your maximum deviation from the optimum of both.
03;01;58;25 - 03;01;59;24
Dr. Hunter Biram
That's your prediction.
03;01;59;26 - 03;02;25;16
Walker Davis
It was really cool to see how all that played out. It turns out it is profitable in Arkansas on average across the wettest median in the driest counties over the last 30 years, average across the years. And the program, all strategies were more profitable than not insuring in the program at a unsubsidized rate. So once you throw in that 51% subsidy, very much so recommend looking into the product
03;02;25;19 - 03;02;26;28
Walker Davis
is kind of what we found.
03;02;27;01 - 03;02;45;08
Dr. Hunter Biram
Well, that is super interesting. And so Walker, then, as we wrap up today, you know, what are well, what's advice that you would give to a producer? If, if they're looking to insure their, forage production, for their livestock operation, first off.
03;02;45;10 - 03;03;06;13
Walker Davis
Of course, like I said at the beginning, PRF is a forage product, but it's a rainfall product for forage. So you have to realize that. If I really care about my forage in going into August, September, October, if I'm trying to keep that 300 day grazing cycle happening, I'm trying to keep forage on the ground as long as possible. And of course, you need rainfall for that.
03;03;06;15 - 03;03;26;28
Walker Davis
That doesn't necessarily mean you need October rainfall. There's other stuff that builds up to that, of course, and we've done some work on that. And I think we'll have another, little paper out about that here in the coming weeks. This is kind of talking more about figuring out what rainfall is impacting your forage more. And that's the biggest thing.
03;03;26;28 - 03;04;02;18
Walker Davis
What's your rainfall happening. Your past rainfall, how does it compare to now? Some work we're doing now is looking at rainfall trends. Are you increasing in rainfall? Are you decreasing in rainfall? That's a big thing. And of course producers are smart, that's your livelihood, you know what's happening on your land. Just be proactive. Realize your rain. If you're decreasing, at a particular interval over time in rainfall and you’re just noticing that, it wouldn't be a bad idea to insure in that one, it's kind of, because, of course, that index is based off of 1948.
03;04;02;20 - 03;04;18;21
Walker Davis
So if your mean from that time is higher than what your mean would be for the last ten years in rainfall, probably wouldn't be a bad idea to look insuring that interval, especially if that is at a time of rainfall that you actually need.
03;04;18;23 - 03;04;47;19
Dr. Hunter Biram
That is so interesting, Walker. And I know that that's in your thesis. And, you know, whenever I think about this, it's it's really downside risk. It's downside rainfall risk is what you're talking about. And, you know, in places, we'll say, in counties, generally, where there is significant downside risk just because that rainfall so high historically. Absolutely. Like in that two month interval, like go all in. To me, I think about it from the, you know, it's very similar on the row crops side of things.
03;04;47;22 - 03;05;05;22
Dr. Hunter Biram
If you have a really high APH, you've got high downside risk. Like an APH yield. If you have a really high, you know, corn yield, if you had like, like a 250 bushel an acre average corn yield, you've got a pretty high downside risk because that's a pretty high yield. Same thing on price. You know, we're in we're in a very low price environment in the commodities, as I'm sure you're well aware of.
03;05;05;22 - 03;05;22;21
Dr. Hunter Biram
And you know, if we, you know, if if only we knew that the, the prices we're going to get this low. Whenever we saw those $15 beans, I mean, even $15 beans, that's just so high compared to history. And so it's like we know there's significant downside risk there. And so I think that's a great point to make, Walker.
03;05;22;21 - 03;05;40;17
Dr. Hunter Biram
Like, if you know that you've had a lot of rain historically, but you've been noticing the past few years, you haven't gotten as much rain, that's probably a good sign that, or a good indicator, that you probably have a high rainfall guarantee and a significant downside risk to be able to protect against that risk. And so with that, Walker, we are out of time.
03;05;40;21 - 03;05;43;12
Dr. Hunter Biram
But I sure appreciate your time. Appreciate you being here today.
03;05;43;14 - 03;05;54;15
Walker Davis
No, I appreciate you having me. It's a lot of fun getting to talk about this stuff, because this has been my life for the past two years. So I enjoy talking about it and hopefully it can help somebody understand it a little better.
03;05;54;18 - 03;05;58;24
Dr. Hunter Biram
Well, that's always the goal. Appreciate your time and stay tuned for the market report. Thanks, guys.
03;05;58;26 - 03;06;20;22
Riley Smith
All right guys. Back with your market report. September 25 corn current price is at $4.30 per bushel. Month ago’s price is at $4.42 per bushel. That's down $0.12. And a year ago’s price is at $4.72 per bushel. That's down $0.42. September 25 rice, current price is at $13.63 per 100 weight. A month ago’s price is at $13.04 per 100 weight, that's up $0.59.
03;06;20;25 - 03;06;47;12
Riley Smith
And a year ago’s price is at $15.56 per 100 weight, excuse me. That's down $1.93. November 25 soybeans current price is at $10.38 per bushel. Month ago’s price is at $10.35 per bushel. That's up $0.03 and a year ago’s price is at $12.11 per bushel. That's down $1.73. July 25 wheat current price is at $5.30 per bushel, a month ago’s price is at $5.31 per bushel.
03;06;47;12 - 03;07;10;23
Riley Smith
That's down $0.01, and a year ago’s price is at $7 per bushel. That's down $1.70. December 25 cotton current price is at $0.68 per pound. A month ago’s price is at $0.69 per pound. That's down $0.01, and a year ago’s price is at $0.79 per pound. That's down $0.11. And your weekly U.S. average for peanuts. Current prices at $466 per ton , a month ago’s price is at $496 per ton.
03;07;10;23 - 03;07;40;18
Riley Smith
That's down $30 in a year. Gas prices at $528 per ton. That's down $62. And that that is your weekly commodity futures this week. Your fertilizer prices this week. Urea $677.50 per ton. Ammonium nitrate is at $547.50 per ton. Ammonium sulfate is at $556 per ton. DAP is at $791 per ton, triple super phosphate is at $656 per ton. Potash is $457.50 per ton.
03;07;40;18 - 03;08;04;04
Riley Smith
Ag lime is $45 per ton. Pellet lime this week's $240 per ton. Your diesel prices this week. Off road diesel is $2.39 per gallon. Highway diesel $3.20 per gallon. And your Mississippi River level at Memphis, Tennessee, this week. Current levels at 17.6ft and a year ago’s at 20.23ft. Want to thank y'all guys again for tuning in to another episode of Morning Coffee and Ag Markets.
03;08;04;06 - 03;08;27;04
Riley Smith
This will be my last market report and last episode to join. It's truly been quite an honor and, quite the journey, moving on to greener pastures. But I've, truly enjoyed doing this and, starting this for these guys. And I know the team is going to carry it on further. So until next time, we'll catch y’all on the flip flop.
03;08;27;09 - 03;08;49;23
Riley Smith
Bye bye, now.