Rainfall insurance is a way for family ranch owners to protect their businesses from drought. A family ranch must have a certain amount of rainfall on a given acreage to produce the type of vegetation that will sustain cattle, as discussed in the video, ‘Rainfall Insurance.’
When too little rain falls, ranchers cannot feed their herds, and they begin selling off animals as food prices increase. If this occurs, the man-made value of the land decreases. Ranchers can purchase a rain insurance plan from a private company or a government agency to avoid this decrease in value.
When buying rainfall insurance, ranchers need to know how much vegetation they will have to grow for enough forage to feed their cattle.
The insurance companies use satellite images to estimate how much vegetation will grow under average rainfall conditions, and they compare the amount of forage available with the number of cattle a rancher can feed.
If the amount of forage falls short, an insurance company will pay a rancher in cash to make up the difference. The insurance companies charge in proportion to how much shortage there is in available grass.
Rainfall insurance protects family ranch owners from drought by compensating them when their natural vegetation does not meet expected production levels. Ranchers can estimate how much vegetation will grow by looking at historical rainfall data, and they purchase insurance in proportion to the expected shortfall.