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