How much will dairy revenue protection cost? | Michigan Farm News

How much will dairy revenue protection cost?

Category: Livestock

by Dr. John Newton, American Farm Bureau Chief Economist; Farm News Media

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Affordable Dairy Revenue Protection (DRP) insurance, an area-based quarterly revenue insurance product to protect against quarterly declines in revenue from milk sales, is now officially available for purchase by Michigan dairy farmers as of October 9.

While DRP has received a great deal of press explaining how it was developed and how it is designed to operate, one of the few remaining unanswered questions about the product is how much will DRP plans cost?

According to Janna Fritz, Crop Insurance Manager for Farm Bureau Insurance, DRP is unique in its ability to closely match farm-level milk price risk by providing milk pricing options based on either classified milk prices or the value of the components in the milk, i.e., butterfat and protein.

“Recognizing that every farmer in the U.S. is paid a different price for their milk, DRP premium rates for a variety of coverage options based on CME futures and options exists,” Fritz said. “So the premium rates will vary by each individual depending on location and the various levels and options they identify for their specific operation.”

While there is no limit on how much milk can be insured, prices will change daily based on the market, and premiums will change daily based on the individual producer’s insurance declarations and expected risk around milk and dairy commodity prices, according to Fritz

“Early indications are that higher levels of DRP coverage are indeed affordable and could range from 10 cents to 30 cents per hundredweight depending on the quarter insured,” Fritz explained. “When combined with USDA’s improved Margin Protection Program, dairy farmers will have a robust USDA-sponsored safety net.”

Class Pricing Option

According to Dr. John Newton, Chief Economist for the American Farm Bureau, the Class Pricing Option, provides revenue protection based on a combination of Class III and Class IV milk futures prices. The producer can choose the weight on Class III used to establish their price guarantee per hundredweight. The weighting factor ranges from 0 to 100 percent on Class III.

This weighting factor allows DRP to better align with the utilization of milk in a farmer’s marketing area and tailors the risk management coverage to business risk exposure.

“For example, assuming DRP was available for sale as of Oct.5-- based on Oct. 4 futures settlement prices for Class III and Class IV milk, a dairy farmer could choose to protect revenue from $15.19 per hundredweight to $15.80 per hundredweight during the first quarter of 2019,” Newton explains. “For the fourth quarter of 2019, prices are available from $16.11 to $16.32 per hundredweight.”

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Figure 1 identifies the range of class prices available assuming Dairy-RP were available as of October 4.

“The cost of Dairy-RP will vary daily based on the state and policy declarations such as coverage level or class price weighting factor, as well as on the futures market prices and option-implied risk, and finally, the expected yield deviation for state-level or pooled production region milk production per cow,” Newton said.

“In general, premiums under Dairy-RP will be more affordable for lower coverage levels and for more nearby quarters,” Newton advised. “Premiums will get more expensive for deferred insurance policies such as the fourth or fifth nearby quarter because the uncertainty in the market is higher.”

Component Pricing Option

The Component Pricing Option is revenue protection based on the components in the milk, including butterfat, protein and other solids. The producer can select the desired butterfat percentage and protein percentage, according to Newton.

Butterfat options range from 3.5 percent to 5 percent. Protein options range from 3 percent to 4 percent. The other solids percentage is fixed at 5.7 percent. The minimum component levels closely match the Class III milk price that is based on 3.5 percent butterfat, 2.99 percent protein and 5.69 other solids.

By electing the component pricing option, a producer can increase the value of milk insured under the policy to reflect the higher-valued, high-component milk, according to Newton. The January to March average Class III milk price, for example was $15.80 per hundredweight and assumes a minimum 3.5 percent butterfat and 2.99 percent protein.

The minimum component value for this same period would be $15.84 per hundredweight – close to the Class III value – but the maximum component value would be $21.53 per hundredweight. This $5.69 per hundredweight difference in milk value reflects the higher butterfat and protein content, and thus a higher value per hundredweight of the milk produced by the farmer.

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Figure 4 highlights examples of Dairy-RP premium rates for a component pricing option policy based on current market price and risk expectations.

While the premiums presented here are for demonstration purposes only, getting a real-time quote is easy with American Farm Bureau Insurance Services, Inc. Farmer-customers with AFBIS-affiliated Farm Bureau insurance companies will have access to a real-time mobile application dedicated to DRP. The app is available for download on the iTunes store.

Michigan dairy farmers can learn more about DRP options and premium costs by contacting their nearest Farm Bureau Insurance Crop Insurance Specialist to schedule a meeting.

Name: Region: Phone:

  • Ryan Fox West Region 269-313-5566
  • Marc Erffmeyer Southwest Region 269-569-1039
  • Marc Reinhardt Bay-Thumb Region 989-450-4851
  • Nate Gust Southeast Region 517-605-1076
  • Brenda Szach Northern Region 989-329-7290
  • Matt Thelen Central Region 989-640-0570