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Revenue Protection in the Dairy Industry: First Quarter Results and Looking Ahead

Josh Newton
Educational Opportunities: 
Young, Beginning Farmers
Home > Education & Events > July 2019 > Revenue Protection in the Dairy Industry: First Quarter Results and Looking Ahead

Dairy Revenue Protection (DRP) is designed to insure dairy farms against unexpected declines in quarterly revenue from milk sales relative to a guaranteed coverage level.  This coverage was first made available to the dairy industry in October of 2018. 

Dairy producers had a short window of opportunity to obtain coverage for Q1 of 2019 (from October 9 - December 15, 2018). During this timeframe, 57 endorsements were booked across Compeer’s territory and 11 of those triggered an indemnity.  Eight of the 11, utilized the Class III Pricing option and three utilized the Component Pricing option.  The average indemnity for the Class III endorsements was $0.66/CWT, with a range of $0.20/CWT to $1.15/CWT. The average indemnity for the Component endorsements was $0.43/CWT, with a range of $0.11/CWT to $1.06/CWT. 

One elective option for dairy farmers to leverage if they see a potential need is the protection factor. The protection factor is an election on each DRP endorsement that ranges from 1.0 to 1.5.  Higher protection factors increase the size of the loss payment accordingly, should the policy trigger an indemnity.  Fifty-two percent utilization of the 1.5 protection factor helped increase the size of some indemnity payments. 
The yield adjustment factor, which compares the expected milk production per cow vs. the actual milk production per cow in the state of Wisconsin, did not have an effect on the indemnities triggered, as that value came in at 1.0.  It’s important to note that when actual milk production per cow is greater than the expected milk production per cow, indemnities can decrease and when the actual is less than the expected indemnities can increase. 
Looking ahead
As we look ahead to the remainder of 2019, we currently have contracts trading at or near contract highs. The opportunity exists to set our DRP guarantee at 95% of those contract highs.  The premiums associated with these contracts should be attractive since the time between now and contract expiration is short. The guarantees currently available, coupled with the strengthening basis some producers have seen, should put dairy operations near break-even or better. 
When we start looking out at Q1 2020 Class III prices, we immediately notice that the prices offered aren’t as high as the latter half of 2019.  When I put this article together the average Class III price for this time period was $16.30/CWT.  A 95% Dairy RP endorsement would obtain a guarantee of approximately $15.49/CWT.  While the guarantee is currently less than the latter half of 2019, we must take into consideration the seasonality of milk prices generally seen during Q1.  For reference, the average Class III prices for Q1 2018 and 2019 were $13.87 and $14.30, respectively.  Dairy RP provides an opportunity to eliminate some of this price risk while maintaining upside, should price move upward. 
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