By Aaron Gransee
Investors Community Bank
A subsidized, pooled, put option is one way to think of the new Dairy Revenue Protection (DRP) plan of insurance. To put it simply, insureds choose when to insure their milk, how much milk to insure, how to price their milk and whether to add a multiplier to increase any indemnity paid. That’s it.
Sales take place every business day beginning at approximately 4 p.m. and end at 9 a.m. the following day. Coverage is available on a quarterly basis and can be purchased up to five quarters out. That being said, insureds who want to insure milk during the first quarter of 2019 would be insuring January, February and March milk, meaning a three-month pool of milk is insured together, per policy written.
Insureds choose how much milk they want to insure per quarter. There is no minimum amount of milk that can be covered; the maximum amount of milk that can be covered is your farm capacity for the quarter.
Insureds have two pricing options to choose from to establish a revenue guarantee for their milk: Class Pricing Option or Component Pricing Option. Both pricing options use futures prices on the Chicago Mercantile Exchange to establish your guarantee. Class Pricing Option uses the Class III Milk futures contract, the Class IV Milk futures contract or any combination of the two, chosen by the insured, to establish your guaranteed price. Component Pricing Option uses futures prices from the butter contract, cheese contract and dry-whey contract to establish a futures market implied price for your milk.
After the futures contracts settle for the day, the Risk Management Agency (RMA) will publish the expected prices for each quarter on the USDA website. Once those prices are posted, DRP sales will become available for purchase. Insureds have until 9 a.m. the next morning to purchase quarterly coverage and protect the expected prices.
At sign-up, insureds choose a coverage level, essentially buying a percentage of the expected price for the quarter they want to insure. Coverage levels range from 70 percent to 95 percent, in 5 percent increments. If the milk price for your quarter settles in at $17/cwt., and you elect 95 percent coverage, you essentially set your guaranteed trigger price for the quarter at $16.15/cwt. ($17 x .95 = $16.15).
One important caveat to note is the Yield Adjustment Factor (YAF). The idea behind the YAF is to protect producers in the area from declines in area milk yield. At signup, expected milk per cow is determined for your area. Upon expiration of the policy, actual milk per cow is announced for your area. If actual milk per cow is higher upon expiration of the policy than expected milk per cow was at signup, claims will not trigger as quickly. On the contrary, if actual milk per cow is lower than expected milk per cow, claims will trigger quicker.
One final option insureds can elect is called a Protection Factor (PF). The PF acts as a multiplier IF an indemnity is triggered. It is important to note that buying up on the PF will not give insureds a higher trigger price. The PF will only come into play if an indemnity is triggered. If an indemnity is triggered, the PF will increase the indemnity. PFs range from 1.05-1.50, in 5 percent increments.
To determine indemnities, simply wait until the time period you insured has passed. RMA will post the actual futures prices and the actual milk per cow for all quarters on the USDA website. If your actual milk revenue for the quarter falls below your guarantee, you trigger a payment.
Premium billing for DRP policies is also simple and easy. It is not due until after the coverage period is over. DRP is available in all 50 states and it can be purchased through authorized crop insurance agents. Unlike more traditional options, Dairy Revenue Protection gives dairy farmers a new tool to protect their expected revenues, a tool that is subsidized, affordable, and simple.
Aaron Gransee is the ag insurance manager, crop insurance services at Investors Community Bank. He can be reached at firstname.lastname@example.org.