Putting cows on the front page since 1885.
Putting cows on the front page since 1885.
What is all the hype about on Dairy Revenue Protection or Dairy-RP?
What does this product offer for protection and how does this program work?
Innovation, such as Dairy-RP, is often born through desperate times.
Developed by the American Farm Bureau Federation, the Dairy-RP product enters the dairy industry at a critical point for producers. As we begin the fourth year of a depressed market, we realize that we need to take action to protect our individual farm gate from the fluctuating prices and tighter margins of the past two decades.
While other available programs such as LGM, MPP/DMC, calls and puts remain viable options for some dairy operations, Dairy-RP offers simplicity and a wider range of options, customized to the individual producer regardless of size.
In dairy risk management, one size truly does not fit all. Dairy-RP fills in the gaps by addressing two major issues: production variability and milk price basis. Production per cow varies from farm to farm for various reasons including breed, stage of lactation, feed quality, climate, and most importantly management.
By either pooling your production by state level or region, you are comparing your operation to similar cow production numbers that more accurately effect your farm-gate milk price.
The milk price and component values vary from region to region and are derived from wholesale commodity prices for cheddar, butter, and powder.
The final mailbox price is a combination of these regulated commodities, regional revenue sharing pools, and producer components and quality premiums.
Dairy-RP allows you to customize the value of your milk based off your components or a blend of Class III and Class IV to take out much of the farm-level risk.
How it works
How does Dairy-RP work? Essentially, the producer sets a floor for their milk price with no risk of a ceiling as prices rise. There is a two-part enrollment process – the application and the endorsement.
The application does not attach any coverage or premium responsibility; it simply attaches the producer to an agent for that year. This crucial first step helps dairy producers work with a knowledgeable agent on dairy markets.
Following the application, there are five steps to endorsement.
1. Choose a class or component pricing option for each quarterly endorsement. For a class pricing policy, the producer can choose any combination of Class III and Class IV based off the Chicago Mercantile Exchange milk futures. For a component based policy, the producer chooses the percent butterfat and protein average to cover during that quarter. The values are multiplied by the CME future prices for butterfat, protein and other solids to determine the component value of the milk.
2. Determine how much milk to insure for the quarter. Producers can insure as much or as little of their milk for each quarter.
3. Decide the level of coverage that makes the most sense for the operation. A producer can choose coverage in 5% increments from 70 percent to 95 percent.
4. Identify what quarters you want to insure. Again, you can choose multiple endorsements at multiple times before the sales period closes for that quarter. Figure-1 shows the four quarters that you can insure in and the associated sales closing date. As an example, a producer can choose today to endorse 100,000 pounds for Quarter 3 (July through September) and make another endorsement of 100,000 pounds for the same quarter on June 15. However, on June 16 Quarter 3 is closed.
5. Decide the level of protection with the protection factor. The protection factor simply multiplies, in the event of a claim, your indemnity by the level of protection you choose from 1.0 - 1.5 in .5 increments.
In summary, Dairy-RP is a valuable tool that all dairy producers, regardless of size, should give consideration for 2019 and beyond.
With volatile markets and uncertainty of milk futures, now is the time mitigate your risk and develop a risk management plan that ensures your farm’s profitable future.
AgChoice Farm Credit has a dairy risk management team in place to help you navigate through these challenging times. To speak with one of our dairy team members or for more information, please contact us at (800) 998-5557.
About AgChoice
Farm Credit
AgChoice Farm Credit specializes in financing farms and country properties “to help our Martinsburg customers confidently reach their dreams.”
Editor’s Note: The Morrisons Cove Herald is partnering with AgChoice Farm Credit to provide information about financing and loans in rural areas such as the Cove.
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