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January 31, 2017

Farm Bureau Working on New Milk Price Insurance

 |  By: Jim Dickrell

A new type of dairy revenue insurance, that would offer regional protection against both milk price and production declines, is being worked on by the American Farm Bureau Federation, American Farm Bureau Insurance Services (AFBIS) and academic collaborators including dairy economist Marin Bozic.

The product, known as Dairy-Revenue Protection (Dairy-RP), protects revenue instead of the milk-feed margin.  It is based on the same concepts as crop insurance, and will be submitted for review to USDA’s Risk Management Agency this spring.

To gauge interest, AFBIS is hosting an on-line survey for dairy farmers. The survey is just 12 questions in length, and takes less than a minute or two to complete. Farmer input will be used to improve the design of the product and for market research. Take the survey here.

“Additionally, Farm Bureau believes livestock insurance funding should be enhanced,” says John Newton, AFBF director of market intelligence. “Livestock insurance funding is currently limited to $20 million per fiscal year despite the $130 billion annual value of the livestock sector.”

As currently designed, Dairy-RP insurance contracts would be quarterly, and could be purchased up to 15 months out. Dairy farmers would have three choices to make:

• A milk price blend between Class III and Class IV

• Number of cows to cover

• Coverage level (up to 90%)

To keep things somewhat simple, production per cow would be based on state-level milk production as reported by USDA. Indemnities would increase if production per cow at the state level decreases during the coverage period, or would decrease if state level production per cow increases during the period. “Indemnities would be paid to the dairy farmer if actual revenue falls below the revenue guarantee,” says Newton.

Dairy-RP premiums would be designed to be actuarially sound pre-subsidy. Based on milk prices from 2008 to 2016 and assuming subsidies similar to those in crop insurance, research by Marin Bozic suggests that the average premiums would be 9¢/cwt three months out, 21¢/cwt six months out, 28¢/cwt nine months out and 36¢/cwt 12 months out.

Bozic’s research shows a variety of hedging strategies with Dairy-RP could provide considerable risk management opportunities. One strategy would have resulted in Dairy-RP indemnities in eight of the 32 three-month quarters since the beginning of 2008, including three quarters in 2009, three quarters in 2015, and twice in 2016. In 2009, those indemnities could have approached $5/cwt; in 2016, about $1/cwt. If a farm had Dairy-RP coverage for the entire eight years, its milk revenue would have averaged $16.67/cwt versus $16.27 without it.

“When the market moves milk prices higher, the availability of a tool like Dairy-RP would provide farmers an opportunity to manage risk and lock-in that higher milk revenue,” says Newton.



The authors of this program imply that rates will be set to be actuarially sound (i.e., in the long run the program would pay for itself). Given that the USDA’s RMA would administer this contract, an important question to answer is whether these premiums would cover the cost of the private insurance providers. Under the LGM-Dairy IOFC insurance program the payment to these providers is about 20% of pre-subsidized premiums. I hope the authors provide more specifics as to the premium rates without subsidies (and with subsidies if that is being considered).

Brian W. Gould
Department of Agricultural and Applied Economics
and University of Wisconsin-Extension
University of Wisconsin-Madison
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