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August 21, 2018

First Look at Dairy Revenue Protection Premiums

 |  By: Dairy Talk

John Newton, chief economist for the American Farm Bureau Federation, has released the first look at what premiums will look like for Dairy Revenue Protection (RP) insurance. 


Dairy RP is tentatively scheduled to go on sale Oct. 9. Dairy farmers will be able to lock in prices by quarter for the next five future quarters. So the first quarter you could lock prices in would be for Quarter 1 (January through March) 2019. The last quarter you could lock in would be for Quarter 5 (January through March 2020).


It appears now that if farmers select a coverage level of 95% of their production each quarter for a 50% weighting of Class III and Class IV milk, premiums would likely range less than 10¢/cwt for Quarter 1 for a price protection level of $15.05, 20 to 25¢/cwt for Quarter 3 for a price protection level of $15.05 and 35 to 40¢/cwt for Quarter 5 for a price protection level of $15.70. Premiums increase with every quarter the further out you go because of increased risk over time, explains Marin Bozic, a University of Minnesota dairy economist.


Note: If Jersey breeders or farmers with high component milk select milk prices based on component values (with components set at 4.8% butterfat, 3.7% protein and 5.7% other solids), the premiums would be higher than those based on Class III and IV. But they would also be protecting milk prices that are 25 to 35% higher as well.


In either case, the RP premiums are less than put options for a number of reasons, but primarily because they are based on a three-month average of futures prices and because USDA is subsidizing the premiums through the Crop Insurance program.