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May 14, 2020

Take Advantage of Current Markets, Lock in DRP Coverage

 |  By: Anna-Lisa Laca

When USDA awarded contracts to dairy processors for the Food for Family box program, milk markets reacted positively and for the past few days have been experiencing a rally. Don’t let this opportunity to enroll in Dairy Revenue Protection (DRP) pass you by, warns Jenny Wackershauser. 

“The market is giving us the opportunities that we need to learn from our mistakes of this spring,” she says. “The market is giving us a second chance on protecting milk.”

The current market rally is similar to our October-November rally which was driven by the purchasing program that was part of the China relief package. 

“We had the perfect storm,” she explains. “We also had a cheese plant in Central America that had to come in and buy U.S. products, and that's what pushed our rally in October-November. As soon as those purchasers were fulfilled, they got the product they needed and left our market, and we saw that crash.”

While current market movement is giving dairy producers hope, the reality is when the companies who have government contracts are fulfilled and leave this market, we could see a fast fall like we did in November, Wackershauser explains.  

For the past few days producers have seen limit moves in milk futures providing profitable levels for DRP contracts. 

“That's the nice part about DRP. Every day the markets open we can buy coverage for months without limit moves,” she says. “That said, today we have limit moves all the way through October. So if that settles we probably won’t have fourth-quarter DRP contracts available tonight.”

Still, you could try tomorrow. Wackershauser advises farmers to start having conversations with their agents now. Also, have in mind what you’re comfortable with spending on DRP coverage. 

“What are you willing to spend if you can protect $16 or $16.50 milk? What are you willing to pay for protecting $15 milk?” she says. 

It’s unclear what the premium will be at this point, because it’s based on volatility. However, Wackershauser says premiums have been in the 50-cent range. 

“Look at it as a net price,” she explains. “If we could lock in $16.46 milk for the fourth quarter tonight, and let's say we were at 50 cents for a cost, your net protected milk (the lowest price where you're going to start seeing money paid back) is at $15.95, essentially.”

Keep in mind, a producer can cover up to 100% of their milk production. So, if you previously covered half, you could use this opportunity to cover the remainder. 

“You don't have to cover all of your milk on any day,” she explains. “So, if they went in and only bought half of their milk previously, you can cover the other half of your milk. As long as all of your policies do not add up to more than you produce in a quarter, you can keep buying coverage.”

The Cold Storage report on May 21 and USDA’s Milk Production report on May 20, will also likely restrict DRP sales, Wackershauser adds.