By Cargill Risk Management
Last fall, the U.S. Department of Agriculture’s Risk Management Agency announced a new insurance plan for dairy producers. The new “Dairy Revenue Protection,” program provides insurance on a quarterly basis for the difference between the final revenue guarantee and actual milk revenue if prices fall.
The plan is flexible, providing two pricing options: class price and component price. Additionally, producers can lock in coverage for 70 to 95 percent of revenue, in increments of 5 percent.
The program is seen as an expansion of the Federal Crop Insurance Act that was set up years ago. And, like that program, this one is subsidized by the government and based on the futures prices, in this case using CME class 3 and class 4 milk futures. Unlike previous programs, however, this one focuses on revenue insurance rather than income minus feed costs. The subsidy currently amounts to 44 to 59 percent of the premium cost of the insurance.
The big question: Will dairy producers take advantage of this new program? Although the answer may seem to be a resounding yes, ultimately there are other considerations that producers should consider. Even if the new program is utilized, producers should consider ways to enhance their revenue through complementary price risk management strategies.
Price Risk Management Tools for the Dairy Producer
In a comprehensive risk management approach, Dairy Revenue Protection should be just one tool in a producer’s toolbox. Ideally, they should also be using other risk management tools such as exchange traded futures, options, over-the-counter (OTC) products, and potential cash market tools between buyer and seller. All of these can help to create a diversified approach to hedging and provide flexibility depending on changes in market price and volatility.
As dairy producers plan for 2019, it is likely many are still determining how the Dairy Revenue Protection offering will fit into their business. Initially, there may be slow adoption as a result. The government shutdown is sure to exacerbate this as well. However, adoption could ramp up quickly, depending on how the market evolves, particularly if futures prices continue to rally.
As these aspects of the market sort themselves out, it’s important to remember that Dairy Revenue Protection – no matter how useful it may be – is just one option among many available to producers. A comprehensive risk management strategy can help alleviate some of the difficulties of a downturn in the market like the one producers have been experiencing in the U.S. dairy sector.