Proposed Dairy-Revenue Insurance Would Protect Against Milk Price Drops

The American Farm Bureau Federation (AFBF) has posted a primer on why its proposed Dairy-Revenue Protection insurance is needed and how it would work.

The insurance is designed to protect against milk price drops such as the one that occurred in 2015 and 2016. Dairy Margin Protection Program insurance failed to cover this drop because feed costs also declined significantly during the period. “The net impact is dairy farmer revenue fell $14.7 billion from 2014 to 2016,” says John Newton, AFBF Director of Market Intelligence. “Dairy-RP is designed to help farmers manage against these unanticipated declines in revenue, and if approved, would be offered in addition to margin-based insurance products currently available to dairy farmers.”

Farmers could select either a milk- or component based pricing policy. The milk-based policy would be based on a combination of Class III and IV Chicago Mercantile Exchange (CME) milk futures. The component-based policy would allow farmers to choose the amount of milkfat and protein they wished to cover, and the value would be determined by CME prices for butterfat, protein and other milk solids.

The farmer would then determine how much milk he or she wished to insure each quarter, and whether to cover 70 to 90% of that production.

After the end of each quarter, actual prices would be compared to the insured levels. If the actual prices were below those levels insured, the farmer would receive an indemnity payment.

“Policies would be sold by USDA-approved insurance providers and could be purchased voluntarily for an individual quarter, or a strip of quarters, up to five quarters out,” explains Newton. “The price of the policy would vary daily based on the farmer-selected parameters and on the expected risk in the market.”

For more information on the concept, click here.  Farm Bureau is also hosting an online survey to get more input from dairy farmers about the revenue protection insurance concept. Log on to the survey here.