A subsidized, pooled, put option is one way to think of the new Dairy Revenue Protection (DRP) plan of insurance. To put it simply, insureds choose when to insure their milk, how much milk to insure, how to price their milk and whether to add a multiplier to increase any indemnity paid. That’s it.

Sales take place every business day beginning at approximately 4 PM, and end at 9 AM the following day. Coverage is available on a quarterly basis and can be purchased up to five quarters out. That being said, insureds who want to insure milk during the 1st quarter of 2019 would be insuring January, February and March milk, meaning a 3-month pool of milk is insured together, per policy written.

Insureds choose how much milk they want to insure per quarter. There is no minimum amount of milk that can be covered; the maximum amount of milk that can be covered is your farm capacity for the quarter.

Insureds have two pricing options to choose from to establish a revenue guarantee for their milk: Class Pricing Option or Component Pricing Option. Both pricing options use futures prices on the Chicago Mercantile Exchange to establish your guarantee. Class Pricing Option uses the Class III Milk futures contract, the Class IV Milk futures contract or
any combination of the two, chosen by the insured, to establish your guaranteed price. Component Pricing Option uses futures prices from the butter contract, cheese contract and dry whey contract to establish a futures market implied price for your milk.

After the futures contracts settle for the day, the Risk Management Agency (RMA) will publish the expected prices for each quarter on the USDA website. Once those prices are posted, DRP sales will become available for purchase. Insureds have until 9 AM the next morning to purchase quarterly coverage and protect the expected prices.

At sign up, insureds choose a coverage level, essentially buying a percentage of the expected price for the quarter they want to insure. Coverage levels range from 70%-95%, in 5% increments. If the milk price for your quarter settles in at $17/cwt., and you elect 95% coverage, you essentially set your guaranteed trigger price for the quarter at $16.15/cwt. ($17 x .95 = $16.15).

One important caveat to note is the Yield Adjustment Factor (YAF). The idea behind the yield YAF is to protect producers in the area from declines in area milk yield. At sign up, expected milk per cow is determined for your area. Upon expiration of the policy, actual milk per cow is announced for your area. If actual milk per cow is higher upon expiration of the policy than expected milk per cow was at sign up, claims will not trigger as quickly. On the contrary, if actual milk per cow is lower than expected milk per cow, claims will trigger quicker.

One final option insureds can elect is called a Protection Factor (PF). The PF acts as a multiplier IF an indemnity is triggered. It is important to note that buying up on the PF will not give insureds a higher trigger price. The PF will only come into play if an indemnity is triggered. If an indemnity is triggered, the PF will increase the indemnity. PF’s range from 1.05-1.50, in 5% increments.

To determine indemnities, simply wait until the time period you insured has passed. RMA will post the actual futures prices and the actual milk per cow for all quarters on the USDA website. If your actual milk revenue for the quarter falls below your guarantee, you trigger a payment.

Premium billing for DRP policies is also simple and easy. It is not due until after the coverage period is over. DRP is available in all 50 states and it can be purchased through authorized crop insurance agents. Unlike more traditional options, Dairy Revenue Protection gives dairymen a new tool to protect their expected revenues, a tool that is subsidized, affordable, and simple.

Views provided in this newsletter are general in nature for your consideration and are not legal, tax, or investment advice. Investors Community Bank (ICB) makes no warranties as to accuracy or completeness of information, including but not limited to information provided by third parties, does not endorse any non-ICB companies, products, or services described here, and takes no liability for your use of this information. Information and suggestions regarding business risk management and safeguards do not necessarily represent ICB’s business practices or experience. Please contact your own legal, tax, or financial advisors regarding your specific business needs before taking any action based upon this information. Ag Insurance products are not insured by the Federal Deposit Insurance Corporation; are not deposits or obligations of the bank or any affiliate; are not guaranteed by the bank or any affiliate;may involve investment risks. Equal opportunity employer and provider.

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