Another tool was just added to U.S. dairy producers’ risk management options this week when USDA announced the launch of the Dairy Revenue Protection (Dairy-RP) insurance program. Sign-up will start October 9, 2018 for coverage starting in 2019. The insurance product was developed by American Farm Bureau Federation Chief Economist John Newton in partnership with AFBIS and economists from the University of Minnesota and Cornell University.
Coverage selection will work by quarters of the calendar year (January-March, April-June, etc). Under Dairy-RP, an indemnity will be paid to a producer when the actual milk revenue falls below the final revenue guarantee for that quarter. Put differently, there will be a payment when the expected value of milk times the expected production for the selected quarter is higher than the actual value of milk times the actual production for that quarter. It is important to note that Dairy-RP is not protecting against milk production declines or component test declines experienced on the farm. Instead, it uses USDA milk production data to calculate an expected milk yield and a yield adjustment factor. This means that the actual production calculation will be your selected coverage volume adjusted by a yield factor. That yield factor will be determined by USDA’s state-level milk production data.
Participants will be able to select the amount of milk production to cover as well as the revenue coverage level (in 5% increments, from 70-95%). Premiums will constantly evolve with the market and be determined on the day coverage is purchased. Expected prices and market risk play a role in how those premiums change. Farm Bureau states that in general, higher levels of liability and policies further down the road will be more expensive to purchase.
Because the program was developed by USDA’s Risk Management Agency, the program will be federally subsidized. Subsidies decrease as coverage level increases.
Farm Bureau put together a short two-minute video intro on the program that you may find useful in understanding the purpose of the program and its foundation: https://youtu.be/cpkJ3jw3h6E