Dairy Revenue Protection Insurance

Dairy Revenue Protection Insurance

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September 20, 2018
Dairy Revenue Protection Insurance
Background
Dairy-RP
In recent years, dairy farmers have experienced low milk
A producer makes five choices when purchasing a policy:
prices. From 2015 to the present, milk prices received by
(1) the amount of milk production to cover; (2) how to
dairy farmers have averaged 20% lower than the relatively
value milk, either by milk class price or component price;
high price period of 2011-2014. Many dairy producers
(3) the level of revenue to cover; (4) which quarters to
believe the 2014 farm bill’s dairy Margin Protection
cover; and (5) whether to purchase an optional protection
Program (MPP), a commodity support program under Title
factor. Also, if multiple producers own the milk, they
I of the 2014 farm bill, has been an ineffective safety net
declare their share and would receive any indemnities
and have been seeking alternatives.
proportionally.
On August 8, 2018, the U.S. Department of Agriculture
Most dairy producers are familiar with the prices and price
(USDA) Risk Management Agency (RMA) announced the
calculations used in Dairy-RP. The policy uses CME Class
forthcoming Dairy Revenue Protection (Dairy-RP)
III (cheese) and Class IV (butter and powder) futures prices
insurance policy. Dairy-RP is to be available starting
for the class option. CME futures prices for butter, cheese,
October 9, 2018, according to the American Farm Bureau
and dry whey are used for the component price option.
Federation (AFBF). The policy was developed by the
Actual revenue is based on the USDA Agricultural
AFBF and the American Farm Bureau Insurances Services
Marketing Service (AMS) reported class prices.
through the Federal Crop Insurance Corporation’s (FCIC)
Milk Production
508(h) private submission process that is authorized by the
Dairy producers can tailor a policy to their individual needs
Federal Crop Insurance Act (7 U.S.C. 1501 et seq.).
by declaring how much milk production to cover in each
Dairy-RP policies are to be sold by Approved Insurance
quarterly policy and the value (or price) level of that milk.
Providers (AIPs) who choose to offer the policies in the
The amount of milk covered and the pricing choice are used
states in which they operate. The policies will be available
to set an expected “revenue guarantee” (Figure 1) for each
every business day except on days when USDA releases
quarter covered, thus allowing producers to account for
major dairy reports, when futures prices hit their daily limit,
seasonality in milk production or individual dairy
or as unforeseen situations arise as determined by RMA.
circumstances.
RMA has offered a Livestock Gross Margin insurance
Milk Pricing Options
policy for dairy cattle (LGM-D) that insures the margin
Producers choose to price their milk production for
between milk and feed prices. But few dairy producers have
calculating an expected revenue guarantee by using either
purchased it. From 2015 to 2017, LGM-D covered about
class prices or component prices. When choosing the class
2.9 billion pounds of milk annually. During those years,
option, a simple average of the Class III and Class IV CME
total U.S. milk production averaged about 212 billion
future prices are used to establish expected revenue during
pounds annually. Many considered its formula for
a given quarter. Producers also choose a weighting factor
determining feed values overly complex. Participation was
for the class prices. For example, a producer might opt for
also limited in part because of a previous $20 million cap
50%-50% share of the two prices, in which case a Class III
on expenditures on livestock insurance policies—since
futures price of $18 per hundredweight (cwt.) and Class IV
removed by the Bipartisan Budget Act of 2018 (P.L. 115-
futures price of $16 per cwt. would yield an average
123)—and a 2014 farm bill provision that prohibited the
expected class price of $17 per cwt. to value producer milk.
use of LGM-D and MPP concurrently.
Alternatively, dairy producers might choose to price
butterfat and protein components of their milk production to
Dairy-RP is to insure against unexpected declines in milk
determine an expected revenue guarantee. In that case,
revenue. Participation is voluntary and offered on a
producers choose their expected butterfat test and protein
quarterly basis for the dairy crop year (July-June) for up to
test (pounds of butterfat and protein in a cwt of milk). The
five quarters. If a producer’s actual milk revenue falls
declared butterfat test may range from 3.5 to 5.0 pounds
below an expected revenue guarantee, the producer receives
and the protein test may be from 3.0 to 4.0 pounds, both in
an indemnity payment. A producer’s revenue guarantee is
0.05 pound increments. The other solids (primarily lactose)
based on a series of choices described below. In developing
test is fixed at 5.7 pounds. The ratio of butterfat test to
the Dairy-RP policy, the AFBF sought to create a simpler
protein test must be no less than 1.15 and not greater than
policy than the existing LGM-D federal crop insurance
1.30. The expected milk price for calculating revenue
policy. Dairy producers may participate in both Dairy-RP
guarantees would be the sum of the expected butterfat,
and MPP.
protein, and other solids prices multiplied by the selected
tests. To calculate expected component prices, the policy
uses CME butter, cheese, and dry whey futures in the
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Dairy Revenue Protection Insurance
Federal Milk Marketing Order price formulas used to
used to calculate actual revenue and the indemnity if
calculate class milk and component prices in the marketing
earned. Less than 85% of actual production would result in
order system.
a reduced indemnity payment.
Coverage Levels
Similarly, for a policy based on butterfat and protein, the
After declaring the amount of milk production to cover and
actual tests must be at least 90% of declared values. Similar
the pricing method to value that production, a producer
to the production adjustment, lower test values would result
chooses the percentage of expected revenue to insure or
in a reduced indemnity payment.
guarantee for the quarter. The producer may choose to
guarantee from 70% to 95% of revenue in 5% increments.
Figure 1. Dairy-RP Indemnity Trigger and Calculation
Optional Protection Factor
Producers also have the option to buy additional protection
coverage. The protection factor may range from 1.0 to 1.5
in 0.05 increments. The protection factor does not increase
the revenue guarantee but is applied to expected revenue for
the purposes of calculating a producer premium. If an
indemnity is earned on the policy, the protection factor is
also applied to an indemnity to determine the total
indemnity payment (Figure 1).
Covered Quarters
Beginning in October 2018, producers may buy Dairy-RP
policies starting with the 2019 January-March quarter. They
may buy policies for five quarters into the future through
January-March 2020 at the outset of the program.
Premium Rates and Subsidies
The premium rating model was developed by AFBF and
approved by RMA. AIPs use the rating model published by

RMA to calculate premiums. AIPs apply the established
Source: CRS using the FCIC Dairy-RP Insurance Standards Handbook.
premium rate to a producer’s selected revenue guarantee—
Yield Adjustment Factor
adjusted for a protection factor, if chosen—then apply the
The second adjustment to actual revenue is a yield
appropriate premium subsidy. The premium subsidy is paid
adjustment factor. The yield adjustment factor is equal to
by FCIC and will vary depending on the coverage level,
the actual quarterly milk per cow, or yield, as reported by
from a 59% subsidy for 70% coverage to a 44% subsidy on
the USDA National Agricultural Statistics Service (NASS),
95% coverage (Table 1).
divided by an RMA determined expected milk per cow.
Table 1. Dairy-RP Coverage and Premium Subsidies
NASS reports milk per cow for 23 states. For the yield
Percentages
adjustment for producers in other states, RMA assigns them
a regional milk per cow by production region. This ratio is
Coverage Level
70
75
80
85
90
95
applied to determine the final actual revenue. The yield
adjustments link actual revenue to productivity, which
Premium Subsidy
59
55
55
49
44
44
varies for producers across the United States.
Source: RMA.
Indemnity Calculation
Actual Revenue
If actual revenue exceeds the insured revenue, no indemnity
A producer’s actual revenue is calculated after the final
is due the producer. However, if, the actual is lower, the
milk prices and milk production data are available for the
producer is paid the difference. In addition, the final
quarter of insurance coverage. A producer’s actual revenue
indemnity payment is increased by the protection factor if
is determined by the final Class III and Class IV prices and
the producer has chosen one for the policy period.
final component prices, as reported by AMS, and applied to
Costs of Program
covered quarterly production. The revenue calculation is
Premiums are based on risk and would vary based on the
adjusted by the revenue guarantee adjustment on production
amount of total liability and other actuarial factors.
and the yield adjustment if they are applicable (see below).
Premiums would rise for succeeding quarters as risk
If actual revenue falls short of the revenue guarantee, dairy
increases further out. The total cost of the program will
producers receive an indemnity payment (Figure 1).
depend on the number of dairy producers who decide to
Revenue Guarantee Adjustments
utilize the policy and the coverage levels that they select.
A policyholder’s actual milk production must be verified
Producers may be less inclined to participate when milk
against declared production. Documentation from a
prices are low because they could be locking in a low
cooperative or milk handler would suffice as evidence of
revenue level. However, if a producer expects prices to
production and butterfat and protein tests. Under the terms
move even lower, a Dairy-RP policy could be attractive.
of the policy, a producer’s actual milk production must be
Conversely, at times of higher prices, producers may be
at least 85% of declared covered production. If it is 85% or
inclined to lock in higher revenue levels to protect against
more of declared production, the entire declared amount is
the risk of price declines that would lower actual revenue.
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Dairy Revenue Protection Insurance

Isabel Rosa, Analyst in Agricultural Policy
Joel L. Greene, Analyst in Agricultural Policy
IF10985

Disclaimer
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