Dairy Revenue Protection - What does it even mean?

Nine(ish) terms you need to know.

By Katelyn Walley-Stoll, Farm Business Management Specialist

September 15, 2021 with updates on December 20, 2021

If you're a dairy farmer new to insurance, your head might be spinning every time you hear or read something about Dairy-RP or LGM-Dairy or MPP-Dairy! While the best thing you can do to learn more about Dairy Revenue Protection in general is to call up a certified crop insurance agent, hopefully this "glossary" can help you get started!

1. Dairy Revenue Protection (also known as Dairy-RP and DRP) is a government subsidized insurance option available for dairy producers. This insurance is available for dairy producers to help manage the risk associated with milk prices - a risk management tool.
2. Risk Management Agency (RMA) is the group that manages the program and is a part of the United States Department of Agriculture (USDA).
3. Approved Insurance Providers are USDA authorized agents. They work with you to set up the right policy for your farm. You should choose one that is familiar with Dairy-RP since it is different than standard crop insurance.
4. CME Futures Market (Chicago Mercantile Exchange where dairy market futures and options are traded) prices determine revenue guarantees. Contracts can only be purchased while the markets are closed (typically between 4pm and 9am central time) and there haven't been any major reports released.
5. Producer Elections are the contract variables that you can choose and change, including milk production to cover, the pricing mechanism, coverage level, protection factor, and desired quarter.
   1. Milk Production to Cover is the pounds of milk that you are applying a selected contract towards. These are actual pounds of milk that you plan to produce. Depending on the pricing mechanism you choose, you have to produce at least 85% or 90% of the milk you're covering. If not, your payments will be reduced. To make things even more complicated, you can use more than one contract to blend multiple coverage options! While you can't overlap coverage for the same pounds of milk, you can cover different pounds or portions of milk with different contracts. So - you could have two (or more) different contracts within a given quarter covering different portions of milk production with different elections. For some herds, multiple contracts might be the best risk management strategy.
   2. Pricing Mechanisms are the type of coverage you select. You should choose the market-based coverage option that matches your type of milk production on your farm (high production vs. high component). Alternatively, you could have multiple contracts with different pricing blends to cover your bases.
      1. Class Pricing Option uses Class III and Class IV milk prices to determine coverage. You can choose to use only Class III, only Class IV, or a combination of both with weighting factors (Class III could be a factor of .8 and Class IV with a factor of .2 for your total class price blend). You have to produce at least 85% of your selected milk production for a full payment.
      2. Component Coverage uses milk component (fat, protein, other milk solids) prices to determine coverage. This may better reflect your farm's production type in some cases. You'll use your farm's actual production components with the published milk fat and protein prices. You have to produce 90% of the components you're covering for a full payment.
   3. Coverage Levels are the amount of milk price futures quotes you'll select to cover. Your choices are 80%, 85%, 90%, and 95%. The higher the coverage, the more likely you see a payment (and have a higher premium). For example, if Class futures are $17, and you select 80% coverage, your "trigger point" will be $13.60. If you selected 95% coverage, your trigger price would then be $16.15.
      1. Trigger Price is the price level that you chose to protect your milk. You could see a DRP payment when the price drops below your trigger point - payments are triggered. Knowing your cost of production is key to ensure you're protecting your milk price above that level to avoid net losses.
   4. Protection Factor is a multiplier from 1 to 1.5 that's available in 0.05 increments. It doesn't increase your trigger price, but will increase your revenue guarantee. If you choose a higher factor, your total premium cost will increase. It will also increase your final revenue guarantee (which means a higher payment) - see below.
   5. Desired Quarter is your selection of a Quarter Block, the lengths of time the insurance contracts are in place/offered. DRP uses calendar quarters (Jan - Mar; Apr - Jun; July - Sept; Oct - Dec). Contracts are offered per quarter for up to five quarters at a time. Sales close 15 days before the selected quarter.
6. Premium subsidies are available to help reduce the cost of your purchased plan. They range from 55% to 44% as your coverage levels increase. Premiums aren't due until the month following the end of the quarter. Depending on your coverage elections and actual revenues, the premium will be deducted from your payment. If you are a qualifying beginning or underserved farmer or rancher, you could be eligible for an additional 10% off of your premium subsidy.
7. Revenue Guarantee is the amount of money you "should" receive based on your covered milk production, the futures market prices, and your selected price mechanism. Revenue guarantee = cwt covered x trigger price x protection factor.

   Source: CRS using the FCIC Dairy-RP Insurance Standards Handbook

8. Actual Revenue is the money you "did" receive in a quarter. Actual Revenue = actual Class milk price (with weighted factors) or component milk price x cwt covered x yield adjustment factor. The actual milk and component values are announced USDA's Agricultural Marketing Service (AMS).
   1. Yield Adjustment Factor is a ratio applied to determine the final actual revenue. It's based on USDA National Agricultural Statistics Service (NASS) reported actual quarterly milk per cow divided by RMA determined expected milk per cow. This helps adjust for large scale milk production declines by region/state. This could be affected by natural occurrences and supply chain disruptions.
9. Producer Payment is the difference between your selected revenue guarantee and the actual revenue. The money deposited into your account (or billed) will be the difference between your premium cost and your producer payment.

Dairy Revenue Protection is a flexible program that is designed to adapt to herd size, current milk production, components, and shorter term quarterly options. While it might be overwhelming at first, there is plenty of information and assistance out there for you to start to slowly add this risk management tool to your toolbox! And it's probably easier than finding your toolbox's 10mm socket.

Want to do some more digging? Here are some resources used to put this list together that go even further!

• Dairy Revenue Protection Insurance Standards Handbook (USDA, FCIC)
• Dairy Revenue Protection Fact Sheet (RMA)
• Dairy Revenue Protection Bulletin (Ohio State University Extension)
• Dairy Revenue Protection Insurance In Focus (Congressional Research Service)
• Dairy Revenue Protection Policy (AFBIS, Inc.)

This material is based upon work supported by USDA/NIFA under Award Number 2018-70027-28588 as part of Cornell University's New York Dairy and Livestock Risk Management Education Project.  

Written by Katelyn Walley-Stoll, Cornell University Cooperative Extension, Southwest New York Dairy, Livestock, and Field Crops Program. For more information, contact 716-640-0522, kaw249@cornell.edu, https://swnydlfc.cce.cornell.edu/. SWNYDLFC is a partnership between Cornell University and the CCE Associations of Allegany, Cattaraugus, Chautauqua, Erie, and Steuben counties. CCE is an employer and educator recognized for valuing AA/EEO, Protected Veterans, and Individuals with Disabilities and provides equal program and employment opportunities.