Maximize Your Dairy Profits: The Power of Dairy Revenue Protection
Ambrose Hill, Crop Insurance Agent
Opportunity is knocking, and it’s time to reach out and seize it. With the recent rebound in Class III milk prices, the outlook for milk futures is increasingly promising. Now is an ideal time to secure a milk price that exceeds your break-even point, extending as far as the next five quarters. But how? The answer lies in Dairy Revenue Protection.
Understanding Dairy Revenue Protection
Dairy Revenue Protection (DRP) is a revenue-based risk management tool that uses futures prices from the Chicago Mercantile Exchange (CME) for class pricing and Agricultural Marketing Service (AMS) formulas for component pricing. This tool allows producers to purchase price protection by quarter, by hundredweight, and either by class or component pricing for up to five quarters in advance.
Class III pricing is based on cheese products, while Class IV pricing is tied to butter and dry products. With class pricing, producers can manage their risk by diversifying across various dairy products. For instance, if the market for Class III declines while Class IV remains steady, as was observed after COVID-19, a producer can mitigate risk by splitting their endorsements between classes, making separate endorsements for Class III and Class IV.
Another approach is component pricing, which pools all products together—such as butter, cheese, dry whey, nonfat dry milk, butterfat, protein, other solids, and nonfat solids—into one pricing model.
How Endorsements Work
Endorsements can be secured at 80-95% of the price. For example, if the forecasted Class III price for the upcoming quarter is $20.00 per cwt., selecting 95% price protection would insure the price at $19.00 per cwt. If the price drops to $17.50 per cwt. during that quarter, the insured milk would receive an indemnity (payout) at a rate of $1.50 per cwt.
It’s important to note that milk can only be insured once under DRP. If 100,000 lbs. are produced, then no more than 100,000 lbs. can be insured. However, DRP offers an option to protect up to 1.5 times the milk’s guarantee. For instance, if 100,000 lbs. are produced, it can be insured with a 1.5 protection factor, effectively safeguarding 150,000 lbs. of production.
Seize the Opportunity
Milk prices are up, and opportunity is knocking. Our team of risk management specialists is ready to help you lock in a milk price that exceeds your break-even cost of production. Stability is just one call away—reach out to us today!