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Dairy Revenue Protection Update – June 2020

Dairy Revenue Protection Update – June 2020

By Andrew Sandeen

Dairy Revenue Protection (DRP) is a federally subsidized insurance program for dairy producers looking to minimize the impact of a decline in dairy prices. There is no cost to learn how the program works, to sign up for the program with a trusted provider, or to develop a strategy for purchasing endorsements. Costs are only incurred after purchasing endorsements to cover specified quantities of milk for future quarters. Once a relationship is established with a DRP provider, decisions on endorsements can be made according to market prices as they change on a daily basis.
 
One of the DRP coverage options is Class III milk. Since the fall in milk prices when COVID-19 first became a global issue, there has recently been a dramatic rebound in forecasted prices for Class III milk, despite lingering concerns about the state of the economy and evolving food trends around the world.
 
Though DRP sales are available for multiple quarters at a time with a variety of coverage options, we will use the third quarter of 2020 (3Q2020) as an example here. In the graph below, Class III and Class IV guaranteed prices are shown in blue, which represent maximum DRP coverage at 95% of the full market prices. It is apparent that the Class III guaranteed price is once again approaching the $17.00 mark that was available at times in January and February, a nice recovery from lows well below $14.00 in April. It is also worth noting the premium rates, which have dropped in recent weeks, are still significantly higher than they were at the beginning of 2020.
 
On June 1st, coverage for a Class III guarantee of $16.31/cwt was available at a cost of $0.2913/cwt.
 
 
Sign-ups for 3Q2020 DRP coverage will close in mid-June, but other coverage can be purchased as far out as 3Q2021.
 
One approach to DRP coverage is to lock in prices when they rise above a dairy’s breakeven price. Currently, it may or may not be possible to lock in a price at breakeven. However, even if DRP prices are below breakeven, it may still be reasonable to consider coverage if there is pessimism about where the prices for a particular quarter might end up as time progresses.
 
There is no obligation for dairy producers to participate in DRP, but it might be worth investing a little bit of time at some point to explore how the program may be useful, whether for decisions in the immediate future or for later months as dairy prices and coverage premiums continue to change.
Source : psu.edu