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Farm Bureau breaks down costs for new Dairy-RP insurance

Premiums for the new insurance product will vary depending on several factors such as location, coverage levels and contract quarters.
Carol Ryan Dumas

Capital Press

Published on October 18, 2018 10:44AM

Last changed on October 24, 2018 8:14AM

Cows feed at a dairy near Kuna, Idaho. The new Dairy Revenue Protection insurance will protect farmers based on a variety of factors that will in turn dictate the premium.

Capital Press File

Cows feed at a dairy near Kuna, Idaho. The new Dairy Revenue Protection insurance will protect farmers based on a variety of factors that will in turn dictate the premium.

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A new dairy insurance plan by USDA became available Oct. 9 and offers a way to protect dairy farmer revenue — functioning in a manner similar to traditional crop insurance, as opposed to other dairy insurance programs aimed at margins between milk prices and the cost of feed.

Dairy Revenue Protection is designed to protect against quarterly declines in revenue from milk sales and is uniquely structured to closely match farm-level milk prices, according to American Farm Bureau Federation, which developed the product in cooperation with American Farm Bureau Insurance Services.

AFBF has provided information about how the insurance will operate, but one unanswered question was how much the insurance would cost.

The cost will vary based on the state, policy choices, markets, milk yields and contract quarters, but John Newton, AFBF’s chief economist, has zeroed in on what producers can expect.

Newton gave examples of premium ranges in a recent AFBF MarketIntel report.

“In general, premiums under Dairy-RP will be more affordable for lower coverage levels and for more nearby quarters,” he said in the report.

“Premiums will get more expensive for deferred insurance policies such as the fourth or fifth nearby quarters because the uncertainty in the market is higher,” he said.

Under Dairy-RP, a producer would choose either a class milk price policy or a milk component policy, the amount of milk production to cover, the level of revenue coverage to insure and which quarterly contracts to cover.

Based on the CME futures settlement prices on Oct. 4, Newton’s examples of premium costs factor in a 44 percent government premium subsidy associated with covering 95 percent of expected quarterly revenue.

The class milk pricing option is based on a combination of milk futures prices for Class III and Class IV, milk used to manufacture cheese and powder. A producer can choose a weight of Class III ranging from 0 percent to 100 percent to align with the utilization of milk in his marketing area.

Assuming a 50 percent class weighting factor, premium rates in Wisconsin would range from a low of 11 cents per hundredweight of milk for a January to March 2019 contract to 26 cents per hundredweight for an October to December 2019 contract.

Premiums for a similar policy in California would range from 13 cents per hundredweight in the nearby quarter to 36 cents per hundredweight in the same deferred quarter.

Differences in premiums between states are due to different yield standards and the different degree to which yield shocks are correlated to shocks in prices, Newton said.

For the component pricing option, revenue protection is based on milk components including butterfat, protein and other solids. A producer can select a butterfat option from 3.5 to 5 percent and a protein option from 3 to 4 percent, with the other solids fixed at 5.7 percent.

Under that policy, a producer can increase the value of milk insured to reflect higher-valued, high-component milk.

For a Wisconsin-based policy for maximum component levels of 5 percent fat and 4 percent protein, premiums ranged from 16 cents per hundredweight for the January to March 2019 contract to 39 cents per hundredweight for the October to December 2019 contract.



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