Understanding Dairy Revenue Protection

Dairy Cows
15 Nov 2023

Dairy farming is a risky business that depends on unpredictable weather patterns, changing market forces, and many other external factors. The Dairy Revenue Protection (DRP) program is designed to offset some of these inherent risks and uncertainties. It also provides dairy farmers with reliable protection against unexpected declines in milk sales revenue. We will take a closer look at the program, its pricing options, covered milk production, approved states, and other essential details.

The DRP program is an area-based revenue product that is designed to provide coverage against an unexpected drop in milk revenue relative to a guaranteed coverage level. The program offers quarterly insurance periods that cover three-month periods and can be sold up to five quarters, except for the last sales period. The program includes two pricing options for each endorsement: The Class Pricing Option uses a combination of Class III and IV prices based on the farmer's declared Class price weighting factor. The Component Pricing Option uses a combination of butterfat protein, non-fat solid, and other solid values based on the farmer's declared butterfat and protein test.

The DRP program's expected revenue is determined based on futures prices for milk and dairy commodities and the amount of covered milk production selected by the dairy producer. The covered milk production is indexed to the state or region where the dairy producer is located. This feature ensures that the DRP indemnity payments reflect the actual economic conditions of the region rather than just the farmer's individual milk production. DRP is approved for sale in all 50 states of the United States.

The Class Pricing Option is based on declared Class prices, which are determined by the USDA's Federal Milk Marketing Order Class III and IV prices. In contrast, the Component Pricing Option is based on the dairy producer's declared components of butterfat and protein. The other solids test is fixed at 57 pounds to establish the milk price. Farmers should elect the butterfat and protein amounts that best match the values within their herds.

At the end of the insured quarter, if actual milk revenue falls below the revenue guarantee, the farmer receives an indemnity payment for the difference between the actual milk revenue multiplied by the share and protection factor. The share and protection factor reflect the DRP coverage level and the percentage of covered milk production. It is important to note that the DRP program does not cover milk quality issues or other non-revenue factors.

Dairy Revenue Protection is an important tool for dairy farmers to safeguard their livelihoods against unexpected declines in milk sales revenue. The program offers multiple pricing options, indexing to the state or region of the dairy producer, and area-based coverage that reflects the actual economic conditions of the region. Understanding the DRP program's features, coverage levels, and indemnity payments can help dairy farmers make informed decisions and manage their risks more effectively. Dairy farming may continue to face challenges in the future, but DRP equips farmers with the confidence and security they need to persevere. Contact your local AgCountry office to learn more about DRP. 

Patrick Reinke
Written By: Patrick Reinke
VP Loan Officer - Lisbon