Knowledge Exchange Partner
October 2018 Knowledge Exchange Partner
Volume 12, Issue 10
Click here for a PDF version of this month's issue.
How Dairy Revenue Protection Works
Since their peak in 2014, milk prices have fallen by more than 30 percent. In response to this challenging environment, the USDA Risk Management Agency approved a new crop insurance option, Dairy Revenue Protection (Dairy-RP), which was developed by the American Farm Bureau Federation. Dairy-RP offers protection against an unexpected decline in milk revenue (whether that comes from yield or price).
So how does Dairy-RP work? Coverage is provided on a quarterly basis, and an indemnity is paid to the farmer if actual milk revenue falls below their revenue guarantee. Farmers can guarantee between 70 and 95 percent of production in five percent increments. Premiums are subsidized by USDA on a sliding scale, from 59 percent at the 70 percent coverage level, to 44 percent at the 95 percent coverage level.
Producers can choose how the policy measures milk revenue, using either a class or component-based price option. The class-based pricing option uses a weighted average of Class III and IV milk prices from the Chicago Mercantile Exchange (CME). The component-based price option uses the average of CME butter, cheese and whey futures.
The farmer then chooses a component value of milk based on the amount of butterfat and protein. There is also a mechanism in the program to adjust for changes in expected milk yield for each state or region. If the actual milk revenue to the farm is below the purchased revenue guarantee, on a quarterly basis, then an indemnity is paid to the farmer.
New in this program is an “optional protection factor.” Because farm milk revenue can vary to a greater extent than national averages, the program allows farmers to choose an additional protection factor from 1.05 to 1.50 in five percent increments. In the event an indemnity is paid, farmers who purchased the optional protection factor will have their payments increased by that protection factor. For example, a farmer with a 1.50 protection factor and an indemnity calculated at $10,000 would end up receiving $15,000.
In summary, to participate in the program, producers have five decisions to make:
- The method used to value milk (class or component);
- The amount of milk production to cover;
- The level of coverage (ranging from 70 to 95 percent of the revenue guarantee);
- Which quarterly contracts to purchase; and
- Whether to buy an optional protection factor.
Each coverage situation is unique, but here are a couple of scenarios for illustrative purposes:
A Dairy Risk Management webinar, held on October 05, discussed Dairy-RP along with other risk management tools. To access the recording and more information, visit our webinars page.
AgTech: An Analysis of a Rapidly Growing Field
Agriculture has always embraced and adopted new technologies. Going all the way back to such inventions as the cotton gin, farmers, ag suppliers and processors have continually sought out and developed new technology and innovation that has often disrupted the industry. Historically, most of this innovation has come from within the agricultural community, such as farmers themselves, ag equipment manufacturers, land-grant universities and others.
Lately, however, we are seeing increased participation from outside the traditional ag community – from Silicon Valley startups to venture capital firms – and others who see the agricultural sector as ripe for disruption.
The Northeast U.S., specifically Boston and New York City, has emerged as one of the hubs of ag tech innovation. Despite the fact that many of these technologies are focused on larger-scale production in the western part of the U.S., much of their research and development is being conducted in our backyard.
A few of these technologies are controlled environment agriculture (CEA), cellular agriculture, microbiome technology, agri-food tech hubs, food waste reduction, aquaculture automation, vertical farms, self-propelled equipment, insect farming, robotics, advanced breeding techniques such as CRISPR, producer networks, and a host of others.
For insight into this ag tech innovation, our Today’s Harvest blog recently kicked off a series of four articles that look at a few of these up-and-coming technologies. The first post in the series is titled, The Ups and Downs of Vertical Farming. While we may not see these advancements commercially for some time, these new technologies hold promise to change agriculture as we know it. To read each of these four articles as they're available, click here.
"You cannot swim for new horizons until you have courage to lose sight of the shore.” ― William Faulkner
Editor: Chris Laughton
Contributors: Tom Cosgrove and Chris Laughton
Farm Credit East Disclaimer: The information provided in this communication/newsletter is not intended to be investment, tax, or legal advice and should not be relied upon by recipients for such purposes. Farm Credit East does not make any representation or warranty regarding the content, and disclaims any responsibility for the information, materials, third-party opinions, and data included in this report. In no event will Farm Credit East be liable for any decision made or actions taken by any person or persons relying on the information contained in this report.