Dairy Revenue Protection Strategies
Article By: Mark Chilson
What's the best way to utilize dairy revenue protection (DRP) milk insurance? Dr. Marin Bozic, assistant professor of applied economics at the University of Minnesota, spoke about the best ways to use DRP in normal times. But first - what are normal times? A normal time is when the projected price of milk is above your break-even costs of production.
In Normal Times
Bozic suggested the following:
- Buy DRP endorsements early.
- Purchase four to five quarters out.
- Gradually build your coverage for all five quarters. You will then have a close focus on whether you are covering your break-even for those quarters.
- If there's an opportunity to lock in prices at or above your break-even point, act quickly to capitalize on it.
- If you miss this opportunity or find yourself only two quarters out with declining milk prices, it's time to shift into a loss mitigation mindset. You still need to purchase some DRP endorsements and establish a price floor in order to prevent anymore losses. By doing this you are keeping the upside potential open.
In Abnormal Times
When projected milk prices are below your break-even, Bozic recommended looking all the way out, all five quarters, and have a loss mitigation mindset. You need to at least set a price floor, even if it is below your break-even. Again, you are keeping the upside potential open if milk prices should rise.
Why go out four to five quarters with DRP endorsements?
Historical analysis has shown over a 10-year period that the further out DRP endorsements are purchased from the current time period, the higher the average indemnities that have been paid out to dairy producers. So, purchasing DRP insurance further out has proven to be more profitable for dairy producers.
Learn more
Talk with your lenders and insurance agent at Security Financial Bank, and we can create a plan for normal and abnormal times and discuss dairy production cash flow. More information on our dairy insurance can be found here: Dairy Insurance | Security Financial Bank (sfbank.com).
Mark Chilson, who leads SFB's insurances services, is licensed to sell dairy revenue protection (DRP), multi-peril crop, crop-hail, and livestock gross margin-dairy (LGM) insurance. He also is licensed to sell term life, return of premium term life, and whole life insurance.
