Suppose a farm wants to use the DRP insurance program. They decide they want insurance in the first quarter of 2019, and they want their protection based 100 percent on the Class III price. They choose to protect 3,000,000 lbs. for the quarter at 95 percent of the current Class III price level. These are the factors a producer chooses when they purchase Dairy Revenue Protection insurance.
|When coverage is in effect
||Up to 4 quarters in future
|Class III and Class IV weights
||Percent of Class III and of Class IV, adding up to 100% in 1% increments
||100% Class III
|Declared covered milk production
||Milk you choose to cover during the calendar quarter
||3,000,000 lbs. (1,000,000 lbs. per month)
||70 to 95% in 5% increments
Coverage level represents the percentage of the market’s expected price you want as a minimum price. The USDA Risk Management Agency looks at the average of each day’s CME Group futures prices for that quarter and then multiplies by the coverage level to provide a level of protection. For the purposes of this example, the Class III average was $15.53 per hundredweight. At the 95 percent coverage level, your minimum price would be $14.75 per cwt.
The total revenue level for the quarter you’d be protecting would be $442,500, which is referred to as the revenue guarantee
. This is calculated as shown below.
|Average CME Class III futures prices
Government subsidies vary based on the coverage level you choose. Using the example value of a 95 percent coverage level, you would be eligible for a government subsidy of 44 percent. For the purposes of the example, let’s say your premium after subsidies would be $0.10/cwt ($3,000 total).
At the conclusion of the quarter, this revenue guarantee will be compared to the final revenue
, calculated as follows:
Average USDA announced Class III prices × Volume enrolled × Yield adjustment factor = Final revenue
(The yield adjustment factor is explained in the notes below. To keep it simple, we won't factor it into our final revenue calculation.)
If final revenue is calculated higher than your revenue guarantee, there will be no indemnity. Let's look at an example of the final revenue calculation as if the first-quarter 2019 average was $16.00.
$16.00/cwt × 3,000,000 lbs. = $480,000 = Final revenue
Since the final revenue of $480,000 is greater than the revenue guarantee of $442,500, there would be no indemnity in this scenario.
However, if final revenue is calculated lower than your revenue guarantee, your indemnity will be the difference between the revenue guarantee and the final revenue. The average USDA announced Class III price for the first quarter of 2018 was $13.87. Let’s calculate the indemnity in this example as if the first-quarter 2019 average was also $13.87. For this example:
$13.87/cwt × 3,000,000 lbs. = $416,100 = Final revenue
Another way to look at this would be the difference between the $14.75/cwt protection level or minimum price and the $13.87 announced USDA price ($0.88) times the 30,000 cwt enrolled. Your insurance agent will send you an indemnity check at the conclusion of the quarter for $26,400 less the $3,000 you owe in premium.
This is a simplified example, so please continue to read the Important factors to consider
tabs for additional information.
Here are some notes and assumptions in this example:
- This example assumes that you would produce at least 85 percent of your declared production (3,000,000 lbs.) during first quarter. If not, your indemnity would be reduced
- A yield adjustment factor (actual milk production per cow compared to expected milk production per cow in your area) impacts your indemnity. The example above assumes there was no difference between expected and actual milk production per cow in your area
- We also assume your declared ownership share in the dairy is 100 percent