I feel very strongly that one of the greatest advances of the Dairy industry during the past ten years has been the introduction of the Dairy Revenue Protection Program, also known as DRP. It has provided producers with a program that can establish a “Floor” under their milk prices by way of Put Options that are purchased on an amount of milk that is determined by the dairyman.
My timing of this information may seem premature, but I only hope I’m not too late with this information. Given the high milk prices we’ve seen in 2022 (& yes, before you remind me that feed costs have been terribly high, I understand that…), is there a point at which we start to negatively impact consumption? I’m pleased that it hasn’t happened yet, but it certainly could, going forward, particularly given that consumers, just like you, are being hammered by rising inflation.
I believe it’s always better to plan ahead on these types of tasks. How does the program work? Essentially, as I said earlier, you are purchasing “insurance” against calamitous milk price drops by acquiring Put Options that place a “floor” under the prices you receive. The premiums for these Put Options are paid for around the 15th of the month following the end of the quarter(s) of coverage.
If prices drop below your Put Option level established through DRP, you will get paid the difference, minus the premiums you owe. However, you have solid coverage on that portion of your milk against the effects of a disastrous pricing scenario.
On the other hand, what happens if prices increase above your DRP Put Option level? For example, what if you set an $18/cwt floor, and prices increase to $19.50/cwt? Well, unfortunately, your Put Options expire unused, and you do still owe the Put Option premiums 15 days after the period of coverage ends. However, the good news is that the price you received was higher than the coverage level you had set, which means that you should have some extra funds to cover the premium.
Remember, your objective is to provide you with a “Safety Net” against huge price drops. Please think back to the years 2000, 2003, 2006, 2009 and 2015-2018. Wouldn’t it have been great if you could have placed a “floor” under the price of at least a portion of your milk sold? DRP, which I believe can now be used in conjunction with the Dairy Margin Coverage (DMC) program, can protect against serious price fallouts.
If you understand your Break-Even Milk Price Levels & your detailed Costs of Production, this can provide you with a solid framework against serious Cash Flow difficulties. As always, if you measure something, you can understand it. If you understand it, you can begin to control it, and if you control it, you can improve it!
The real question is – Why Wait? Do it now, and as I suggested previously, what will happen? You will provide yourself with solid price insurance. And, that would be excellent!
Let’s take your business to the Next Level!