Dairy Revenue Protection – Is it for me?
As you probably already know, the new Dairy Revenue Protection Program was introduced in early November. Is this the answer we’ve all been looking for? I don’t see it as the whole answer to our industry challenges. However, it does represent another tool to use in setting minimum milk prices. Like any other existing tool, it can only benefit you if you learn how to use it and then, most importantly, take appropriate action to move forward.
Let’s look at the pros and cons of the program:
Besides providing us with another positive tool to manage milk prices, the DRP program allows us to essentially buy Put Options at about half of their normal cost, since their purchase is being subsidized by the Federal government. In fact, you can purchase these contracts for up to five quarters ahead. Using the price projections of the CME, these contracts are readily available and can be set up with minimal levels of milk. You can also add quarterly endorsements at unlimited decision points. In other words, if you went out five quarters on a minimal amount of your anticipated milk production, you could add more tiers of contracts as you get closer to those quarters and have clearer information.
I believe that this tool, like any other milk marketing program, can assist you to manage credit risk if you have borrowed money, and given the last four years’ financial results, who hasn’t borrowed more funds… However, I believe your lender will agree that this is one way to develop a better budget for the upcoming year. The good news is that, unlike most options programs, you don’t even need to pay the premiums until 15 days after the end of the quarter you are covering. By then, theoretically, you should have already received funds from the DRP program for the milk prices being below your contracted level or else you should have received a better market price, which will obviously boost your cash flow. It will be important to talk to your crop insurance agent to clarify this point.
On the less positive side, the DRP program does have some limitations. I believe coverage is limited to 90% of your expected production, and coverage options range between 70% & 95% of the expected milk prices you contract. This is somewhat confusing but is critical for you to understand. Be sure to discuss this with your sales agent. Once you have it set up for a quarter, you are locked in on that production. However, I believe you can use other outside tools to offset your contracts, if desired, somewhat. You just cannot do this within DRP. While some of these aspects are somewhat confusing, I still feel it is a program that producers should learn more about. Please take some time to check it out.
I hope you’ve found this article helpful. What applications of these lessons can you make in your business? Be watching for our upcoming “Mastermind Group” opportunities we are planning to offer. I am currently introducing new Success Strategies Busniess Navigator Program in early 2019 that are designed to reach more people with the Finance & Strategy Concepts that I offer business people. I am currently working on the content that I will deliver during those sessions. Be on the lookout for these sessions and sign up today.
This entire thinking process is so crucial today. If you need assistance, please e-mail me at firstname.lastname@example.org. I’m always open for a follow-up call and wish you the best of success!