DAIRY REVENUE PROTECTION INSURANCE: EFFECT ON RISK REDUCTION AND RETURN

Abstract

US farm milk prices have been volatile in recent years, prompting creation of several new risk management tools. The Dairy Revenue Protection Program is an agricultural insurance program that began operation in 2018 and has quickly become widely used. Dairy Revenue Protection is a subsidized basket of put options where dairy farmers can insure class III and class IV milk prices modified by deviations from trend in average milk per cow at the state level. This research examines the performance of Dairy Revenue Protection including the relative risk reduction provided, the mix of class III and IV prices, and the date of purchase. The results suggest that the program is effective in decreasing the negative semi-variance of milk price and that the variation across states is driven by the yield factor assigned to states.