Dairy Revenue Protection (Dairy-RP) is an insurance policy available to dairy producers to guarantee revenue every quarter. Dairy-RP was designed to help producers combat the high volatility in the fluid milk market. There are five terms producers must agree to when purchasing a policy, however, the most important decision is the pricing option of either class or component pricing. Since the introduction of Dairy-RP, over 82,000 policies have been purchased. From these policies, 253 billion pounds of milk have been insured, generating $1.72 billion in premiums, which resulted in $1.26 billion in indemnities. The number of Class Pricing policies has increased from 5,000 in 2019 to 11,300 in 2023. Alternatively, Component Pricing policies have decreased from 2,800 policies in 2019 down to 2,300 in 2023. For the producer selection terms and added information, see the previous article, Dairy Revenue Protection Historical Performance for Class Price, as this publication covers producer options.
The loss ratio is one method of measuring the performance of Dairy-RP. The loss ratio is calculated as total indemnity payments divided by the total premiums, thus representing a ratio of the total money paid back to the producers relative to the premiums paid (in total) for the policies. We often focus on a loss ratio of one, which means all money paid for the policy (insurance premiums) was distributed back to the producers in protection (indemnities).
We analyzed the performance of Dairy-RP by state under the component pricing option. Figure 1 shows the weighted average loss ratio for Dairy-RP (component pricing option) by state. Compared to the class pricing option, policies purchased under component pricing as a collective have had historically lower loss ratios. There are 40 states that are currently enrolled in Dairy-RP, and none of the states have loss ratios greater than or equal to one. California accounts for 22.8% of the milk declared under the component pricing option, but even though being the most declared, it ranks twelfth with the highest loss ratio of 0.75. Wisconsin is the second most declared, accounting for 15.1% of the milk declared under the component pricing option, and ranks fifth for the highest loss ratio at 0.82. Idaho has the largest loss ratio of 0.91 and accounts for 14.4% of the component priced milk declared. Three states, New Hampshire, Delaware, and Massachusetts are not listed as producers in these states have not purchased any component pricing policies. The southeast is expected to see lower participation in component price due to the federal milk marketing order. However, Texas ranks second with a loss ratio of 0.84 and accounts for 9.1% of the milk declared under the component pricing option.
