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Insurance You Hope You Never Collect

22:00PM Oct 03, 2014

How many dairy farmers take out casualty and fire insurance on their facilities hoping they’ll collect?

How many dairy farmers still pay the premium, knowing they’d be in a world of hurt if a tornado or fire wiped away the barn?

In a sense, that’s the way farmers should view the new dairy Margin Protection Program insurance offered through 2014 farm bill. "We should all hope we NEVER take payment under MPP-Dairy," says Scott Brown, a dairy and ag economist with the University of Missouri.

If you do collect, that means dairy margins have eroded to the point of triggering payments. It also means that margins have likely eroded well below the $8.50/cwt margin average over the past 10 years.

With current futures prices, the margin is greater than $10 for 2015. But the question is, will they hold? Global dairy commodities are typically trading well below U.S. prices, and the likelihood of world prices climbing to the U.S. level are far less than the reverse.

At the same time, $3.50/bu might not last either. "Could we see a repeat of 2012 on corn prices in 2015, when there was a rapid increase in prices no one ever predicted?" asks Brown.

In 2012, corn prices were still OK in June, but shot up horrendously in July as acreage and crop assessments solidified. "What happens if we plant 84 million acres of corn next year, 8 million less than this year? Current corn prices could turn around quite rapidly."

"I’m not saying 2015 will be a train wreck," says Brown. "But I am saying there is risk in the market."

Brown is urging dairy farmers to look at their farm’s risk profile. Taking the $4/cwt catastrophic coverage, which only costs the $100 administrative fee, won’t offer much risk reduction. "$4 might be OK if you protect your risk in other ways, however," he says.

Brown has developed an easy-to-use, MPP dashboard calculator to assess your individual farm risk. Access it here.