Upper Midwest dairy farm revenue variation and insurance implications

Purpose - The purpose of this paper is to examine the sources and magnitude of variation in accrual adjusted gross farm revenue and farm revenue net of feed purchases on Michigan dairy farms representative of Upper Midwest dairy farms. The paper aims to assess whether adjusted gross revenue‐type insurance instruments meet insurability conditions when applied to dairy farms. Design/methodology/approach - Accrual adjusted dairy farm revenue and revenue net of feed purchased from Michigan dairy farm panel data from 1995 through 2006 were detrended and summarized. Variance decomposition was used to identify sources of variation in adjusted gross revenue and adjusted gross revenue less feed purchases. In‐sample insurance premiums were estimated and Monte Carlo simulations were used to adjust these premiums for out‐of‐sample considerations. Findings - Milk price variation was the largest source of variation while milk production per cow varied little. Farms with smaller herds and those with larger percentages of farm revenue from crop sales had higher relative revenue variability and would trigger a higher frequency of indemnities under a whole farm revenue insurance contract. Research limitations/implications - Because the data analyzed conclude in 2006, the volatility of the past couple of years is not reflected. Therefore, researchers are encouraged to test the proposed insurance feasibility further with more recent data. Practical implications - The paper addresses considerations for the development and commercialization of a feasible dairy revenue insurance instrument. Originality/value - This paper fulfils a need to understand magnitude and source of revenue variation on dairy farms and how insurance might mitigate negative consequences of this variation.