Dairy Revenue Protection Basic Provisions allow producers to combine DRP with CME options in pursuit of a more customized risk management strategy. Section 24(a)(1) of Basic Provisions limits the short puts to such strikes that generate revenue no more than 80% of premium owed by the producer for DRP. In that context, how should quarterly packs be treated?

What are option packs?

A pack, in this context, is the simultaneous sale or purchase of a series of options contracts. A pack trade involves executing an order that uses the same strike price in the same product (e.g. Class III milk options) for a series of months at a single premium price. Pack trades can cover a calendar quarter, half-year, or full year or simply a string of several consecutive months. A pack ensures execution across a collection of months with a single order entered at a single time, and guarantees pricing at the total desired premium.  An alternative, placing several orders for individual months, can result in getting the order filled in some months, but not others, without any certainty regarding the total cost (or revenue).

A key feature of entering a pack order is that while the total cost of the pack is known with certainty, the broker (and their client) has no certainty as to what how the total cost will ultimately be allocated by CME to individual months. Consider a pack for July – September 2025, with the total cost of $0.45/hundredweight-month, i.e. cost to cover 1 cwt per month for each of the months in the strip. This corresponds to $0.45/3 = $0.15/cwt (cost for each hundredweight in the pack)

While the screen suggests how each month is likely to be priced, those amounts will not be known with certainty until the order is filled. Once the order is filled, monthly premiums are known:

DRP Basic Provisions stipulate:

(1) If you buy a QCE and also open a new short put option on the relevant dairy futures contract, such that:
(i) The put option contract month is within the quarterly insurance period;
(ii) The put option is sold within 2 trading days before or 5 trading days after the QCE effective date; and
(iii) At the time you sold the put option, the option premium (per cwt) was greater than 80 percent of your QCE premium.

Assume that this option pack was sold the day after the DRP endorsement was purchased, and that the DRP premium after subsidy was $0.22/cwt. By comparing average monthly cost of the pack, $0.15/cwt, with the DRP premium of $0.21/cwt, the ratio is $0.15/$0.21 = 68.2%, which is less than the 80% threshold in DRP Basic Provisions, Section 24(a)(1)(iii). However, when we look at the individual options within the pack, September 2025 option has the assigned premium of $0.20/cwt, which is 90.9% of the DRP premium, on per cwt basis. So does this strategy violate 24(a)(1)(iii) or not?

There is no violation of the rules, as long as: (1) average cost per cwt in the pack is less than 80% of DRP premium, and (2) brokerage statements clearly indicate this was a spread trade, i.e. that options were sold as part of a pack.