Know Your Market
LGM for Dairy: How to Assess the “Percentile Ranking” of This Month’s “Margin Estimate”
May 23, 2011
A decision-making tool can help you visualize how the current month’s Livestock Gross Margin for Dairy ranks in relation to previous margin time frames.
By Marv Carlson, Dairy Gross Margin, LLC
Our percentile rank for the month’s Livestock Gross Margin for Dairy is based on historical comparisons to actual margins or margins that could have been calculated in times before LGM for Dairy was available.
Dairy Gross Margin, LLC has developed a decision-making tool to help dairy producers visualize how the current month’s Livestock Gross Margin for Dairy ranks in relation to previous margin time frames. Several producers have asked how the CME Class III milk price going into the current sales month compares to recent times, so we have added this feature to the percentile rank decision-making tool for further analysis.
When you look at the chart below and on our webpage, you will notice the “average feed” and “low feed” percentile comparisons in addition to “milk.” The 10-year and five-year percentile comparison gives the longer term and more recent snapshots by month that LGM is available during the current sales period. Where you see “#NA,” that means there is no LGM insurance offered that month.
For instance, take the January average feed margin estimate of $11.98. The 10-year average percentile was 80.60%. This means that 80.60% of the time over the past 10 years the margin estimate would have been calculated lower, and 19.40% of the time it was calculated better. I would say this margin estimate achieved a “B minus“ grade. The five-year percentile ranking for the same $11.98 estimate was 77.30%, or a “C plus” grade.
We have set up average feed and low feed inclusions for our margin estimate comparisons. The low feed calculation was designed for producers who grow most of their own feed or have other risk tools placed into action. The average feed calculation is based on a near total amount of feed needed for the average ration a producer may be feeding.
The Risk Management Agency’s (RMA) purpose for the variable feed inclusion allows you to factor in variables to match you operation such as:
· whether you’re growing your own heifers;
· dry cow feed needs;
· amount of feed needs that must be purchased in relationship to feed grown on the farm;
· milk production level goals you may have.
We recommend you calculate your corn and soybean meal equivalent based upon your total feed usage. From there, look at the cost percentage vs. total cost to determine margin coverage needed for the “at risk” component of your feed needs.
The percentile ranking of your own margin estimate will vary from those we present each month, since the LGM for Dairy margin estimate is calculated by subtracting your feed inclusion values for corn and soymeal from the value of 100 lb. of milk (milk minus feed equals margin).
Percentile Rank Comparison Chart from the April 29, 2011 LGM for Dairy Sales Date:
Check our website: www.dairygrossmargin.com under “Dairy History” to view the Percentile Ranking Decision-Making chart for Margin and Milk comparisons. Even though LGM for Dairy will not be available until this fall, we are maintaining our decision-making tools and updates to help you “manage the margin” for better profitability.