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New software tracks real-time margins

PD Editor Walt Cooley Published on 30 April 2013

new_tech

Wisconsin dairyman Brian Gerrits attended a large-herd dairy management conference just one year after the worst of the 2009 dairy crisis had passed.

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When he came home, he said he realized he needed to start better managing his dairy’s margins.

What Gerrits didn’t know at the time was that his desire for more individual control over margins would become a new online-based software program. One that would help other dairymen track their own margins and implement risk management strategies.

“At this conference, the topic of margin management came up,” Gerrits recalls. “I had always heard about it, but the light bulb really never came on – until that day.”

Gerrits, who is CEO and CFO for Breeze Dairy Group LLC in Wisconsin, began by researching the Livestock Gross Management insurance program, but wanted more control and flexibility than it offered.

During his research, he mentioned to his dairy’s accountant, Mark Linzmeier, that he “had to use a program or something” to better project and manage his dairy’s future financial situation.

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Linzmeier, a certified public accountant who grew up on a dairy and dairy-farmed himself early in his career, offered to help.

“I told him if the tool is not out there, we can build it,” Linzmeier recalls.

Prior to being an independent accountant, Linzmeier worked as a commercial ag lender and then as a senior executive for Smithfield Beef Group, the fifth-largest beef packer in the U.S. He says he applied the lessons learned from both responsibilities in his new assignment from Gerrits.

“My responsibilities at Smithfield were to project our overall profitability every day for five different packing plants across the country,” Linzmeier says. “I developed a forecast model for them, which was much more complex than even dairy risk management.

We were dealing with a lot more unknowns. We knew we were going to buy 8,000 head of cattle per day, but we didn’t know what we were going to pay for them, how they were going to grade or to whom we would sell our end products and for how much.”

As Gerrits had thought, building a new tool is what Linzmeier ended up doing. He wanted to use similar forecasting techniques from his Smithfield days in the new creation.

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After several years of working with a professional software developer, Linzmeier unveiled the product of his partnership with Gerrits and the Breeze Dairy Group early this year.

The new web-based software program, Marginsmart, tracks a dairy’s feed costs, basis levels for milk and grain, milk marketings and operating costs to provide an up-to-the-minute assessment of a dairy’s gross margin.

It can also update that margin based on the CME’s current milk and CBOT’s current grain futures in real-time.

The software’s highest premium level allows producers to set margin and net income profitability targets and be alerted by text message when the market changes create pricing that meets or exceeds those targets.

“I used to find that several times per day I was either on my phone or on my computer watching the CME,” Gerrits says. “I’m hardly looking at it at all any more because Marginsmart is watching it for me. And I sleep a lot better at night knowing we have a risk management plan in place and that it’s being implemented.”

Of all the software’s features, Gerrits likes its overall margin summary report, which shows how much milk and feed the dairy has contracted up to two years in advance. He also likes that it can provide expected gross income and net income profitability at a moment’s notice.

“The first thing you have to do is dig into your finances and find out what your operating expenses are,” Gerrits suggests. “Then you’re monitoring your income over feed costs or your margin.”

Linzmeier says if a dairy is well aware of all its costs, it would take about three to five hours to get started. Initial setup takes in all of a dairy’s feed ingredients and their current and future pricing contracts. It can even assign values for home-grown feeds.

Next, users build rations from the ingredients in the previous step and assign amounts of feed to be fed. Feed amounts can be entered as as-fed pounds, dry matter pounds or percentage fed.

“We’ve tried to incorporate as many features and calculations as possible throughout the whole program because we knew we were going to market this to the whole industry,” Linzmeier says. “We know different farms and different parts of the country have different ways of doing things, so we made it completely flexible in how you can input information.”

The next setup set assembles a dairy’s cows into pens that receive the rations assigned previously. Users can project feed usage per month for up to two years.

“If a dairy changes a ration seasonally, they can allocate those rations accordingly and only show cows eating them in the winter or summer, for example,” Linzmeier says.

For just about each step of the setup, Linzmeier identifies multiple ways data can be entered into the program. He says this was intentional.

“It’s built to be a living program so it can accommodate a dairy’s ongoing changes easily,” Linzmeier says.

Ingredients and rations fed to the cows project milk output on a herd or pen level. It will also project feed ingredient use.

“For a specific period of time, you will be able to see exactly what your feed needs will be,” Linzmeier says.

Ingredient and milk prices can be set to calculate based on a fixed price, fluctuate based on CME and CBOT markets or a blended combination thereof that would reflect both a dairy’s forward futures and fixed price contracted feed and milk and any spot purchases or sales.

It also allows each dairy the ability to include its own milk and grain basis levels to truly calculate margins for their own situation.

“If a dairy closes any futures contract before its due date, the program will calculate any gain or loss and factor that into the margin as well,” Linzmeier says.

The output of all this financial data is a monthly overall gross milk margin projected over any time period the user selects. Numerous charts and graphs will also display the data.

For a 3,000-cow dairy, these basic program features would generally cost $6,000 per year and include 16 hours of customer service. The software’s cost is based on one of five tiered prices based on herd size (under 500; 500 to 1,000; 1,000 to 3,000; 3,000 to 10,000; and 10,000-plus).

At a premium subscription level, producers can customize and input other income and expenses specific to their operations, such as calf sales, patronage dividends from a co-op, cull cow sales or checkoff, and hauling costs.

Expenses can be entered on a per-cwt basis or in absolute dollars. These details allow dairymen to see their specific bottom-line net income profitability on a monthly basis. With these additional features, the overall cost for a 3,000-cow dairy would be $9,000 per year and include more hours of customer service.

At the highest subscription level, a dairyman could define monthly targets for specific margins or bottom-line profitability and be alerted by text message when current futures prices and their dairy’s parameters in the software indicate such a margin or profitability would exist for the specified month in the future.

Dairymen can also request the software send a text message with margins or profitability numbers at any time and at a specific time each day to keep track of their margin and profitability. For the same dairy quoted above, these features would cost $10,700 per year and include 24 customer service hours.

“Any time all of your specifics and the software’s calculation indicate the margin or profitability you select is available, you will get a text,” Linzmeier says. “Our goal is for our program to give people information. It will alert you to take action. It will be up to you to decide, ‘Do I want to lock these prices in?’”

During development and testing, Gerrits had Linzmeier determine the dairy’s average annual income over feed cost for the past seven years. This is the number he used as his benchmark for setting risk management targets; he won’t do any forward contracting unless the dairy at least hits its average margin.

He doesn’t feel pressure to always lock in feed and milk at the same time because he can set separate targets for feed and milk prices, act on them separately, and the software will blend the results into a new projected margin.

He says there was an instance earlier this year where locking in feed and milk together would have been a detriment to the dairy. Within a day, milk futures spiked higher but corn remained relatively high and steady.

He locked in the milk prices, but then a few days later when corn dipped lower, he locked in those prices. Without the software’s feed, milk price and margin targets and a text alert sent when those were met, he says he likely would have missed an opportunity like that in the past.

“If you’re not excited about managing finances, you’re probably not going to be excited about this software,” Gerrits says. “But that person who is excited by it better exist on your operation, given the volatility there is in the markets these days.”

Gerrits says his goal isn’t to beat the market but rather to just better control his finances.

“Hopefully, 2009 is still fresh on everyone’s mind. There will be another 2009 someday.” PD

Email Linzmeier or call him at (920) 264-9139 for more information.

Walt Cooley
  • Walt Cooley

  • Editor-in-chief
  • Progressive Dairyman
  • Email Walt Cooley
  1. Do you feel risk management is important for your dairy?
  2. Do you know all of the feed sources you will use in a given year?
  3. Would you like to better predict how much of a feed source you will need and when you may need to order more?
  4. Do you have a hard time translating changes in futures prices into actual impacts on your dairy’s feed costs?
  5. Do you want to know your income over feed cost or milk margin at any given moment?
  6. Do you want to know your bottom- line projected profitability at any given moment?
  7. Do you hesitate to implement risk management strategies because you don’t feel you have enough information about how they will impact your bottom -line?
  8. Would you like to be notified immediately when the market presents a good margin opportunity for your dairy?

If you answered yes to five or more of these questions, this technology may be one for you to consider.

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