Developing and Refining your Marketing Plan How does an effective marketing plan relate to the market outlook… Lee Schulz leeschulz@agecon.ksu.edu January 31, 2012 Iowa State University Webcast Managing Margins: Risk Management for Producers

Types of Risk Profit Price Financial Business Production etc… Futures Price Basis

Western Cornbelt Cash Prices and Basis, 2007-2011 Weekly   Average Standard Deviation High Low August price 74.76 3.95 77.76 68.45 August basis 0.73 2.64 3.77 -1.54 December price 65.61 5.45 74.86 61.27 December basis -5.23 2.86 -1.72 -7.93

Why Should I have a Marketing Plan? Detached from the decision Proper perspective Introduces discipline and consistency Check your logic What if…

What is a Marketing Plan? A marketing plan is an outline of price, date, and quantity objectives used to generate a reasonable return given the existing market conditions.

8-Step Marketing Plan Describe your current operation Specify goals Know your costs of production and break-even Utilize sound market information Set target prices Evaluate pricing alternatives and actions Cash, futures/options, forward contract Execute when target prices are hit Review and evaluate results

1.Describe your current operation… Annual marketing's: number, weight, timing of sales Input purchases: feeder pigs, feed needs Quality of hogs: genetics, leanness, weight distribution Cost of production: cash and total costs Alternative market outlets: distance, transportation costs Marketing philosophy: sell on tight schedule, shop for best price, standing order Attitude toward price risk and knowledge of risk management tools Where are you going?

2.Specify goals… Manage risk and protect profit potential Goals should be achievable and measurable If and when consistently met – revise upward Examples: Selling price 10% higher than the state average for the year Sell in top 1/3 of state price range for the year Cover total costs plus growth requirements Cover cash requirements

3.Know your costs of production and break-even… Production history and expectations Incorporate input quantities and prices Project costs on per unit sold Variable $/unit Total $/unit Budgeting tools available http://www.extension.iastate.edu/agdm/livestock/html/b1-21.html

3.Know your costs of production and break-even… Project a break-even level Price to cover variable costs Price to cover fixed costs Price to cover profit and growth Sensitivity analysis for key variables Back calculate from revenue to what you can afford to pay for feeder pigs

4.Utilize sound market information… Factors that impact price Supply Demand Demand and supply balance Systematic price variations Trends Cyclical movements (hog cycle) Seasonal price patterns

Relationship of Pig Crops to Commercial Hog Slaughter Two Quarters Later Year Dec-Feb Pig Crop U.S. (000) Commercial Hog Slaughter July-Sept (000) Slaughter to Pig Crop Ratio Mar-May Commercial Hog Slaughter Oct-Dec 1998 25,480 25,039 0.983 26,989 27,586 1.022 1999 25,245 24,953 0.988 26,271 26,724 1.017 2000 24,521 24,098 25,565 25,715 1.006 2001 23,970 23,635 0.986 25,507 26,470 1.038 2002 24,857 25,120 1.011 26,001 26,715 1.027 2003 24,393 24,747 1.015 25,630 27,608 1.077 2004 25,109 25,817 1.028 25,639 27,192 1.061 2005 25,348 25,528 1.007 25,991 27,486 1.058 2006 25,660 25,810 26,599 27,880 1.048 2007 26,395 26,566 27,870 30,396 1.091 2008 28,388 28,696 28,631 30,214 1.055 2009 28,552 27,072 0.948 29,012 29,615 1.021 2010 27,596 26,931 0.976 28,730 29,626 1.031 2011 27,866 27,374 0.982 29,252 29,892 Oct-Dec Slaughter = 1.041 x Mar-May Pig Crop e.g. Mar-May Pig Crop = 27,000,000 Oct-Dec Slaughter = 28,107,000 (27,000,000 x 1.041)

Relationship of Pig Crops to Commercial Hog Slaughter Two Quarters Later Year June-Aug Pig Crop U.S. (000) Commercial Hog Slaughter Jan-Mar (000) Slaughter to Pig Crop Ratio Sept-Nov Commercial Hog Slaughter Apr-Jun 1998 26,634 24,775 0.930 25,902 23,628 0.912 1999 25,863 25,579 0.989 24,973 24,288 0.973 2000 25,546 25,039 0.980 25,110 23,125 0.921 2001 25,587 24,578 0.961 25,553 23,280 0.911 2002 25,725 24,148 0.939 25,094 24,280 0.968 2003 25,974 24,654 0.949 25,484 23,922 2004 26,165 25,717 0.983 25,874 24,737 0.956 2005 26,446 25,538 0.966 26,190 25,031 2006 26,519 26,208 0.988 26,855 24,839 0.925 2007 29,095 26,684 0.917 29,513 25,526 0.865 2008 29,240 29,601 1.012 28,771 27,941 0.971 2009 28,718 28,503 0.993 28,260 27,072 0.958 2010 28,871 27,630 0.957 28,488 26,074 0.915 2011 29,084 27,486 0.945 29,014 26,113 0.900

Data Source: Livestock Marketing Information Center

2011 per capita consumption was down 3.88% Livestock Marketing Information Center Data Source: USDA-AMS, Compiled & Analysis by LMIC

2011 pork demand was up 2.04% NAIBER Data Source: LMIC, Compiled & Analysis by NAIBER

Data Source: Livestock Marketing Information Center

Data Source: Livestock Marketing Information Center

Livestock Marketing Information Center Data Source: USDA-AMS, Compiled & Analysis by LMIC

Livestock Marketing Information Center Data Source: USDA-AMS, Compiled & Analysis by LMIC

4.Utilize sound market information… Market information and projections USDA reports (weekly, monthly, annual) Extension forecast/outlook reports Commodity organizations Newsletters Private marketing firms

5.Set target prices… Set target prices based on actual or accurately estimated production costs Know what the market is paying (or expected to pay) The level and timing of target prices based on: Market outlook information Cost of production figures Cash flow needs Advantageous to set several target prices Allows for changing market trends

Date March 25, 2011 Commodity Description Number of animals  1200 Future contract  AUG-LH Placement date Current quotation  102.00 Placement weight 45 Expected basis  -1.73 Expected sell date  August 1, 2011 Expected price 100.27 Expected sell weight  270 Cost head/sold Cost cwt/sold Accumulated Cost Cost Price of the pig 81.09 30.03 Feed 74.27 27.51 57.54 Interest on feeder pig and feed 2.46 0.91 58.45 Veterinary and Supplies 1.80 0.67 59.12 Transportation and marketing costs 5.28 1.95 61.07 Direct facility 5.86 2.17 63.24 Labor 2.31 0.85 64.10 Facility and Overhead 4.27 1.58 65.68 Price Target Live Hog Lean Hog Equivalent 1 87.95 2 89.11 3 64.89 90.18 4 91.25 5 68.68 95.31 6 71.68 99.37 7 74.68 103.44

6.Evaluate pricing alternatives and actions… Method Advantages Disadvantages Cash sales Easy to transact Immediate payment No set quantity Minimize risk No price protection Less flexible Forward contract Easy to understand Flexible quantity Locked-in price Must deliver in full Opportunity loss if prices rise Futures contract Easy to enter/exit Often better prices than forward contracts Commission cost Performance bond calls Set quantities Options contract Price protection Benefit if prices rise Premium cost

6.Evaluate pricing alternatives and actions… Current positions Too short, too long? Average price sold – will it get you close to the target or are you in danger of falling below the minimum? Market activity Trends Support and resistance Fundamental, seasonal, and technical picture

6.Evaluate pricing alternatives and actions… Example If the market outlook is bearish… Sell futures on 50% of production If the market outlook is neutral… Buy put option to set a net floor price If the market outlook is bullish… Stay in the cash market Price Target Lean Hog Equivalent 1 87.95 2 89.11 3 90.18 4 91.25 5 95.31 6 99.37 7 103.44

March 25, 2011 – USDA’s quarterly Hogs and Pigs report estimates were modestly higher than one year ago and, for the most part, slightly higher than analysts’ pre-report estimates. The report may be slightly bearish for nearby CME Lean Hog futures. Lower-than-expected farrowing and farrowing intentions numbers may be slightly bullish for deferred contracts (CME Daily Livestock Report). June 24, 2011 – USDA’s quarterly Hogs and Pigs report from USDA was very much as the market expected and will most likely be viewed as neutral in the markets (CME Daily Livestock Report).

7.Execute when target prices are hit… Price Target Lean Hog Equivalent 1 87.95 2 89.11 3 90.18 4 91.25 5 95.31 6 99.37 7 103.44

8.Review and evaluate results… Check performance relative to marketing goals Biggest reason for failure to repeatedly use marketing plans is that performance is compared to what might have been Typically the highest price alternative Probably an unrealistic goal No one strategy is best all the time Are conditions changing?

What Makes a Marketing Plan Work? Know your market positions Track all positions – where do you stand on % sold and average price? Make the plan manageable Don’t expect to achieve your highest targets Focus on only tools you feel comfortable using Set price targets that are realistic Use multiple sources of analysis

A Little Marketing Philosophy Bad outcomes still happen… Never compare to the market high… Your plan for your operation…

Questions Lee Schulz leeschulz@agecon.ksu.edu