Agricultural Marketing ECON 337: Agricultural Marketing Chad Hart Associate Professor chart@iastate.edu 515-294-9911 1

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

Fear, Greed, and Ego Fear of making a bad decision -- Watching prices slip away as you wait -- Watching prices rise after you’ve sold Greed of expecting even higher prices -- Not taking advantage of good price opportunities Ego of wanting to claim you caught the market high -- “Lake Wobegon” marketing

Ego Greed Fear

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: feeders, feed needs, crop inputs 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 5% higher than the auction or plant average Sell in top 1/3 of price range 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 animals

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

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

6.Evaluate pricing alternatives and actions…

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

7.Execute when target prices are hit… Price Target Futures Price 1 50.72 2 76.24 3 79.19 4 82.14 5 86.19 6 90.25 7 94.30

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… Remember it’s your plan for your operation…

Class web site: http://www2.econ.iastate.edu/faculty/hart/ Classes/econ337/Spring2017/index.htm