1. ECON 337: Agricultural Marketing Chad Hart Associate Professor chart@iastate.edu 515-294-9911 Lee Schulz Assistant Professor lschulz@iastate.edu 515-294-3356

2. Developing and Refining your Marketing Plan Questions to Ponder: 1.Why does an effective marketing plan need to be tailored and designed to meet the various needs of each unique operation? 2.How does an effective marketing plan relate to the market situation and outlook?

3. Types of Risk Profit PriceFinancialBusiness Productionetc…

4. Reasons for Reducing Price Risk and Uncertainty Influenced by the enterprise combination, cash flow needs, financial situation, and personality and attitude toward risk  Reduce the variability of income over time  Allows more accurate planning for items such as debt payment, family living expenses, and operation growth  Ensure some minimum income level to meet family living expenses and other fixed expenses  Enhance the survival of the operation  Making a business judgement on how much loss a business can withstand is a key to putting a price risk management plan in place

5. In management of your operation, how would YOU describe your risk taking behavior? A.A risk avoider B.Cautious C.Willing to take risks after adequate research D.A real gambler

6. In management of your operation, how would YOUR NEIGHBORS describe your risk taking behavior? A.A risk avoider B.Cautious C.Willing to take risks after adequate research D.A real gambler

7. Which factors below do you consider your comparative advantages? A.Analysis and use of new technology B.Business planning skills (transition planning, business structure, alliances, etc.) C.High quality livestock (genetics, etc.) D.High quality land (crops, pasture, etc.) E.Loan and interest rate management F.Low cost G.Facility and machinery management H.Marketing skills I.Personnel management J.Production skills

8. How do you manage farm income volatility? A.Purchase insurance (LRP, LGM) B.Off-farm income C.Saving funds in good years D.Selling more culls during hard times and retaining more at other times E.Utilizing futures and/or options F.Utilizing contracting (marketing, production, etc.)

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

10. 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.

12. 8-Step Marketing Plan 1.Describe your current operation 2.Specify goals 3.Know your costs of production and break-even 4.Utilize sound market information 5.Set target prices 6.Evaluate pricing alternatives and actions −Cash, futures/options, forward contract 7.Execute when target prices are hit 8.Review and evaluate results

13. 1.Describe your current operation… Annual marketing's: number, weight, timing of sales Input purchases: feeders, 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?

14. 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

15. 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

17. 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

18. 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

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

20. 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

21. DateMarch 22 Commodity Description Number of animals 1200Future contract Oct-LH Placement dateMarch 22Current quotation 69.950 Placement weight12Expected basis -1.24 Expected sell date September 1Expected price68.710 Expected sell weight 270 Cost head/soldCost cwt/soldAccumulated Cost Cost Cost of the wean pig29.7411.01 Feed cost66.9024.7835.79 Non-feed variable costs50.9618.8754.67 Fixed costs11.794.3759.03 Price TargetLive PriceLive Price, adj basisFutures (Lean) Price 135.7937.5250.72 254.6756.4076.24 356.8558.5879.19 459.0360.7682.14 562.0363.7686.19 665.0366.7690.25 768.0369.7694.30

22. 6.Evaluate pricing alternatives and actions…

23. MethodAdvantagesDisadvantages Cash salesEasy to transact Immediate payment No set quantity Minimize risk No price protection Less flexible Forward contractEasy to understand Flexible quantity Locked-in price Minimize risk Must deliver in full Opportunity loss if prices rise Futures contractEasy to enter/exit Minimize risk Often better prices than forward contracts Opportunity loss if prices rise Commission cost Performance bond calls Set quantities Options contractPrice protection Minimize risk Benefit if prices rise Easy to enter/exit Premium cost Set quantities Commission cost

24. 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…

25. 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 6.Evaluate pricing alternatives and actions… Price Target Futures Price 150.72 276.24 379.19 482.14 586.19 690.25 794.30

26. Steve Meyer, Express Markets Inc. (Feb 8, 2016) – My biggest concern for hog markets this year is whether supplies will out-strip packing capacity this fall (National Hog Farmer). Lee Schulz, ISU (January 2016) – Producers should consider taking take some price coverage on hogs to protect against any negative market impacts especially for prices in the second half of 2016. Oct-16, Dec-16, and Feb-17 contracts seem favorable, at this time, given supply projections (Wallaces Farmer).

27. 7.Execute when target prices are hit… Price Target Futures Price 150.72 276.24 379.19 482.14 586.19 690.25 794.30

28. 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?

29. 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

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

31. Class web site: http://www2.econ.iastate.edu/faculty/hart/Classes/econ 337/Spring2016/index.htm