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

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

4. 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

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

7. 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.

9. 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

10. 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?

11. 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

12. 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

14. 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

15. 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

16. 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 = 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)

17. 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

18. Data Source: Livestock Marketing Information Center

19. 2011 per capita consumption was down 3.88%
Livestock Marketing Information Center
Data Source: USDA-AMS, Compiled & Analysis by LMIC

20. 2011 pork demand was up 2.04% NAIBER
Data Source: LMIC, Compiled & Analysis by NAIBER

21. Data Source: Livestock Marketing Information Center

22. Data Source: Livestock Marketing Information Center

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

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

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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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).

32. 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

33. 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?

34. 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

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

36. Questions
Lee Schulz