1. Sponsors: University of Minnesota Extension Service MN Soybean Research & Promotion Council College of Agricultural, Food and Environmental Sciences Center for Farm Financial Management

2. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Explore the Key Elements of a Pre-Harvest Marketing Plan Develop your own Marketing Plan Use your Plan in a Simulation Game

3. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. What is a Marketing Plan? A marketing plan is a proactive strategy to price your grain that considers your financial goals, cash flow needs, price objectives, storage capacity, crop insurance coverage, anticipated production, and appetite for risk Proactive, not reactive, not overactive

4. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Marketing is Important! Iowa State University studies show that since 1998 the average Iowa farm has earned 20-30 cents/bushel (including gov’t payments). Marketing strategies that increase the net price received by just 10 cents per bushel could increase net income by 33-50%!! We get there by eliminating mistakes!

5. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Why do I need a Marketing Plan? Fear and greed are powerful emotions - they will affect your decisions. A solid plan is the only effective weapon against these emotions “Plan your trades, trade your plan”

6. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Objective: Buy crop insurance to protect my production risk, and have 70% of my insured (APH) corn crop priced by late May. Price 10,000 bushels at $2.00 cash price ($2.50 Dec. futures) using fixed-price tool (forward contract/futures hedge/futures fixed contract). Price 10,000 bushels at $2.12, or by Mar.18, using some form of fixed-price tool. Price 10,000 bushels at $2.24, or by April 16, using some form of fixed-price tool. Price 10,000 bushels at $2.36, or by April 30, consider options or a trend system. Price 10,000 bushels at $2.48, or by May 16, consider options or a trend system. Price 10,000 bushels at $2.60, or by May 30, consider options or a trend system. Plan starts on November 1, 2002. Earlier sales will be made at a 15 cent premium to price targets noted above. Ignore decision dates and make no sale if prices are lower than $2.00 local cash price/$2.50 December futures. Exit all options positions by mid-September. (1) Pricing targets (2) Decision dates (3) Trump cards (4) Baseline prices Key Elements of a Pre-Harvest Marketing Plan

7. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Objective: Buy crop insurance to protect my production risk, and have 70% of my insured (APH) corn crop priced by late May. Price 10,000 bushels at $2.00 cash price ($2.50 Dec. futures) using fixed-price tool (forward contract/futures hedge/futures fixed contract). Price 10,000 bushels at $2.12, or by Mar.18, using some form of fixed-price tool. Price 10,000 bushels at $2.24, or by April 16, using some form of fixed-price tool. Price 10,000 bushels at $2.36, or by April 30, consider options or a trend system. Price 10,000 bushels at $2.48, or by May 16, consider options or a trend system. Price 10,000 bushels at $2.60, or by May 30, consider options or a trend system. Plan starts on November 1, 2002. Earlier sales will be made at a 15 cent premium to price targets noted above. Ignore decision dates and make no sale if prices are lower than $2.00 local cash price/$2.50 December futures. Exit all options positions by mid-September. (1) Pricing targets Key Elements of a Pre-Harvest Marketing Plan

8. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Pricing Targets Choose your minimum price threshold Loan rate Cost of production (pre-harvest only) –See appendix for detailed costs of production in Minnesota

9. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Pricing Targets Choose your price steps This plan starts at $2.50 Dec corn and works up to $3.10 Dec –But how often does Dec corn exceed $3.00?

10. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Objective: Buy crop insurance to protect my production risk, and have 70% of my insured (APH) corn crop priced by late May. Price 10,000 bushels at $2.00 cash price ($2.50 Dec. futures) using fixed-price tool (forward contract/futures hedge/futures fixed contract). Price 10,000 bushels at $2.12, or by Mar.18, using some form of fixed-price tool. Price 10,000 bushels at $2.24, or by April 16, using some form of fixed-price tool. Price 10,000 bushels at $2.36, or by April 30, consider options or a trend system. Price 10,000 bushels at $2.48, or by May 16, consider options or a trend system. Price 10,000 bushels at $2.60, or by May 30, consider options or a trend system. Plan starts on November 1, 2002. Earlier sales will be made at a 15 cent premium to price targets noted above. Ignore decision dates and make no sale if prices are lower than $2.00 local cash price/$2.50 December futures. Exit all options positions by mid-September. (2) Decision dates Key Elements of a Pre-Harvest Marketing Plan

11. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Decision Dates Decision dates are needed to make it a real plan for action Crop insurance and/or options allow us to forward price with confidence What’s so special about the March to May period in pre-harvest pricing? How do they work? If I reach a decision date before my pricing target is met, I will price the grain (if prices are above my minimum pricing threshold).

12. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Decision Dates Year1- May 1- Oct CORN Change 19802.953.490.54 19813.772.87(0.90) 19822.932.20(0.73) 19833.033.530.50 19843.042.78(0.26) 19852.642.26(0.39) 19862.041.77(0.27) 19871.871.84(0.03) 19882.272.950.68 19892.642.39(0.26) 19902.702.29(0.42) 19912.532.540.01 19922.532.12(0.41) 19932.43 0.00 19942.582.14(0.44) 19952.633.110.48 19963.332.90(0.44) 19972.762.56(0.20) 19982.622.05(0.58) 19992.312.05(0.26) 20002.621.99(0.63) 20012.272.11(0.16) 20022.202.560.36 Ave.2.642.47(0.16) Corn, 1980-2002 16 years (70%) the market declined, an average of 37 cents/bu. 7 years (30%) the market improved, an average of 43 cents/bu.

13. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Decision Dates

14. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Decision Dates Don’t forget to sell something!

15. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Decision Dates This “June rally” is deceptive, and a result of 1988 alone!

16. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Pricing Tools I understand the opportunity in pre-harvest pricing, but which pricing tool should I use? Fixed-price tools Forward contract Sell futures Futures fixed (HTA) Minimum-price tools Forward contract and buy a call option Buy a put option Minimum price tool offered by local elevator (?)

17. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Objective: Buy crop insurance to protect my production risk, and have 70% of my insured (APH) corn crop priced by late May. Price 10,000 bushels at $2.00 cash price ($2.50 Dec. futures) using fixed-price tool (forward contract/futures hedge/futures fixed contract). Price 10,000 bushels at $2.12, or by Mar.18, using some form of fixed-price tool. Price 10,000 bushels at $2.24, or by April 16, using some form of fixed-price tool. Price 10,000 bushels at $2.36, or by April 30, consider options or a trend system. Price 10,000 bushels at $2.48, or by May 16, consider options or a trend system. Price 10,000 bushels at $2.60, or by May 30, consider options or a trend system. Plan starts on November 1, 2002. Earlier sales will be made at a 15 cent premium to price targets noted above. Ignore decision dates and make no sale if prices are lower than $2.00 local cash price/$2.50 December futures. Exit all options positions by mid-September. (3) Trump cards Key Elements of a Pre-Harvest Marketing Plan

18. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. The #1 reason people avoid marketing plans… “As soon as I sell, the price will go up!” Use a “trump card” – some form of a trend following tool - to follow a price rally up then sell when trend turns back down Trump Cards A disciplined but flexible way to change your plan!

19. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Options Technical trading tools Consider a simple moving average as a proxy for your favorite technical tool Track two moving averages (e.g., 7 and 10 day) “Crossover” signals buy or sell See appendix for more information Trump Cards

20. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Trump Cards – Moving Averages

21. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Trump Cards Save trump cards (options and/or technical tools) for the later stages of the plan Lowers the cost (i.e. the time value) of options Spring and summer months are more likely periods for trends (avoid quick “in and out” signals from technical tools)

22. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Before we play the game, you need to make your plan! Objective: Buy crop insurance to protect my production risk, and have ___% of my insured (APH) corn crop priced by late May. Price ______ bushels at $______ cash price ($_______ Dec. futures) using ___________. Price ______ bushels at $______, or by _______, using __________________________. Price ______ bushels at $______, or by _______, using __________________________. Price ______ bushels at $______, or by _______, using __________________________. Plan starts on __________________. Earlier sales will be made at a _________ cent premium to price targets noted above. Ignore decision dates and make no sale if prices are lower than $_________ local cash price/$_________ December futures.

23. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Objective: Buy crop insurance to protect my production risk, and have 70% of my insured (APH) corn crop priced by late May. Price 10,000 bushels at $2.00 cash price ($2.50 Dec. futures) using fixed-price tool (forward contract/futures hedge/futures fixed contract). Price 10,000 bushels at $2.12, or by Mar.18, using some form of fixed-price tool. Price 10,000 bushels at $2.24, or by April 16, using some form of fixed-price tool. Price 10,000 bushels at $2.36, or by April 30, consider options or a trend system. Price 10,000 bushels at $2.48, or by May 16, consider options or a trend system. Price 10,000 bushels at $2.60, or by May 30, consider options or a trend system. Plan starts on November 1, 2002. Earlier sales will be made at a 15 cent premium to price targets noted above. Ignore decision dates and make no sale if prices are lower than $2.00 local cash price/$2.50 December futures. Exit all options positions by mid-September. 50% is plenty!

24. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Objective: Buy crop insurance to protect my production risk, and have 70% of my insured (APH) corn crop priced by late May. Price 10,000 bushels at $2.00 cash price ($2.50 Dec. futures) using fixed-price tool (forward contract/futures hedge/futures fixed contract). Price 10,000 bushels at $2.12, or by Mar.18, using some form of fixed-price tool. Price 10,000 bushels at $2.24, or by April 16, using some form of fixed-price tool. Price 10,000 bushels at $2.36, or by April 30, consider options or a trend system. Price 10,000 bushels at $2.48, or by May 16, consider options or a trend system. Price 10,000 bushels at $2.60, or by May 30, consider options or a trend system. Plan starts on November 1, 2002. Earlier sales will be made at a 15 cent premium to price targets noted above. Ignore decision dates and make no sale if prices are lower than $2.00 local cash price/$2.50 December futures. Exit all options positions by mid-September. I want different price objectives! and a higher minimum! $2.10

25. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Objective: Buy crop insurance to protect my production risk, and have 70% of my insured (APH) corn crop priced by late May. Price 10,000 bushels at $2.00 cash price ($2.50 Dec. futures) using fixed-price tool (forward contract/futures hedge/futures fixed contract). Price 10,000 bushels at $2.12, or by Mar.18, using some form of fixed-price tool. Price 10,000 bushels at $2.24, or by April 16, using some form of fixed-price tool. Price 10,000 bushels at $2.36, or by April 30, consider options or a trend system. Price 10,000 bushels at $2.48, or by May 16, consider options or a trend system. Price 10,000 bushels at $2.60, or by May 30, consider options or a trend system. Plan starts on November 1, 2002. Earlier sales will be made at a 15 cent premium to price targets noted above. Ignore decision dates and make no sale if prices are lower than $2.00 local cash price/$2.50 December futures. Exit all options positions by mid-September. I want different dates!

26. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Objective: Buy crop insurance to protect my production risk, and have 70% of my insured (APH) corn crop priced by late May. Price 10,000 bushels at $2.00 cash price ($2.50 Dec. futures) using fixed-price tool (forward contract/futures hedge/futures fixed contract). Price 10,000 bushels at $2.12, or by Mar.18, using some form of fixed-price tool. Price 10,000 bushels at $2.24, or by April 16, using some form of fixed-price tool. Price 10,000 bushels at $2.36, or by April 30, consider options or a trend system. Price 10,000 bushels at $2.48, or by May 16, consider options or a trend system. Price 10,000 bushels at $2.60, or by May 30, consider options or a trend system. Plan starts on November 1, 2002. Earlier sales will be made at a 15 cent premium to price targets noted above. Ignore decision dates and make no sale if prices are lower than $2.00 local cash price/$2.50 December futures. Exit all options positions by mid-September. Too many decisions! 20,000

27. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. The Game Rules Production is 84,000 bushels Starts first of January Ends first of October All open positions liquidated on that day Any unsold bushels will be priced at harvest, no post-harvest sales If you use a trump card, you must use some fixed-price tool when sell signal occurs

28. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Now get ready for the game by writing your own marketing plan! Think of your own operation, but use 84,000 bushels for total expected production

29. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Before we play the game, you need to make your plan! Objective: Buy crop insurance to protect my production risk, and have ___% of my insured (APH) corn crop priced by late May. Price ______ bushels at $______ cash price ($_______ Dec. futures) using ___________. Price ______ bushels at $______, or by _______, using __________________________. Price ______ bushels at $______, or by _______, using __________________________. Price ______ bushels at $______, or by _______, using __________________________. Plan starts on __________________. Earlier sales will be made at a _________ cent premium to price targets noted above. Ignore decision dates and make no sale if prices are lower than $_________ local cash price/$_________ December futures.

30. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Game Wrap-Up How did you do? How did your neighbor do? Is this a better way to market your grain?

31. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Objective: Buy crop insurance to protect my production risk, and have 70% of my insured (APH) corn crop priced by late May. Price 10,000 bushels at $2.00 cash price ($2.50 Dec. futures) using fixed-price tool (forward contract/futures hedge/futures fixed contract). Price 10,000 bushels at $2.12, or by Mar.18, using some form of fixed-price tool. Price 10,000 bushels at $2.24, or by April 16, using some form of fixed-price tool. Price 10,000 bushels at $2.36, or by April 30, consider options or a trend system. Price 10,000 bushels at $2.48, or by May 16, consider options or a trend system. Price 10,000 bushels at $2.60, or by May 30, consider options or a trend system. Plan starts on November 1, 2002. Earlier sales will be made at a 15 cent premium to price targets noted above. Ignore decision dates and make no sale if prices are lower than $2.00 local cash price/$2.50 December futures. Exit all options positions by mid-September. (4) Baseline prices Key Elements of a Pre-Harvest Marketing Plan

32. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Baseline Prices How do you know if you’re a star? A “baseline price” is a benchmark for comparison Homework: Track the average price over the marketing life of a crop Get to know your local market!

33. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Baseline Prices Jan-Oct 2002 will be the new crop price Nov-Jun 2003 will be the spot price Use the loan rate when prices are below loan Same day each month (2 nd Friday, etc.) MonthCornSoybeans Jan 20022.38 -.55 = $1.83/$1.844.51 -.65 = $3.86/$4.86 Feb2.35 -.55 = $1.80/$1.844.52 -.65 = $3.87/$4.86 Mar2.28 -.55 = $1.73/$1.844.71 -.65 = $4.06/$4.86 Apr2.21 -.55 = $1.66/$1.844.53 -.65 = $3.88/$4.86 May2.21 -.55 = $1.66/$1.844.63 -.65 = $3.98/$4.86 Jun2.23 -.55 = $1.68/$1.844.70 -.65 = $4.05/$4.86 Jul 2.32 -.55 = $1.77/$1.84 5.21 -.65 = $4.56/$4.86 Aug2.61 -.45 = $2.165.25 -.45 = $4.80/$4.86 Sep$2.47$5.22 Oct$2.15$4.86 Nov$2.12$5.20 Dec$2.10$5.34 Jan 2003$2.08$5.27 Feb Mar Apr May Jun Average$1.99 thru Jan$4.97 thru Jan My Average $2.22$5.15 (60%)

34. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Baseline Prices Because the baseline price is an average over several months, it is hard to beat Even many professional marketing advisors have difficulty doing better AgMAS is an ongoing study at the University of Illinois

35. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. How does the marketing plan presented here compare to other approaches? What gives you the best average price over several years? Compared three different marketing plans using actual prices from 1990- 2001 Pre-Harvest Marketing Plan Study

36. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. PLAN #1: The Basic Pre-Harvest Corn Plan $2.50 futures minimum, November 1 start, forward contract only Price 10,000 bushels at $2.00 cash/$2.50 Dec. futures Price 10,000 bushels at $2.12 cash/$2.62 Dec. futures, or by March 30 Price 10,000 bushels at $2.24 cash/$2.74 Dec. futures, or by April 15 Price 10,000 bushels at $2.36 cash /$2.86 Dec. futures, or by April 30 Price 10,000 bushels at $2.48 cash /$2.98 Dec. futures, or by May 15 Price 10,000 bushels at $2.60 cash /$3.10 Dec. futures, or by May 31 Remaining 24,000 bushels priced at October 10 harvest price PLAN #2: Use of Options Same as Plan #1, plus purchase call options against final three sales, exit all options positions by mid-September PLAN #3: Harvest Sales benchmark No pre-harvest marketing, take harvest price on October 10 Pre-Harvest Marketing Plan Study

37. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. YearPLAN 1PLAN 2PLAN 3 1990 $2.06 $2.00$1.86 1991 $2.04 $2.03$2.00 1992 $1.97 $1.91$1.58 1993 $2.01 $1.92 1994 $1.96 $1.89$1.64 1995$2.28$2.36 $2.68 1996 $2.40 $2.37 $2.40 1997$2.27$2.25 $2.38 1998 $2.14 $2.07$1.72 1999 $1.62 $1.49 2000 $1.84 $1.79$1.54 2001 $1.74 $1.64 AVERAGE$2.03$2.00$1.90 VARIANCE$0.05$0.06$0.15 best?10 / 12 yrs3 / 12 yrs LDP’s and other gov’t payments were not considered! Pre-Harvest Marketing Plan Study (Corn)

38. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Winning the Game Launch Your 2003 Marketing Plan Summary A plan is discipline - plan your trades, then trade your plan A plan is proactive, not reactive, and not overactive Pre-harvest marketing is very important – history supports it and you have upside price potential in a lower market Crop insurance is confidence Set pricing targets and decision dates, track your baseline price The use of options and technical trading tools (trump cards) offers flexibility with discipline. Use selectively!

39. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Teams of Regional Extension Educators conducted 30 workshops in MN Evaluations have not been summarized Also sending surveys to the sponsors Evaluation 2001-02

40. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Sponsor Model Sponsor responsiblities: Provide the location/facilities Provide eats and treats Promote the workshop locally Pay the University $600 University responsiblities: Provide promotion materials to sponsor Present the workshop Provide the participant materials

41. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Sponsor Model -- Advantages Reduced transaction costs on income Local presence for promotion, advertising & partnership Eliminates local meeting arrangements Lower financial risk with low turn out Cover direct program costs – travel, printing, etc. Pressure on presenters to deliver quality program

42. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Sponsor Model – Requirements for Success Requires a quality program – name recognition helps Aggressive promotion to potential sponsors Provide sponsors with promotional tools Make sure sponsors understand their responsibility Assist with statewide promotion

43. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Sponsor Model – Challenges Private vs. public meetings Logistics of sponsor care – promotion, billing, follow-up

44. Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Focus on strategy – not outlook Challenging game Well packaged turn-key program Broad support from commodity organizations Good teaching teams Reasons for Success