Developing and Refining your Marketing Plan How does

Developing and Refining your Marketing Plan How does an effective marketing plan relate to the market outlook… ECON 337: Agricultural Marketing Lee Schulz Assistant Professor lschulz@iastate. edu 515 -294 -3356 Chad Hart Associate Professor chart@iastate. edu 515 -294 -9911

Types of Risk Profit Price Financial Business Production etc…

In your farm management, 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

In your farm management, 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

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

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. )

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 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

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/b 1 -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 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

Date Commodity Description Number of animals Placement date Placement weight Expected sell date Expected sell weight 1200 March 25 45 August 1 270 Cost Price of the pig Feed Interest on feeder pig and feed Veterinary and Supplies Transportation and marketing costs Direct facility Labor Facility and Overhead Price Target 1 2 3 4 5 6 7 Future contract Current quotation Expected basis Expected price Cost head/sold 81. 09 74. 27 2. 46 1. 80 5. 28 5. 86 2. 31 4. 27 Cost cwt/sold 30. 03 27. 51 0. 91 0. 67 1. 95 2. 17 0. 85 1. 58 Live Hog 63. 24 64. 10 64. 89 65. 68 68. 68 71. 68 74. 68 Lean Hog Equivalent 87. 95 89. 11 90. 18 91. 25 95. 31 99. 37 103. 44 March 25 AUG-LH 102. 00 -1. 73 100. 27 Accumulated Cost 30. 03 57. 54 58. 45 59. 12 61. 07 63. 24 64. 10 65. 68

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 • • • Must deliver in full • Opportunity loss if prices rise Futures contract • Easy to enter/exit • Minimize risk • Often better prices than forward contracts • • Options contract • • • Premium cost • Set quantities • Commission cost Easy to understand Flexible quantity Locked-in price Minimize risk Price protection Minimize risk Benefit if prices rise Easy to enter/exit Opportunity loss if prices rise Commission cost Performance bond calls Set quantities

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 Lean Hog Target Equivalent 1 87. 95 2 89. 11 3 90. 18 4 91. 25 5 95. 31 6 99. 37 7 103. 44

March – 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-thanexpected farrowing and farrowing intentions numbers may be slightly bullish for deferred contracts (CME Daily Livestock Report). June – 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… August Lean Hogs 110 105 Price Lean Hog Target Equivalent 1 87. 95 2 89. 11 3 90. 18 4 91. 25 5 95. 31 6 99. 37 7 103. 44 100 95 90 85 80 3 -Jan 3 -Feb 3 -Mar 3 -Apr 3 -May 3 -Jun 3 -Jul 3 -Aug

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…

Class web site: http: //www. econ. iastate. edu/~chart/Classes/ec on 337/Spring 2015/