ECON 337 Agricultural Marketing Chad Hart Associate Professor

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

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

ar ed Fe G re Ego

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: 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/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 animals

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

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 • • • 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

7. Execute when target prices are hit… Price Target 1 2 3 4 5 6 7 Futures Price 50. 72 76. 24 79. 19 82. 14 86. 19 90. 25 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: //www 2. econ. iastate. edu/faculty/hart/ Classes/econ 337/Spring 2018/index. htm