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Every
businessperson eventually becomes involved
in finance, production and marketing. These
three activities are essential to effective
business management. While most farmers
describe themselves primarily as producers,
they also have to finance and market what
they produce.
Fortunately,
good producers can be good marketers because
smart marketing begins with an idea of the
cost of production. Managers who market without
an idea of their cost of production can only
concentrate on enhancing the price they get
for their product. It's like driving a car
that only has a front window and no side or
rear windows. As long as everything runs smoothly,
it can be OK. But any setback must be handled
with incomplete knowledge.
Those
who market with an understanding of their
cost of production can make decisions about
what is an acceptable price, what price will
cover certain critical costs, and what are
the risks of not taking a price when it is
offered. Using the analogy of the car, it
provides front, side and rear windows so that
the decision maker can make both offensive
and defensive decisions.
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| The
marketing plan described here is intended, first,
to cover as many of the costs of production
as possible and, second, to maximize the price
received for commodities produced. Many farmers
try to maximize price before they have implemented
strategies to cover all costs. While marketing
in this manner is the prerogative of the farmer,
it is not the approach reviewed in this guide.
The marketing plan discussed here focuses on
relatively simple and available strategies that
can be used to increase income and reduce risk.
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A
Three-Step Process:
A business-oriented marketing plan includes
the following three steps:
- Estimate
your cost of production and expected break-even
price per unit of commodity, e.g., bushel, pound
or hundredweight.
- Determine
your marketing plan - how much you are going to
sell at what price.
- Develop
a follow-through plan.
Your
Cost of Production:
Good producers can be good marketers because
smart marketing is aided by a thorough understanding
of the production process. By analyzing the production
process, managers are able to estimate costs of
production. Each productive activity involves the
use of inputs and services. By listing the activities,
you can estimate prices to cover each activity and
eventually the whole production process. The best
source of cost information is an internal review
of your own production activities and costs of production.
A record keeping program that tracks all of the
costs of production provides a historical perspective
on costs. These are coupled with estimates of input
use and prices for the coming production year to
develop a projected cost of production for the coming
year.
A good
cost-of-production worksheet should contain sections
detailing the operating and ownership costs incurred
in production. These details give perspective on
which costs are cash costs and which are not. Cash
costs are those expenses, such as seed and fertilizer
that require cash to be paid to the supplier. Noncash
costs include depreciation in equipment and land
interest for owned land. An understanding of the
nature of the costs (operating and ownership, cash
and noncash) helps establish target prices.
The marketing
plan, no matter how good, may not be able to lock
in prices that cover all costs of production. Key
target prices that compensate for critical costs
are important to have in years where opportunities
to cover all costs are limited. In the absence of
your own cost estimates, you can use published costs
of production, available from Extension and other
sources. However, these cost estimates provide only
rough estimates of fixed and variable costs of production
and do not have the detail necessary for personal
business analysis and marketing.
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The
Marketing Plan:
The primary objective of a marketing plan is
to cover as many costs of production as possible.
Use the cost-of-production estimate discussed above
and begin to set target sales prices as follows:
- Estimate
the outcome of different pricing alternatives.
- Determine
a target and quantity to market.
Estimate
different pricing alternatives.
Consider several marketing opportunities from cash
sales to forward contracts to futures and options.
Basis information for your local market is necessary
to analyze the futures and options marketing alternatives.
The result of considering all marketing alternatives
is to arrive at expected prices for all marketing
alternatives. These expected prices can be compared
with the cost of production. Whether the current
expected prices exceed or are less than the total
cost of production, the decision becomes one of
marketing a certain percentage of expected production
now or taking a risk that a higher price can be
obtained at a future date.
Determine
a target and quantity to market
Anytime a manager is waiting for a higher price,
the possibility of getting a lower price exists.
From this perspective, a marketer needs to have
both a defensive and an offensive strategy. The
offensive position indicates that you will sell
when the price rises to a certain level and you
are able to cover pertinent costs. The defensive
position is the price at which you will sell some
of your production in an attempt to lock in income
you might otherwise lose.
The target
consists of a trigger price and quantity to sell
for both an offensive and a defensive position.
The trigger price is the price for each marketing
alternative that will create a response from the
marketer. When the expected price reaches the trigger
price for either the offensive or defensive plan,
a sale is initiated. The quantity you decide to
sell under each plan determines how much of the
expected production you will market at different
times. Your goal is to maximize the price you receive
while minimizing downside price risk.
The
Follow-Through Plan:
Once the target table is completed, the markets
must be watched to determine when either trigger
price has been reached. A key to effective marketing
under this plan is to have a method of following
the markets. Futures prices can be tracked by having
continuous market information delivered to your
office, using daily or weekly closing prices, or
giving your broker or elevator manager authority
to conduct the trade.
Because
the trade will be initiated at an unknown time in
the future, it is necessary to make arrangements
that facilitate quick trading. Open any necessary
accounts with a broker and banker. Have forward
contracts ready to be signed and delivered. When
a trigger is pulled, the decision should be easily
implemented.
Stick
to your plan
Because marketing is an emotional activity,
it is important to have someone to keep you accountable
to conduct trades at the predetermined triggers.
If prices are moving up, the tendency will be to
postpone pulling the trigger because a higher price
surely is ahead. When prices are moving down, optimism
says they will bounce back and you should wait for
the rebound. This is not objective marketing.
You set
trigger prices in an attempt to capture an acceptable
price without undue risk. Because you market only
a portion at each target, the price expectations
experienced at each trigger can be built into future
targets.
Accountability
can be obtained by having another person know and
understand the marketing plan. Spouses are often
in a good position to implement a marketing plan
because they may not feel as attached to the production
as the person producing the commodity. When the
target is reached, your spouse can remind you to
initiate a trade. Marketing clubs, brokers and business
partners can also serve as reminders to trade. Giving
authority to grain traders to initiate a trade at
certain targets can also be a way of keeping to
the plan.
Aim
at a second target
Whenever a trigger is pulled, aim at a second
target. Select both offensive and defensive trigger
prices, along with quantities to be marketed. The
process of setting a target, pulling the trigger
at key points and aiming at another target repeats
until all of the production is sold.
Marketers
need to keep track of what percentage of expected
production is forward priced so that they do not
oversell as they repeat the marketing plan. Portions
of the marketing plan worksheet assist producers
in tracking what percentage of expected production
is already forward priced.
Marketing
Tips
The plan described here is an attempt to introduce
objectivity into the marketing process. Other things
need to occur to market production successfully.
The following tips should help make your marketing
more successful.
- Don't
market all of your production at one time - especially
anticipated production. Grain in the field is
not as sure as grain in the elevator. Forward
price less than 75 percent of your expected production.
- Remember
your strengths. Most farmers prefer production
to marketing. Focus on production. Market as objectively
as possible according to plans.
- Keep
an eye on your financial position. Leverage and
liquidity problems can wreak havoc on your finances
and marketing plans. Having to sell to meet financial
obligations is not part of the marketing plan
and is not usually the best time to sell.
- Don't
get greedy. If you can lock in a profit, do it.
It may not be the highest profit, but it is a
profit.
- Remember
profit is a return to risk. You cannot reduce
all risk and still expect to excel in profit.
John
Berry, Agricultural Marketing
Penn State Cooperative Extension, Lehigh County
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Crop Marketing Plan