Developing and Refining your Marketing Plan

How does an effective marketing plan relate to the market outlook…

ECON 337:Agricultural Marketing

Chad HartAssociate Professorchart@iastate.edu515-294-9911

Lee SchulzAssistant Professorlschulz@iastate.edu515-294-3356

Types of Risk

Profit

Price Financial Business Production etc…

Futures Price

Basis

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/b1-21.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− 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 March 25Commodity DescriptionNumber of animals  1200 Future contract  AUG-LHPlacement date March 25 Current quotation  102.00Placement weight 45 Expected basis  -1.73Expected sell date  August 1 Expected price 100.27Expected sell weight  270

Cost head/sold Cost cwt/sold Accumulated CostCostPrice of the pig 81.09 30.03 30.03Feed 74.27 27.51 57.54Interest on feeder pig and feed 2.46 0.91 58.45Veterinary and Supplies 1.80 0.67 59.12Transportation and marketing costs 5.28 1.95 61.07Direct facility 5.86 2.17 63.24Labor 2.31 0.85 64.10Facility and Overhead 4.27 1.58 65.68

Price Target Live Hog Lean Hog Equivalent1 63.24 87.952 64.10 89.113 64.89 90.184 65.68 91.255 68.68 95.316 71.68 99.377 74.68 103.44

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• Minimize risk

• Must deliver in full• Opportunity loss if prices rise

Futures contract • Easy to enter/exit• Minimize risk• Often better prices than forward

contracts

• Opportunity loss if prices rise• Commission cost• Performance bond calls• Set quantities

Options contract • Price protection• Minimize risk• Benefit if prices rise• Easy to enter/exit

• Premium cost• Set quantities• Commission cost

• 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

6.Evaluate pricing alternatives and actions…

Price Target

Lean Hog Equivalent

1 87.952 89.113 90.184 91.255 95.316 99.377 103.44

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-than-

expected 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…

Price Target

Lean Hog Equivalent

1 87.952 89.113 90.184 91.255 95.316 99.377 103.44

3-Ja

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12-Ja

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21-Ja

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30-Ja

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8-Fe

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17-F

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7-Mar

16-M

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20-Ju

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August Lean Hogs

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/econ337/Spring2014/