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

2. Types of Risk Profit PriceFinancialBusiness Productionetc… Futures Price Basis

3. Why Should I have a Marketing Plan? Detached from the decision Proper perspective Introduces discipline and consistency Check your logic What if…

4. 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.

6. 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

7. 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?

8. 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

9. 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

11. 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

12. 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

13. 4.Utilize sound market information… Market information and projections −USDA reports (weekly, monthly, annual) −Extension forecast/outlook reports −Commodity organizations −Newsletters −Private marketing firms

14. 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

15. DateMarch 25 Commodity Description Number of animals 1200Future contract AUG-LH Placement dateMarch 25Current quotation 102.00 Placement weight45Expected basis -1.73 Expected sell date August 1Expected price100.27 Expected sell weight 270 Cost head/soldCost cwt/soldAccumulated Cost Cost Price of the pig81.0930.03 Feed74.2727.5157.54 Interest on feeder pig and feed2.460.9158.45 Veterinary and Supplies1.800.6759.12 Transportation and marketing costs5.281.9561.07 Direct facility5.862.1763.24 Labor2.310.8564.10 Facility and Overhead4.271.5865.68 Price TargetLive HogLean Hog Equivalent 163.2487.95 264.1089.11 364.8990.18 465.6891.25 568.6895.31 671.6899.37 774.68103.44

16. 6.Evaluate pricing alternatives and actions… MethodAdvantagesDisadvantages Cash salesEasy to transact Immediate payment No set quantity Minimize risk No price protection Less flexible Forward contractEasy to understand Flexible quantity Locked-in price Minimize risk Must deliver in full Opportunity loss if prices rise Futures contractEasy to enter/exit Minimize risk Often better prices than forward contracts Opportunity loss if prices rise Commission cost Performance bond calls Set quantities Options contractPrice protection Minimize risk Benefit if prices rise Easy to enter/exit Premium cost Set quantities Commission cost

17. 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…

18. 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 187.95 289.11 390.18 491.25 595.31 699.37 7103.44

19. 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).

20. 7.Execute when target prices are hit… Price Target Lean Hog Equivalent 187.95 289.11 390.18 491.25 595.31 699.37 7103.44

21. 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?

22. 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

23. A Little Marketing Philosophy Bad outcomes still happen… Never compare to the market high… Your plan for your operation…

24. Class web site: http://www.econ.iastate.edu/~chart/Classes/ec on337/Spring2014/