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ECON 337: Agricultural Marketing

ECON 337: Agricultural Marketing. Lee Schulz Associate Professor lschulz@iastate.edu 515-294-3356. Chad Hart Associate Professor chart@iastate.edu 515-294-9911. Sources of economic risk…. Output prices Input prices (seed, fertilizer, feed, feeders) Interest rates

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ECON 337: Agricultural Marketing

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  1. ECON 337: Agricultural Marketing Lee Schulz Associate Professor lschulz@iastate.edu 515-294-3356 Chad Hart Associate Professor chart@iastate.edu 515-294-9911

  2. Sources of economic risk… • Output prices • Input prices (seed, fertilizer, feed, feeders) • Interest rates • Equipment/facilities • Labor • Animal performance, yields • Other??? • How are these risks managed? • (and which are most important)

  3. Types of Risk Profit Price Financial Business Production etc… Futures Price Basis

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

  5. 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

  6. Ego Greed Fear

  7. 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. 8-Step Marketing Plan • Describe your current operation • Specify goals • Know your costs of production and break-even • Utilize sound market information • Set target prices • Evaluate pricing alternatives and actions • Cash, futures/options, forward contract • Execute when target prices are hit • Review and evaluate results

  9. 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?

  10. 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

  11. 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 • Livestock • http://www.extension.iastate.edu/agdm/livestock/html/b1-21.html • Crops • https://www.extension.iastate.edu/agdm/crops/html/a1-20.html

  12. 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

  13. 4.Utilize sound market information… • Factors that impact price • Supply • Demand • Demand and supply balance • Systematic price variations • Trends • Cyclical movements • Seasonal price patterns

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

  15. 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

  16. 6.Evaluate pricing alternatives and actions…

  17. 6.Evaluate pricing alternatives and actions…

  18. 7.Execute when target prices are hit…

  19. 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?

  20. 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

  21. A Little Marketing Philosophy • Bad outcomes still happen… • Never compare to the market high… • Remember it’s your plan for your operation…

  22. Class web site: http://www2.econ.iastate.edu/faculty/hart/Classes/econ337/Spring2019/index.htm

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