Developing and Refining your Marketing Plan

1. Developing and Refining your Marketing Plan How does an effective marketing plan relate to the market outlook… Lee Schulz leeschulz@agecon.ksu.edu January 31, 2012 Iowa State University Webcast Managing Margins: Risk Management for Producers

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

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

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.

9. 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

10. 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?

11. 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

12. 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

14. 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

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

16. Oct-Dec Slaughter = 1.041 x Mar-May Pig Crop e.g. Mar-May Pig Crop = 27,000,000 Oct-Dec Slaughter = 28,107,000 (27,000,000 x 1.041)

18. Data Source: Livestock Marketing Information Center

19. 2011 per capita consumption was down 3.88% Livestock Marketing Information Center Data Source: USDA-AMS, Compiled & Analysis by LMIC

20. 2011 pork demand was up 2.04% NAIBER Data Source: LMIC, Compiled & Analysis by NAIBER

21. Data Source: Livestock Marketing Information Center

22. Data Source: Livestock Marketing Information Center

23. Livestock Marketing Information Center Data Source: USDA-AMS, Compiled & Analysis by LMIC

24. Livestock Marketing Information Center Data Source: USDA-AMS, Compiled & Analysis by LMIC

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

26. 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

28. 6.Evaluate pricing alternatives and actions…

29. 6.Evaluate pricing alternatives and actions… • 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

30. 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

31. March 25, 2011 – 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 24, 2011 – 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).

32. 7.Execute when target prices are hit…

33. 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?

34. 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

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

36. Questions Lee Schulz leeschulz@agecon.ksu.edu