sponsors: university of minnesota extension service mn soybean research & promotion council...

Sponsors:

University of Minnesota Extension Service

MN Soybean Research & Promotion Council

College of Agricultural, Food and Environmental Sciences

Center for Farm Financial Management

Copyright © 2003 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.

Explore the Key Elements of a Pre-Harvest Marketing Plan

Develop your own Marketing Plan Use your Plan in a Simulation Game


What is a Marketing Plan?

A marketing plan is a proactive strategy to price your grain that considers your financial goals, cash flow needs, price objectives, storage capacity, crop insurance coverage, anticipated production, and appetite for risk

Proactive, not reactive, not overactive


Marketing is Important!

Iowa State University studies show that since 1998 the average Iowa farm has earned 20-30 cents/bushel (including gov’t payments).

Marketing strategies that increase the net price received by just 10 cents per bushel could increase net income by 33-50%!!

We get there by eliminating mistakes!


Why do I need a Marketing Plan?

Fear and greed are powerful emotions - they will affect your decisions. A solid plan is the only effective weapon against these emotions “Plan your trades, trade your plan”


Objective: Buy crop insurance to protect my production risk, and have 70% of my insured (APH) corn crop priced by late May.

Price 10,000 bushels at $2.00 cash price ($2.50 Dec. futures) using fixed-price tool

(forward contract/futures hedge/futures fixed contract).Price 10,000 bushels at $2.12, or by Mar.18, using some form of fixed-price tool.Price 10,000 bushels at $2.24, or by April 16, using some form of fixed-price tool.Price 10,000 bushels at $2.36, or by April 30, consider options or a trend system.Price 10,000 bushels at $2.48, or by May 16, consider options or a trend system.Price 10,000 bushels at $2.60, or by May 30, consider options or a trend system.

Plan starts on November 1, 2002. Earlier sales will be made at a 15 cent premium to price targets noted above.Ignore decision dates and make no sale if prices are lower than $2.00 local cash price/$2.50 December futures.Exit all options positions by mid-September.

(1) Pricing targets

(2) Decision dates

(3) Trump cards

(4) Baseline prices

Key Elements of a Pre-Harvest Marketing

Plan






(1) Pricing targets


Plan


Pricing Targets

Choose your minimum price threshold• Loan rate• Cost of production (pre-harvest only)

– See appendix for detailed costs of production in Minnesota


Pricing Targets

Choose your price steps• This plan starts at $2.50 Dec corn and

works up to $3.10 Dec– But how often does Dec corn exceed

$3.00?






(2) Decision dates


Plan


Decision Dates

Decision dates are needed to make it a real plan for action

Crop insurance and/or options allow us to forward price with confidence

What’s so special about the March to May period in pre-harvest pricing?

How do they work? If I reach a decision date before my pricing target is met, I will price the grain (if prices are above my minimum pricing threshold).


Decision DatesYear 1-

May1-

OctCORN

Change

1980 2.95 3.49 0.54

1981 3.77 2.87 (0.90)

1982 2.93 2.20 (0.73)

1983 3.03 3.53 0.50

1984 3.04 2.78 (0.26)

1985 2.64 2.26 (0.39)

1986 2.04 1.77 (0.27)

1987 1.87 1.84 (0.03)

1988 2.27 2.95 0.68

1989 2.64 2.39 (0.26)

1990 2.70 2.29 (0.42)

1991 2.53 2.54 0.01

1992 2.53 2.12 (0.41)

1993 2.43 2.43 0.00

1994 2.58 2.14 (0.44)

1995 2.63 3.11 0.48

1996 3.33 2.90 (0.44)

1997 2.76 2.56 (0.20)

1998 2.62 2.05 (0.58)

1999 2.31 2.05 (0.26)

2000 2.62 1.99 (0.63)

2001 2.27 2.11 (0.16)

2002 2.20 2.56 0.36

Ave. 2.64 2.47 (0.16)

Corn, 1980-2002

16 years (70%) the market declined, an average of 37 cents/bu.

7 years (30%) the market improved, an average of 43 cents/bu.


Decision DatesDecember Corn Futures, 1980-2000 average

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Don’t forget to sell something!



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This “June rally” is deceptive, and a result of 1988 alone!


Pricing ToolsI understand the opportunity in pre-harvest pricing, but which pricing tool

should I use?

Fixed-price tools• Forward contract• Sell futures• Futures fixed (HTA)

Minimum-price tools• Forward contract and buy a call option• Buy a put option• Minimum price tool offered by local elevator (?)






(3) Trump cards


Plan


The #1 reason people avoid marketing plans…• “As soon as I sell, the price will go up!”

Use a “trump card” – some form of a trend following tool - to follow a price rally up then sell when trend turns back down

Trump Cards

A disciplined but flexible way to change your plan!


OptionsTechnical trading toolsConsider a simple moving average

as a proxy for your favorite technical tool• Track two moving averages (e.g., 7

and 10 day)• “Crossover” signals buy or sell• See appendix for more information

Trump Cards


Trump Cards – Moving Averages

CBOT December 1988 Corn Futures, 11/25/87 - 7/20/88

$1.80

$2.00

$2.20

$2.40

$2.60

$2.80

$3.00

$3.20

$3.40

$3.60

$3.80

Dec'88 Corn Futures

7 Day Average

10 Day Average

Crossover to uptrend signaled

Sell!


Trump Cards

Save trump cards (options and/or technical tools) for the later stages of the plan • Lowers the cost (i.e. the time value) of

options• Spring and summer months are more

likely periods for trends (avoid quick “in and out” signals from technical tools)


Before we play the game, you need to make your plan!

Objective: Buy crop insurance to protect my production risk, and have ___% of my insured (APH) corn crop priced by late May.

Price ______ bushels at $______ cash price ($_______ Dec. futures) using ___________.

Price ______ bushels at $______, or by _______, using __________________________.


Price ______ bushels at $______, or by _______, using __________________________. Price ______ bushels at $______, or by _______, using __________________________.


Plan starts on __________________. Earlier sales will be made at a _________ cent premium to price targets noted above.Ignore decision dates and make no sale if prices are lower than $_________ local cash price/$_________ December futures.



Price 10,000 bushels at $2.00 cash price ($2.50 Dec. futures) using fixed-price tool (forward contract/futures hedge/futures fixed contract).

Price 10,000 bushels at $2.12, or by Mar.18, using some form of fixed-price tool.

Price 10,000 bushels at $2.24, or by April 16, using some form of fixed-price tool.

Price 10,000 bushels at $2.36, or by April 30, consider options or a trend system.

Price 10,000 bushels at $2.48, or by May 16, consider options or a trend system.



50% is plenty!










I want different price objectives!

and a higher minimum!

$2.10










I want different dates!










Too many decisions!

20,000

20,000

20,000


The Game RulesProduction is 84,000 bushelsStarts first of JanuaryEnds first of October

• All open positions liquidated on that day

• Any unsold bushels will be priced at harvest, no post-harvest sales

If you use a trump card, you must use some fixed-price tool when sell signal occurs


Now get ready for the game by writing your own marketing

plan!

Think of your own operation, but use 84,000 bushels for total expected production


Before we play the game, you need to make your plan!

Objective: Buy crop insurance to protect my production risk, and have ___% of my insured (APH) corn crop priced by late May.

Price ______ bushels at $______ cash price ($_______ Dec. futures) using ___________.



Price ______ bushels at $______, or by _______, using __________________________. Price ______ bushels at $______, or by _______, using __________________________.


Plan starts on __________________. Earlier sales will be made at a _________ cent premium to price targets noted above.Ignore decision dates and make no sale if prices are lower than $_________ local cash price/$_________ December futures.


Game Wrap-Up

How did you do?How did your neighbor do? Is this a better way to market your

grain?






(4) Baseline prices


Plan


Baseline PricesHow do you know if you’re a star?

• A “baseline price” is a benchmark for comparison

Homework: Track the average price over the marketing life of a crop• Get to know your local market!


Baseline Prices

Jan-Oct 2002 will be the new crop price

Nov-Jun 2003 will be the spot price

Use the loan rate when prices are below loan

Same day each month (2nd Friday, etc.)

Month Corn Soybeans

Jan 2002 2.38 -.55 = $1.83/$1.84

4.51 -.65 = $3.86/$4.86

Feb 2.35 -.55 = $1.80/$1.84

4.52 -.65 = $3.87/$4.86

Mar 2.28 -.55 = $1.73/$1.84

4.71 -.65 = $4.06/$4.86

Apr 2.21 -.55 = $1.66/$1.84

4.53 -.65 = $3.88/$4.86

May 2.21 -.55 = $1.66/$1.84

4.63 -.65 = $3.98/$4.86

Jun 2.23 -.55 = $1.68/$1.84

4.70 -.65 = $4.05/$4.86

Jul 2.32 -.55 = $1.77/$1.84

5.21 -.65 = $4.56/$4.86

Aug 2.61 -.45 = $2.16 5.25 -.45 = $4.80/$4.86

Sep $2.47 $5.22

Oct $2.15 $4.86

Nov $2.12 $5.20

Dec $2.10 $5.34

Jan 2003 $2.08 $5.27

Feb

Mar

Apr

May

Jun

Average $1.99 thru Jan $4.97 thru Jan

My Average

$2.22 $5.15 (60%)


Baseline PricesBecause the baseline price is an

average over several months, it is hard to beat

Even many professional marketing advisors have difficulty doing better• AgMAS is an ongoing study at the

University of Illinois


How does the marketing plan presented here compare to other approaches?

What gives you the best average price over several years?

Compared three different marketing plans using actual prices from 1990-2001

Pre-Harvest Marketing Plan Study


PLAN #1: The Basic Pre-Harvest Corn Plan$2.50 futures minimum, November 1 start, forward contract onlyPrice 10,000 bushels at $2.00 cash/$2.50 Dec. futuresPrice 10,000 bushels at $2.12 cash/$2.62 Dec. futures, or by March 30Price 10,000 bushels at $2.24 cash/$2.74 Dec. futures, or by April 15Price 10,000 bushels at $2.36 cash /$2.86 Dec. futures, or by April 30Price 10,000 bushels at $2.48 cash /$2.98 Dec. futures, or by May 15Price 10,000 bushels at $2.60 cash /$3.10 Dec. futures, or by May 31 Remaining 24,000 bushels priced at October 10 harvest price PLAN #2: Use of OptionsSame as Plan #1, plus purchase call options against final three sales, exit all options positions by mid-September PLAN #3: Harvest Sales benchmark

No pre-harvest marketing, take harvest price on October 10

Pre-Harvest Marketing Plan Study


Year PLAN 1 PLAN 2 PLAN 3

1990 $2.06 $2.00 $1.86

1991 $2.04 $2.03 $2.00

1992 $1.97 $1.91 $1.58

1993 $2.01 $2.01 $1.92

1994 $1.96 $1.89 $1.64

1995 $2.28 $2.36 $2.68

1996 $2.40 $2.37 $2.40

1997 $2.27 $2.25 $2.38

1998 $2.14 $2.07 $1.72

1999 $1.62 $1.62 $1.49

2000 $1.84 $1.79 $1.54

2001 $1.74 $1.74 $1.64

AVERAGE $2.03 $2.00 $1.90

VARIANCE $0.05 $0.06 $0.15

best? 10 / 12 yrs 3 / 12 yrs 3 / 12 yrs

LDP’s and other gov’t payments were not considered!

Pre-Harvest Marketing Plan Study(Corn)


Winning the Game Launch Your 2003 Marketing Plan

Summary A plan is discipline - plan your trades, then trade your

plan A plan is proactive, not reactive, and not overactive Pre-harvest marketing is very important – history

supports it and you have upside price potential in a lower market

Crop insurance is confidence Set pricing targets and decision dates, track your

baseline price The use of options and technical trading tools (trump

cards) offers flexibility with discipline. Use selectively!


Teams of Regional Extension Educators conducted 30 workshops in MN

Evaluations have not been summarized

Also sending surveys to the sponsors

Evaluation 2001-02


Sponsor ModelSponsor responsiblities:

• Provide the location/facilities• Provide eats and treats• Promote the workshop locally• Pay the University $600

University responsiblities:• Provide promotion materials to sponsor• Present the workshop• Provide the participant materials


Sponsor Model -- AdvantagesReduced transaction costs on incomeLocal presence for promotion,

advertising & partnershipEliminates local meeting

arrangementsLower financial risk with low turn outCover direct program costs – travel,

printing, etc.Pressure on presenters to deliver

quality program


Sponsor Model – Requirements for SuccessRequires a quality program – name

recognition helpsAggressive promotion to potential

sponsorsProvide sponsors with promotional

toolsMake sure sponsors understand

their responsibilityAssist with statewide promotion


Sponsor Model – Challenges

Private vs. public meetingsLogistics of sponsor care –

promotion, billing, follow-up


Focus on strategy – not outlookChallenging gameWell packaged turn-key programBroad support from commodity

organizationsGood teaching teams

Reasons for Success

sponsors: university of minnesota extension service mn soybean research & promotion council...

Documents

price targets

net price

price objectives

local cash price

harvest marketing plan

solid plan

preharvest marketing

form of fixed