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Developing a Marketing Plan

It is essential for an agricultural producer to have a written marketing plan. Developing a good marketing plan will help you identify and quantify costs, set price goals, determine potential price outlook, examine production and price risk, and develop a strategy for marketing your crop.

While producers have traditionally done a good job of producing, they have often neglected marketing. In the past, farm loan programs and deficiency payments allowed producers to neglect or ignore the marketing side of their businesses. Now, with the possible elimination of farm programs and increased volatility in the markets, producers will have the right and the obligation to determine their own financial security. In this more uncertain and risky future, failing to plan may be the same as planning to fail.

Importance of a Written Plan 

In any business you must have a set of goals and objectives. A marketing plan is a road map to work from. It helps identify where we are going and how we are going to get there. Each marketing year we encounter has some similarity to previous years, but we are still headed someplace we have never been before. We need that map to help us maintain perspective and stay on course. 

The marketing plan needs to be written down. A plan not written down is only a dream we hope will come true. The plan must also be dynamic. As external market factors change, the marketing plan may need to be adjusted. Having a written plan provides discipline and is a good way to check your logic or the accuracy of your thought process after the year has ended. By putting the plan in writing, and sharing it with your spouse, partners, etc., you will have a reminder that you had committed to follow a specific plan of action (for example, selling a certain percent of the crop pre-harvest if prices reached (x) percent over your cost of production). Writing down both the original plan and the changes allows you to analyze your decisions and thought processes later. In this way, you can not only identify what you did correctly, but more importantly, you can determine where your analysis, strategies, or discipline have room for improvement. This is one of the most critical reasons for having a written plan. You can not fix a mistake until you know what it is, and without a written record, it may be difficult to identify what really went wrong.

Once you get the various parts of the plan put together, you can start conducting what if or sensitivity analysis. Since you know the future is uncertain, you may want to examine different possible price and yield scenarios and see how your strategies perform. You can also use the plan to help you determine what you need to do in the worst case scenario. This is extremely important, because you can not afford to let one big mistake put you out of business.

Components of a Marketing Plan

• Financial Situation and Goals. The first step in preparing a marketing plan is to review your financial situation. A review of the financial health of the operation (financial statements, debt load, non-farm income, etc.) will provide an initial idea of the amount of risk the operation can bear. In addition to the financial situation, your goals and objectives, personal risk preferences, age, etc. will enter into your decision about what you produce, how you produce and market the product, the risk management tools you use, and how much risk you want to accept or avoid. In some cases, lender requirements may be an over-riding factor. With deficiency payments gone, more lenders may require producers to have at least some price and/ or production risk protection at a profitable level before they will approve a production loan.



• Determining What to Produce and Setting
  Price Goals. The second step is to determine which commodity/ commodities to produce, and what price is needed to fulfill your goals. Given the increased planting flexibility associated with the new farm bill, you need to start by determining which crop or livestock enterprises are possible alternatives. The list of alternatives can then be compared by calculating the cost of production and break-even prices. Often we calculate a break-even price to cover only production and harvesting expenses. As one economist put it, "You can go broke breaking even." You need to calculate the price necessary to fulfill your goals. These goals should include gaining enough income to pay your production expenses and debt obligations, provide ample income for cash flow, and possibly contribute capital to operator equity. Additional goals could be sending a child to college or purchasing new machinery.

Sensitivity analysis should be performed at this point to see how much a 5, 10, or 20 percent change in yields will affect break-even prices. Once you have an idea of the price objectives that will meet your costs and needs, you can compare the different crop alternatives to existing forward pricing opportunities and outlook projections to get an idea of which crop may be more profitable or less risky during the coming year. This, of course, needs to be evaluated along with agronomic and crop rotation considerations.

• Market Outlook and Expectations. The third component of the marketing plan is to assess the market situation, and determine what might happen to prices as you progress through the production and marketing year. 

While you may not be able to make precise price forecasts into the future, you may be able to get some idea of the probability that the market will offer a price that will meet your objectives some time during your marketing horizon.

Knowing how markets typically act and ways they may change in the future can help in developing a marketing strategy. Most commodity prices are seasonal. Seldom will the highest price for a seasonally produced commodity occur when harvest is in process, but it does occasionally happen in short crop years. Some of the highest prices and best pricing opportunities commonly occur prior to harvest, such as at planting or pollination time.

How do you expect the market to act this year? Supply and demand for the commodity around the world will dictate where prices go in the long run. Also, keep in mind that the supply/ demand situation can be heavily influenced by the political process both in the U. S. and around the world. In the short run, market prices also can be influenced by technical analysis, as many traders watch and follow those signals. In your marketing plan, write down those factors that you expect will influence prices. Relevant market factors could include current U.S. and world ending stock levels, projected consumption and exports, growing conditions in the U. S. and around the world, changes in trade policies, economic or currency fluctuations, seasonal or cyclical price tendencies, and price chart formations or other technical indicators. Again, remember that a marketing plan must be dynamic. As conditions change, incorporate the changes into the marketing plan.

With the advent of the information age and vast advances in information technology, the various pieces of information that influence market prices are more readily available to the public all the time. This ever increasing amount of information can be overwhelming at times, so try to maintain perspective and keep the big picture in mind.

• Production Risk Tools. The fourth component of the marketing plan is production risk. There are numerous management practices such as irrigation, diversification, and dispersion of land holdings that can be used by producers to help in the struggle against "Mother Nature" to reduce production risk. Beyond the cultural practices, other tools for reducing risk include using crop yield futures and options, as well as a growing list of insurance products. Crop yield futures and options have some inherent difficulties and have met with very little producer or industry acceptance. Crop insurance also has its detractors, but insurance providers have responded to the increasing risk associated with the 1996 farm bill by providing more insurance products to cover yield and, in some cases, revenue risk.

The tools for managing production and revenue risk are important not only because they reduce risk due to yield loss, but also because of their interaction with the pricing tools. Used correctly, they allow more flexibility to producers who wish to do more pre-harvest pricing.

• Price Risk Tools. The fifth component of the marketing plan is to know what pricing alternatives are available, and which ones you feel comfortable using. A word of caution: It is not an alternative to you if you do not know how to use it. Producers have a wide array of pricing tools in their arsenal, yet many are content to sell their commodity at harvest or shortly thereafter. Producers need to explore, learn, and use alternatives in the future. A few examples of available tools are forward contracts, hedging with futures and options, minimum price contracts, basis contracts, cooperative pools, harvest time cash sales, and storage. 

Each pricing alternative has advantages and disadvantages, and no one alternative is the best year after year. Many producers are reluctant to forward contract because of production uncertainties. Once you have sold, there is risk that prices will move higher. Buying a put option allows the producer to forward price his commodity prior to planting and still have upside price potential, but premiums are sometimes expensive. One of the biggest advantages of diversifying by using several of the alternatives is that it allows you to spread your sales out, and gives you a much longer marketing horizon over which to look for profitable pricing opportunities.

• Price and Date Objectives. In this section of the marketing plan you can begin to combine the information from the previous sections (cash flow needs, costs, price objectives, outlook, production and price risk tools) and start identifying price and date triggers. By what date would you like to have some pre-harvest sales made? What price would you need pre-harvest versus what you would need or accept post-harvest? Are there some seasonal price tendencies that you want to try to take advantage of?



• Strategies. Probably the most difficult, yet most important, component of the marketing plan is determining a way to combine all of your information into an overall strategy. This requires discipline, and takes into account all the previous information such as the expected production, break-even price, market outlook, etc. You need to have a plan that covers what to do if prices rise, but also what to do if prices decline.

As an example, consider your upcoming wheat crop. You may choose to scale up sales, selling 10 percent increments of expected production at increasingly higher price levels. At what price would the first portion of the crop be sold or hedged? What tool would you choose to price the crop? Would you price only the insured production if it were pre-harvest? What if, by April, prices had climbed to $3.95 per bushel, the U. S. crop was looking excellent and prices were expected to fall? How much would you have priced using any tool? What will you do if prices decline to your break-even and you have not priced any of the crop yet? Even if you think prices will go higher, do you need some downside protection?

Evaluate the Plan

Finally, the marketing plan needs to be evaluated both during and after the end of the marketing year. Determine what worked, what did not, and why. Evaluating the plan will help you identify areas that you need to work on. You may need to expand your alternatives by learning more about specific marketing strategies. Having a marketing plan will help take some of the emotion out of marketing, but it takes discipline to execute the plan. 

*Assistant Professor and Extension Economist; Associate Professor and Extension Economist; Professor and
Extension Economist; and Extension Program Specialist-Risk Management, The Texas A& M University System. 

 

Partial funding support has been provided by the Texas Wheat Producers Board, Texas Corn Producers Board, and the Texas Farm Bureau.

Produced by Agricultural Communications, The Texas A&M University System 

Extension publications can be found on the Web at: http://agpublications.tamu.edu

Educational programs of the Texas Agricultural Extension Service are open to all citizens without regard to race, color, sex, disability, religion, age or national origin. 

Issued in furtherance of Cooperative Extension Work in Agriculture and Home Economics, Acts of Congress of May 8, 1914, as amended, and June 30, 1914, in cooperation with the United States Department of Agriculture. Chester P. Fehlis, Deputy Director, Texas Agricultural Extension Service, The Texas A&M University System.1M, New ECO