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Pricing ManagementPricing Management
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Aims of Pricing Management ModuleAims of Pricing Management Module
Improve your skills for developing and implementing marketing plans
Discuss the characteristics of corn and soybean markets
Review selected pricing tools
Consider an example marketing plan
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What is a Marketing Plan?What is a Marketing Plan?
Dictionary defines marketing as:
– Process of selling or purchasing in a market
Dictionary defines a plan as:– A method for
achieving an end
– Formulation of a plan of action
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PlansPlans Consequences of
strategic plan should be DRIVE:
– Provide Direction
– Reasonable (practical, obtainable)
– Inspiring, challenging
– Easy to Visualize, able to measure
– Eventual (time frame for achieving goals)
Consequences of tactical plan should be SMART:
– Specific
– Measurable
– Attainable
– Rewarding
– Timed
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What’s The Time Frame For Your What’s The Time Frame For Your Marketing PlanMarketing Plan
You can price after harvest if you are willing to store
You can price new crop corn and soybeans today for sale at harvest in 2002 … or 2003
Suggests a planning horizon from of at least 18 months prior to harvest to 6 months post harvest
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Key Features of PlanKey Features of Plan Goals … that reflect the SMART
criteria
Written plan that lays out a general strategy and proposed actions when faced with particular opportunities and risks
Make decisions on logic, not emotion
Deals with who, when, how, how much, and follow-up
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Key Questions About Your GoalsKey Questions About Your Goals How much risk are you willing to bear?
Based upon your net worth / equity in the farm business
Comfort zone
How much risk are you willing to take to capitalize on potential opportunities?
How do you feel about using your equity vs. using risk reducing tools to deal with risk?
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Structuring Your PlanStructuring Your Plan Define your goals Quantify the financial exposure you are
willing to assume Describe the size of the crop that will
be available for you to market: Most likely potential bushels Yield / Product Quality risk faced Potential role of crop insurance to
backstop pre-harvest pricing
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Structuring Your Plan (continued)Structuring Your Plan (continued) Break the time period over which you can
price into several periods Prior to March 15 Late spring / early summer Harvest Jan-March
Calculate targets for each period: Bushels to sell Target price
Describe how you will change your targets given opportunities and risks that may arise
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What Kind of Market Do You Face?What Kind of Market Do You Face?
Degree of Volatility Patterns
New Crop
o Seasonal
o Across yearsOld Crop
o Seasonal
o Across years
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There are patterns a disciplined There are patterns a disciplined approach can build uponapproach can build upon
On the average, across the last 25 years, pre-harvest priced corn & soybeans in late spring - early summer for did better than pricing @ harvest.
The late spring - early summer vs. harvest price difference has varied from year to year and is sensitive to perceived ending stock position.
There is potential gain but additional risk is incurred to go after the gain.
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Dec 2000 Corn Contract Dec 2000 Corn Contract
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““If you think you can If you think you can out guess the commodity futures out guess the commodity futures
market --market --you are nuts!”you are nuts!”
Quote from a marketing consultant
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Some Evidence:Some Evidence:Two Year Performance of Selected Two Year Performance of Selected
Cash-Only Market AdvisorsCash-Only Market Advisors Pro-Farmer Doane Freese-Notis USDA avg. price received Ag Profit Stewart-Peterson Brock Associates Agri-Visor
• $349.80
• $349.70
• $347.40
• $343.30
• $340.51
• $337.84
• $334.00
• $331.20
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What’s Possible?What’s Possible?
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Feasibility of Pricing GoalsFeasibility of Pricing Goals
Pricing goal
Your Skill in the Summarizing Market Information
Mkt is Efficient
Mkt is Inefficient
Only when big shocks
occurNearly always
Price enhancemen
tNot
feasibleSometimes
feasible Feasible
Risk control Feasible Feasible Feasible
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Set Price and Timing GoalsSet Price and Timing Goals Use your “costs of production” developed in
the financial section in setting Revenue Requirement goals:
– Total Economic Costs
– Maintain Net worth
– Cash Flow Requirements
Equity available to risk
Drive how much you can “afford to gamble”
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““Break Even Prices Needed”Break Even Prices Needed”
Make Sure You Have These Values
Low Debt Farm CORN SOYS
35. Total Economic Cost / Bu $2.70 $6.4151. Maintain Net Worth per Bu $2.10 $4.6461. Meet Cash Flow Demands per Bu $2.16 $4.80
Medium Debt Farm CORN SOYS
35. Total Economic Cost / Bu $2.75 $6.5651. Maintain Net Worth per Bu $2.21 $4.9761. Meet Cash Flow Demands per Bu $2.43 $5.62
High Debt Farm CORN SOYS
35. Total Economic Cost / Bu $2.81 $6.7551. Maintain Net Worth per Bu $2.33 $5.3161. Meet Cash Flow Demands per Bu $2.41 $5.55
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Pre-March 15 pricesPre-March 15 prices::Dec CBOT Dec CBOT corncorn @ $2.50/bu @ $2.50/buHarvest basis @ $0.40/buHarvest basis @ $0.40/bu=Cash forward contract @ =Cash forward contract @
$2.10/bu$2.10/bu
Price
$1.85$2.04$2.19$2.32$2.45$2.59$2.75$2.95$3.24
Probability that therealized CBOT
corn futures price atmaturity will be
less than this price10%20%30%40%50%60%70%80%90%
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Pre-March 15 pricesPre-March 15 prices::Nov CBOT Nov CBOT soyssoys @ $4.85/bu @ $4.85/buHarvest basis @ $0.40/buHarvest basis @ $0.40/bu=Cash forward contract @ =Cash forward contract @
$4.45/bu$4.45/bu
Price
$3.80$4.11$4.35$4.56$4.77$4.99$5.24$5.54$6.00
Probability that therealized CBOT
soy futures price atmaturity will be
less than this price10%20%30%40%50%60%70%80%90%
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Set Price and Timing GoalsSet Price and Timing Goals
Look at historical patterns to assess the current situation for setting both price and time targets and triggers
Use commodity Supply-Demand Balance Sheets in combination with futures and options
Use charts -- particularly for setting short term and daily price targets
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What “Tools” Can I Use to Provide What “Tools” Can I Use to Provide Information In Setting Pricing Targets:Information In Setting Pricing Targets:
Price Potential
o Near term
o Longer term
Risk and Opportunity
Use of price history
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How Much do I have to sell?How Much do I have to sell?
Describe how much you will have to market?
Planned acres
Yield probability charts
Prevented planting risk
Harvest quality risk
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Cum
ulat
ive
prob
abili
ty (
%)
Probabilities of How Much Corn You Have To Sellbu
0 50000 100000 150000 200000
10
20
30
40
50
60
70
80
90
100
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Marketing AlternativesMarketing Alternatives Spot Sales
Cash Forward Contract
Short Hedge
Basis Contract
Minimum Price Contract
Options on futures contact
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Marketing AlternativesMarketing Alternatives
Hedge-to-Arrive
Max-Min
Loan and LDP’s
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Risk Management GameRisk Management Game
We only consider:– Spot (cash) sales
– Cash forward contracts
– LDP’s
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Example Marketing Plan:Example Marketing Plan:
Lets apply what we have discussed to developing an example marketing plan for the medium debt farm
Discuss how the plan might might vary with other debt structures
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Set your preliminary targets for each period:o Price triggers
o Time triggers
o Is scaling up warranted?
How will the plan change in response to particular (e.g., scaling up):
o Opportunities
o Risk
Are you likely to need to restructure debt given price prospects?
•
Marketing plan worksheet
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Example Marketing Plan for Medium Debt Farm
Timing for corn and soybeans
- Price 20% by March 15
- Price 40% by June/July
- Price 80% by Harvest
If prices are at least 15 cents over the loan rate
Price Goals for corn and soybeans
-March and beyond
- 40% if price will Maintain Net Worth
- 60% if price is above Total Economic Costs
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Example Marketing Plan for Medium Debt Farm
Price Goals for corn and soybeans Con’t
- July
- 30% if price reaches top 40% of price dist., $2.16
- 40% if price reaches top 30% of price dist., $2.28
- 60% if price reaches top 20% of price dist., $2.42
- only 10-15% chance of pricing soybeans over loan rate, price 60% if the 5-10% chance of $5.70 occurs
- Could use MPC to go 80% in July if net price 15 cents over loan
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Example Marketing Plan for Medium Debt Farm
Price Goals for corn and soybeans Con’t
- At harvest
- Take LDP on the 80% priced
- Store up 20% if forward contract higher than storage costs to March
- 15% under a forward contract, take LDP
- 5% wait to price
- Use loan on unpriced stored crop
- March 2001
- Price remainder
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Who is responsible for developing a Who is responsible for developing a Marketing Plan and implementing it?Marketing Plan and implementing it?
You are!
(But maybe your spouse could do a
better job!)
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Write it down.
Tell someone else your plan (spouse, business partner).
Post your plan (in your home or office) to remind you to follow it.
Stick with your plan.
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The success of your operation The success of your operation depends on YOU!depends on YOU!
Take charge,
seek assistance, and
set a plan you can live with.
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END