Marketing Sample Lesson

MAIN IDEA: What steps are needed to complete a marketing plan?

In the previous lesson you have already given some thought to what you would want to accomplish with a commodity marketing plan and what elements that plan should include. This lesson takes the process a little further by dividing the task up into the basic steps required complete your plan.

This lesson gives you a map to follow to reach your goal. Lessons that follow will give you more help on how these five steps are completed and how they can be used by producers to improve their market returns.

FIVE MARKET PLANNING STEPS

1. Project your production:

Your first planning step is to have reasonable estimates of what you will have to sell and when you will want to deliver it. This is especially important as you consider forward pricing; you do not want sell more than you will have. In addition, you will need production numbers in order to plan any kind of scale-up or scale-down selling strategy.

Knowing your cost of production will also be useful. If price projections indicate tight profit margins, or even potential losses, you may want to opt for a much more conservative plan in order to cut your losses short.

Likewise, if prices are well above your costs, you can afford to take more risk and may be able to add significantly to those profits. That is important, because it can help you to build financial reserves for years when prices are lower.

Thus, a part of your plan is to analyze both the variable and fixed costs associated with your enterprise. An analysis of costs for each product will tell you your break-even -- the price at which you can cover your costs.

2. Know what prices you can expect to receive:

As with other businesses, it pays to do market research. You need to keep yourself well-informed on prices and the outlook for the coming year. It helps you know if the price offered on any business day is too low, or if it is a good pricing opportunity.

Once you have estimated costs and expected sales prices, an optional step is to take another look at what you are producing. Is this the most profitable crop, or combination of crops? What other crop alternatives could you consider? At this point you may also want to consider livestock production alternatives. Would it be more profitable to feed corn to hogs or cattle?

3. Study your marketing alternatives:

Learn about all of the marketing tools currently available -- such as futures, options and various types of cash contracts. This increases your opportunities for successful marketing.

It is a mistake to reject the use of futures or options simply because you do not understand how they work. It is not difficult to learning the basics of using these forward pricing tools. Information and advice is available to anyone who is willing to learn.

4. Make your plan:

Develop a marketing plan that controls your RISK and put that plan in writing. However, you must remember that taking risk is not an evil in itself. If you are financially able to take more risk, you will improve your chances of increasing profits.

• A low risk plan will complete some sales early to start covering costs. Then plan to sell the bulk of your production at a reasonable objective that is based on market outlooks. The low risk plan is most suitable for producers who have large debt and have had to borrow significant amounts to cover production costs.

• Caution: If prices are trending lower, be ready to cut your losses short. Don't hold out in the hope of covering total cost. In years when prices are trending above your break-evens, you can afford to wait longer to lock in prices in order to take advantage of higher price objectives.

• A higher risk plan will generate more profit in some years, but greater losses in others. Over time, the ability to take more risk will average a higher return. When price trends are favorable, producers who have the financial reserves to cover their costs may want to sell little or nothing early in the season.

  These producers with "deeper pockets" can depend more on technical objectives and market outlooks to set their pricing objectives. They also may make upward adjustments in those objectives as long as markets continue to trend higher.

• Success with either a low risk or higher risk plan will depend on the quality of market information you receive and setting the right pricing objectives.

5. Take action and stick to your plan:

Your annual plan gives you a place to start. It will be necessary to keep your production estimates up to date and to keep current on market prices in order to track your plan. Of course, the outlook can change with weather conditions and shifts in demand. So can your expected yields, the amount you are likely to harvest and your cost per bushel. You will want to be sure to keep your plan current with the latest information.

FINDING MARKET PLANNING INFORMATION

The best sources of information will differ with the crop or type of livestock you are marketing. Farmers today can have a wide range of information at their fingertips. Tools such as computerized record systems, the Internet and market information networks provide the latest data in easy-to-use reports. In general, the types of information you will need include the following.

Internal information:

Planning starts with the farm, the resources available, the history of production, and financial statements. Producers who use some form of computer record system will have easy access to the facts they will need.

To make a market plan, you will need to determine the acreage you will be planting to each crop, the yields you expect, the number of livestock you will produce, etc. In addition, it will be helpful to have a cost accounting system that will provide costs per unit to be marketed.

External information:

These are the outside factors that will influence production and prices. They include weather forecasts, price reports, news developments, crop reports, production and demand data, market analysis and pricing recommendations from advisory services.

In the past, farmers had to depend upon radio, newspapers, newsletters and other printed publications delivered by mail to get this information. Much of it was outdated before it was ever received. Only a few farmers were able to get additional information from phone hotlines and phone conversations with an analyst or a commodity broker.

Today, nearly everything needed can be delivered as computer data and electronic network reports. Many more farmers have access to the latest facts.

EXERCISES:

Now that you are acquainted with our five basic steps to planning, give some more thought to the crop marketing plans you started in the last lesson.

You discovered that the process requires having two active plans under way most of the time -- one for the "new crop" yet to be harvested and the other for the "old crop" that may not yet be sold.

In addition, a calendar is used to outline planning and marketing activities you must handle through the year.

1. Imagine you are a producer. Create a "model farm" on paper to practice doing some market planning. Start by putting together some production numbers for your farm. How many acres will you plant, how many cattle or hogs will you finish out to market? Based upon past history in your area, what kind of yields can you expect from your crops? How many total bushels do you expect to harvest? What gains can you expect from livestock?

2. Make a start at determining your costs. You will find some example cost budgets in the AgEdNet.com Management Library. You will also get more help on this in AgEdNet.com lessons MK454 Projecting Costs for Market Planning and MK458 Putting Your Plan on Paper. In any case, you will need to know how much you will spend for seed, fertilizer, fuel and other expenses.

3. Decide what kind of risks you want to take. Will you lean more toward a low-risk approach, or are you willing and able to take more risk? Make a list of factors you feel you should consider.

INTERNET RESOURCE:

** Stewart-Peterson
Note: You can customize quotes under "My Portfolio."
http://www.stewart-peterson.com/markets_0017/My_Portfolio_0110.html

TEST:

1. The basic objective of the five planning steps in this lesson is to:
A. Reduce risk
B. Maximize Profit
C. Increase selling price
D. Save time

2. Reducing risk assures a larger long-term profit potential. TRUE or FALSE?

3. Your break-even price is likely to be lower in a year when yields are high. TRUE or FALSE?

4. List two important planning questions you can answer by doing market research.

5. Once you have completed a marketing plan, you still need to __________ on that plan in order to make it work.

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Copyright © 1998 Stewart-Peterson, Inc. All Rights Reserved.
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END STUDENT SECTION

TEACHER'S GUIDE

MK453 Five Basic Steps to Market Planning

OBJECTIVE: Students will be able to list five basic steps that help to organize a farm commodity marketing plan; and they will understand and be able to discuss what is involved in each of the five steps.

PREPARATION: Review lesson content. You may want to consider some additional class discussion on these five steps, as they will be used as a basis for other planning lessons in this section of the AgEdNet.com Marketing library. Be ready to answer student questions and help them find factual information they will need to create a "model farm" typical of farming operations in your area. The suggested extension activity may be a way to have a student committee help you gather this information.

INTERNET RESOURCE:

** Stewart-Peterson
Note: You can customize quotes under "My Portfolio."
http://www.stewart-peterson.com/markets_0017/My_Portfolio_0110.html

IMPORTANT TERMS: break-even, contracts, costs, "deep pockets," financial reserves, fixed costs, futures, options, profit margins, risk, variable costs, yields.

EXTENSION: NOTE: This suggested extension may require more than the usual amount of time and effort by students. However, it will be useful for this and other lessons in this section, including AgEdNet.com lesson MK454 Projecting Costs for Market Planning.

Assign a committee of students to investigate the typical farm recordkeeping systems used by local farmers to get the "internal" information needed for market planning. Ask the committee to make a report to the class on how a farmer can determine what it costs to produce a bushel of grain or a pound of weight gain on cattle or hogs.

Places to check include the local Extension agent and private firms that offer farm accounting services and farm accounting systems. Some of these services may be able to provide average cost data for farms in your state or region. This data will help with exercises in this and other marketing lessons.

EXERCISE ANSWERS:

1. Yield records from farms in your area, county or state would be helpful in making estimates. It is usually wise to add HIGH and LOW "what ifs" to your production estimates. For example, use a HIGH estimate "if" weather is really good and a LOW estimate "if" it turns out to be a dry year.

2. Good records are helpful. In addition to those you will find in the AgEdNet.com Management Library, you may be able to get averages from an Extension Farm Management Association in your state. It also will be helpful to consider what happens to your cost per bushel for your HIGH and LOW yield estimates.

3. You should consider at least three kinds of factors when deciding how much risk you are willing to take.
A. How do you feel about taking risk? Some people are more willing "go out on a limb" than others. Meanwhile, others fear taking risks even when they would be financially able to take losses. Personal feelings are probably as important as anything in deciding how much risk to take.
B. Your financial condition, must be considered. If you have a big mortgage and have borrowed heavily to pay for seed and fertilizer, you'll be wise to take a careful, conservative approach to marketing. Your banker may insist on it.
C. What are the current prices and market trends? You can afford to take more risk in years when prices are above your costs and trending higher.

TEST KEY:

1. The basic objective of the five planning steps in this lesson is to:
A. Reduce risk
B. Maximize Profit
C. Increase selling price
D. Save time

While all listed can result from planning, B. Maximize Profit, is the most important and most basic objective.

2. Reducing risk assures a larger long-term profit potential. TRUE or FALSE?

FALSE. Risk takers who are able to carry through periods of loss tend to earn larger long-term profits.

3. Your break-even price is likely to be lower in a year when yields are high. TRUE or FALSE?

TRUE. Higher yields will lower cost per bushel by spreading per-acre costs over more bushels. Thus a higher yielding crop will earn a profit at somewhat lower selling prices.

4. List two important planning questions you can answer by doing market research. A. What price or price range you can expect for your commodities; and
B. What production adjustments you may want to make based upon expected prices.

5. Once you have completed a marketing plan, you still need to act on that plan in order to make it work.
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Copyright © 1998 Stewart-Peterson, Inc. All Rights Reserved. RF/nc 891001
STEWART-PETERSON and AGEDNET.COM are registered trademarks of Stewart-Peterson, Inc.

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