The Ag Economics Dialogues - Focus on Planting Season 2019 presenters had a common theme: Market for Profit.
Marketing for profit may not seem new to producers, but the way they look at their marketing plans should be. No longer do crop producers purchase Yield Based Crop Insurance products. Instead, they are buying Revenue-based products. This change is the same mindset that needs to be front-of-mind when evaluating the markets.
Revenue-based marketing starts with knowing the producers' costs to grow a crop. With most seed, fertilizer, and chemical purchases made, insurance levels set, and rental agreements signed, and in place, producers know what a large percentage of their expenses related to producing the 2019 crop, even though the seed is still in the bag. As many of the variable and fixed costs are known for the 2019 and maybe even the 2020 crop year for producers, it is time to look at setting revenue targets and what this means for your risk management plan.
This cost number, no matter its size, is the first step in knowing how much income is needed to break even. At this point, producers can calculate potential harvested acres by looking at historical production and crop insurance records. Estimated expenses divided by the expected bushels provide a minimum breakeven price for the crop.
For example, an operation with 500 acres of corn with the following assumptions:
- $245,500 in Expenses ($491/acre), and
- 90,000 Bushels Expected (180/bu./ac.), would result in a
- $2.72 breakeven price.
Producers can use these numbers in two ways:
- Make pre-harvest marketing decisions that generate $245,500 (cover all expenses) or
- Make pre-marketing decisions that sell or forward price bushels above their breakeven price.
Additionally, bushels that were not covered by the pre-harvest marketing plan are priced using a post-harvest market plan. The combination of pre- and post- provides producers with action steps for marketing crops to cover expenses for their operation.
Keep production risk in mind. Combining crop revenue insurance coverage into the decision, and evaluating individual yield change potential allows producers to pre-price bushels with a high degree of confidence. An actionable marketing plan needs to be developed based on how a producer wants to manage their revenue risk given their operation’s risk tolerance, production costs, cash flow needs, and insurance coverage explained Lisa Elliott, Commodity Marketing Specialist. “In some cases, marketing strategies may be utilized that put a floor in revenue and decrease the variation in revenue outcomes reducing risk, but may also lower the expected revenue due to the cost of revenue protection,” Elliott said. “A pre-harvest marketing plan is about producers identifying their optimal combination of options, hedges, and insurance that optimizes return relative to risk,” she said.
Marketing plan creation and implementation is something many producers find easier to say than do.
“As discussed in many of our meetings, a team of professionals helps producers with the areas of their operations that need assistance.” Heather Gessner, Livestock Business Management Field Specialist, says, “Adding a marketing manager that helps create the revenue goal for the operation, developing a plan to accomplish the target, and then implements the plan is likely a good management strategy for producers.
There are many businesses available to producers that aid in marketing. Producers must know how much assistance they need with their plan, and then find a company you can work with comfortably. “Interview the company representative. Make sure you are comfortable with their approach to marketing, and the tools they use the most. As this person will be responsible for your plan, you need to develop a comfortable working relationship with them.” Jack Davis, Agronomy Business Management Filed Specialist, says. “Just knowing your numbers isn’t enough, you need to do something with them.
SDSU Extension has created Managing the Margin marketing videos to aid producers with the development of their marketing plans and crop budget calculators to aid in cost-of-production determination. For assistance with your marketing plan contact SDSU Extension staff Lisa Elliott, Jack Davis, Matt Diersen or Heather Gessner.