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					Facilitator’s Notes – Marketing Plan

AgVentures
Grain Marketing
Facilitator’s Notes Developing a Marketing Plan
TIME ALLOWED: 45-50 minutes INTRODUCTION: Most producers develop excellent crop production plans each year. They develop strategies for weed control, fertilization, and tillage, and match these with their financial resources. They modify the production plan as conditions change, such as an abnormally wet planting season or an unexpected pest problem. A grain marketing plan identifies a producer’s specific price objectives as the production and/or storage season progresses. It then identifies strategies available to achieve the price objectives. While it may take several forms, it is generally most useful if it is written down, and reviewed relative to market conditions on a regular basis. A marketing plan must be flexible. A producer must be able to adapt to market conditions if it becomes clear that an earlier price objective is not likely to be achieved. OBJECTIVE(S): 1. Understand the essential elements of a marketing plan. 2. Understand the steps in developing a marketing plan for the grain business. 3. Provide a sample plan that illustrates the key features of a successful marketing plan. INSTRUCTIONS: In conjunction with the PowerPoint slides the following script will enable the facilitator to provide basic understanding of marketing plan development to the seminar or workshop participants. Slide 1:

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Facilitator’s Notes – Marketing Plan
Ask the seminar participants what is the meant by marketing plan? And ask whether they had a plan or not? Tell that ‘many people fail to plan but not plan to fail’. Tell them that even though the majority of producers fail to plan it is not too late to understand and develop a marketing plan. Slide 2: Producers are good at production. They have excellent production plans while producing major grains. Each plan starts with certain goals and objectives. They have strategies to reach these goals. Producers know how to reach the goals by taking care of production uncertainties and keeping the plan very flexible to meet any exigencies. And also producers evaluate the outcomes of the strategies against the goals that were set. Slide 3: Like these successful production plans every plan has certain key elements such as objectives or goals, strategies and evaluation procedures. This is true in the case of marketing plan also. As you are already good at developing production plans it is not hard for you to understand the process of development of a marketing plan. But you need to learn more about the strategies that call for actions depending upon market situation and the objectives set forth. For example, before you make a storage decision you want to set the specific price objective to achieve. Then you should follow through the plan and when desired price level was reached you execute the appropriate strategy. There are several alternative strategies available to achieve this post-harvest marketing plan. Each strategy will call for different actions. The grain curriculum and further sessions will help in your learning of these issues in depth. Here in this session we focus on marketing plan development process with an example. Slide 4: Grain marketing plans will take different forms. But it is always better to have a written marketing plan that guides the actions into the future. By writing down the marketing plan you can maintain a history of the actions and results that will help in further refinement of the existing plan. Each marketing plan should be revised on a regular basis as the market conditions change. If you observe the demand and supply conditions in grain markets, they change considerably from month to month either due to political actions, foreign competition, weather or many other factors. So it is important to keep the marketing plans flexible that will call for different actions if the conditions make it clear that the earlier objectives set forth are unattainable. Slide 5: There are four major factors that influence the grains marketing plan. These are: 1) Personal feeling and attitudes about marketing.

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Facilitator’s Notes – Marketing Plan
2) Financial needs of the business. 3) Seasonal price patterns. 4) Current price outlook. Let us look at each factor a little bit closely. Slide 6: Each producer will differ in his or her personal characteristics. Each person business goals and objectives should drive the marketing plan. What works for one individual may not work for another individual. Hence the plans will differ. You need to identify yourself whether you are a speculator or a risk manager depending upon your attitude towards risk. This slide show the key differences between the speculators and risk mangers. Go over them. Explain about the two broad groups of market participants, speculators and risk managers, and their motivations to participate in the markets. Emphasis should be placed on the motivations of the risk managers in these markets. Almost all the grain producers will identify themselves are risk managers. Slide 7: The second factor is identifying your financial objectives. Each business will differ in its financial needs and ability to meet the financial uncertainties. Businesses that are small and under capitalized should have different marketing plans than those businesses that have high liquidity and big in size. Go over the slide and put emphasis on knowing ones production costs where the family living expenses were factored in. And also each producer should know what is the acceptable return over production costs i.e. is it 20% or 30% over the production costs that he will be happy to receive the price for his output. Slide 8: Third factor is Seasonal price patterns: Understanding the seasonality in the grains prices will help to better formulate the strategies. Seasonality in price is well-recognized fact in grain business. During the harvest period the prices will be low due to abundant supply where as the marketing season progresses the prices tend to become firm with summer months having the high price levels with lots of volatility or fluctuations. Like the price levels, the basis (cash price minus futures price) also has seasonality. Understanding the seasonality in the basis levels is crucial for the successful hedging operations using futures and options. Slide 9:

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Facilitator’s Notes – Marketing Plan
Final factor is the grain price outlook: The price outlook for the current season will dictate the actions to be taken. For example, if the current cash prices are higher compared to the futures prices due to the short crop year it is better to consider current cash sales rather than storage. Please go over the slide and emphasize that at least a portion of the current crop should be marketed based on financial considerations of the business irrespective of the current outlook. Next four slides will provide the key ingredients of market plan development. We show this in three easy steps. Each grain producer should have thorough knowledge of the items that are shown in these three steps. Further sessions and our grain curriculum will help those that lack understanding. Slide 10: As the first step in the market plan development we suggest each producer to have a thorough understanding of the potential strategies or alternatives available to market their grain. Each producer finds some strategies more useful than other strategies depending upon the size and financial condition of their operation. Slide 11: This slide shows the various marketing tools that are available to the producer. Hedging using futures and options, various contracts and their advantages are given in the grain curriculum or will be discussed in another sessions. The key point is that the producer needs to understand there are multiple tools and strategies that can be used to market the grain. Slide 12: This slide provides the marketing horizons: when a producer wants to market his product. Is it preharvest, harvest or post-harvest time? Depending upon the time horizon the strategies will differ. We will discuss some of the strategies to follow depending upon the time horizon in an example that comes shortly. Slide 13: In the step three of the marketing plan each producer should decide upon the amount of marketable units of the expected production. It is not a good idea to price 100 percent of expected production before harvest. Instead, it is advantageous to consider various pricing strategies that can be used for a portion of the crop before and after harvest. So in this step each producer should devise the amounts to be marketed with set pricing objectives. Slide 14:

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Facilitator’s Notes – Marketing Plan
This slide along with the next two slides will provide a partial listing of most popular strategies that are in use to market the grain depending upon when the grain should be marketed. For pre-harvest marketing of the product it is beneficial to follow the following strategies. Each producer should know the advantages and disadvantages associated with each strategy. Slide 15: This slide provides the typical strategies to market grain at the time of harvest. Slide 16: Here are some strategies for post-harvest marketing of grain. Slide 17: Finally, a successful marketing plan provides the road map with specific goals and objectives to achieve with specific actions or strategies to follow. Once a price objective is achieved depending upon the time horizon the success of the plan is concluded. Recognize the existence of some successful opportunities to speculate in the market and incorporate that into the plan. A plan of action will prove to be more beneficial than action without a plan. Let us consider a sample corn marketing plan example. In this example the data provided is not current and you should understand that it is used here for illustrative purposes only. Slide 18: First, divide the entire production into five equal marketable portions. Each portion will be priced according to a pricing objective starting from most conservative to aggressive goals. We will look into different marketing strategies to achieve the set pricing objectives. Slide 19: You should know your expected yield. Here each producer should give consideration for the existence of yield risk. In the current example, let us assume on 500 acres of corn crop the average yield to be 120 bushels per acre over the last 5 years. Divide the entire production of 60,000 bushels to five equal portions of 12,000 bushels each. We will market these portions separately by setting different pricing objectives. Slide 20: For the first bundle of the expected 20% of the production, price it during the pre-harvest period. By doing this the marketing season is extended well into the planting time and there will be plenty of opportunities to lock-in a better price. Your price objective could be to lock-in a price if the market

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offers 20 cents above the variable costs. You should know your costs of production along with the break-even price. No matter what the price action is going to be later, once you saw the price of 20 cents above the variable costs you should use the marketing tools to lock-in. Slide 21: On this slide you will see the most popular strategies to follow during this pre-harvest period. Once the prices are above the target of 20 cents over the variable costs depending upon the basis expectations a producer can enter into the forward cash contract or directly use the futures contracts to do a short hedge or getting into hedge to arrive contract or purchasing a put option. Slide 22, 23, 24 & 25: Pre-harvest price objective such as the current one is much easy to achieve, as there are plenty of opportunities that the market is offering prices at levels well above the target price over considerable lengths of time. Observe the following price charts of Corn December 2002 contract, Corn weekly average prices and corn monthly average prices. There are many time periods the prices are well above the target price (20 cents over the variable costs of production). Slide 26: This is also a pre-harvest price objective on the second portion of the expected production. Now price the corn when the price is in the top 1/3 rd of its historical range. You should know the price history in your local market. Slide 27: For example, if the top 1/3 rd of the historical price range falls above the $2.65 per bushel and if you see the futures price above this level, depending upon what the elevator offers i.e. either normal harvest basis or weak harvest basis you should go with forward cash contract or short hedge using the futures market. Slide 28: This slide gives the December corn futures prices (harvest time futures contract) and the prices that fell above the $2.65 level. See how many times the market offered prices in this target zone. Once the target is reached immediately the strategies should be executed without further guessing or regardless of the general market outlook. Slide 29: This is the nearby corn futures price chart. Here also you can see historically, how many times the nearby futures are above the target price to execute the strategies.

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Facilitator’s Notes – Marketing Plan
Slide 30: This slide provides price objectives for the third bundle. If the prices are below in the bottom third of the price range do not take any action, just speculate that the prices will go higher. If the prices are in the middle 1/3 range of the historical prices establish a price floor and if the prices are in the top 1/3 rd of the historical price range establish price floor to remain in the top half of the historical price range. Depending upon expectation of post-harvest basis movements this portion of the crop should go either into storage or selling at the harvest time. Slide 31: This slide provides the strategies to follow for the third bundle depending upon the basis expectation when the price target on this bundle is reached. Minimum price contracts or put option hedges could be used to set price floors and forward contracts could be used to lock-in a price. Slide 32: Here depending upon basis movements, storage can be used with a forward cash contract if the anticipated basis strengthens and if the basis anticipation does not cover storage, this portion could be sold at harvest.

Slide 33: The fourth portion of the marketable bundle price objective depends upon the price outlook. If the outlook seems to be good, wait until the price objective is reached before selling. The objective is not reached and the outlook changes then you need to reevaluate the strategy and determine whether to store or not. Slide 34: Depending upon basis movements two strategies (A and B) are suggested. Follow the slide. Slide 35: On the final bundle no pre-harvest strategy is considered. This bundle basically takes care of production risk. It should be either sold at the harvest time or kept in the storage depending upon basis movements. Slide 36:

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Facilitator’s Notes – Marketing Plan
Three actions (A, B and C) are specified with regard to pricing the final bundle depending upon the potential basis movements. Forward contracts, basis contracts, options strategies are suggested to price this bundle. Follow the notes on the slide. Slide 37: This slide will summarize some of the high points of following the suggested marketing plan. Emphasize that not more than 80% of the crop is priced before harvest and there is always substantial yield risk. Go over the slide contents. Slide 38: This slide provides the general rules of thumb. Follow the slide. Slide 39: Conclusions are provided here on this slide. Make sure to tell that following a plan will result is reducing the uncertainty and assure a reasonable return for the business.

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