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John Lawrence Written, October 2006
Extension Livestock Economist
Director of the Iowa Beef Center
Ames, IA 50011-1070
jdlaw@iastate.edu |
Livestock producers should make market ing decisions every day of the year. In fact, deciding not to produce for a time is itself a marketing decision because it prolongs the day when production will begin and, therefore, when the day to sell arrives. The most common marketing decisions, however, are where to sell, how to sell, and when to sell. Although every producer faces these questions, the appropriate decision depends on the individual. Each livestock producer must weigh the alternatives available to him in the context of his own business objectives and personal goals.
Why Develop a Marketing Plan?
Marketing decisions are not made in a vacuum. They depend upon and are an important part of a complete production and farm management plan. The objectives of a marketing plan need to ensure the short-term survival as well as the long-term success of the business. Short-term survival requires sufficient cash flow to cover variable cost, debt obligations, and family living expenses. Long-term success of the livestock enterprise requires a return to the fixed assets used in production. It is essential for both short-term and long-term marketing decisions that the producer know his costs of production. Accepting a $50 hog price may be a good decision for the producer with a $40 break-even, but a disaster for the producer with a $52 variable cost.
Besides cash flow concerns, marketing decisions should provide an income that is reasonably predictable. This stability allows the producer to make additional production and management decisions with some confidence that he will be able to carry them through to completion. Often less price risk may result in a lower price received. While it is tempting to try to hit the big profit home run it does little good if you strike out due to cash flow problems in the short run.
An equally important concern for producers making marketing decisions is that the criteria used to evaluate the alternatives be practical. The marketing plan should accurately incorporate key elements and yet be simple enough as to not discourage its use. These key elements include marketing goals and objectives, the producer's current market potential, cost of production estimates, a realistic view of the current market environment, and a contingency plan to fall back on should problems arise. It must also be flexible enough to change with evolving market conditions. Finally, a marketing plan should not cost more than the return it generates. This cost includes the time required to learn and operate the system.
Specify Marketing Goals and Objectives
Marketing goals and objectives are essential to a good marketing plan. Goals should be simple, measurable, and reflect a longer run target for marketing skills. For example, receiving a net market price that is 10 percent above the quoted market price for a given period is a good goal. It is simple and it can be measured. In addition, it is realistic. A goal of selling all of your production at the top of the market is an admirable goal, but not a good one if you become discouraged and quit trying. The target may always be set higher once you learn how to shoot accurately.
Marketing objectives tend to be shorter term in nature, more specified, and typically warrant some action if achieved. In fact, it may be wise to have multiple price objectives each with a different significance and different actions. Consider the example below of a farrow-to-finish operation setting price objectives for its June marketings.
This producer identified different price objectives that were important to the operation and what action would be taken at each objective. The producer has also intuitively placed a risk weighting to each objective by taking full protection at prices below $40, taken reasonable profits on 75 percent of production if offered, but left himself somewhat open in the middle of the price range. Each producer's objectives will differ depending on his cost of production, financial and cash flow needs, and his ability and/or willingness to bear risk.
The first step to develop a marketing plan is to evaluate the current situation. Get the facts on cost of production and animal quality. Determine how your marketing skills compare with some standard. Next, what will it take to achieve a more profitable market price? Do you need to change markets, what you produce, how you sell, or when you deliver?
Second, realize that higher prices do not necessarily mean higher profits. An additional $1/cwt. is no advantage if it cost $1.50/cwt. to get it. With livestock, in particular, additional weight and/or finish can lead to a price discount that lowers your net returns. For example, sort discounts on hogs may easily cost more than they return if they require extra marketing trips or labor that is better used elsewhere in the operation.
Finally, because the future is unknown, marketing decisions are based on expectations. While the exact price that will occur next period is unknown, it does not mean that no decision can be made. History can provide producers with useful information about the probability of a given outcome occurring at some future date. In addition, professional market analysis, both at universities and from private firms, can provide producers with projections about the future.
*Reprinted with permission from Ag Decision Maker, Iowa State University Extension.
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