Why it’s time for marketing makeover
Marketing plans are still an important part of the overall management of a farm or ranch business. How will the decline in market prices over the past several months affect your bottom line for the 2014 year? Will you cover all operating expenses, chattel and real estate payments, and your family living or draw? Will you come up short after several years of very good profits? How will you fill the financial gap if it exists in your operation?
The past seven years have been some of the most profitable in history, particularly for those farms that were concentrated in crop production. Beef producers, particularly cow-calf producers, are finally seeing their share of very good prices now, as they did not enjoy the higher prices that crop producers saw in the past few years. One of the outcomes of seven years of very good crop prices was a decline in the area of developing marketing plans. As many crop producers would testify to, many marketing plans did not provide the same high level of gross income and profitability that was experienced by those producers who sat on the sidelines and simply sold when the prices reached very high levels. There are examples where planning and carrying though on the plan had producers hauling in corn and soybeans for one-half to two-thirds the cash price that was available on the same day to those that had not prepriced any of the crop. One result of this was a backing away from the use of some very common marketing tools. At that point, producers needed to ask themselves what the reason for the marketing plan was, and what they were protecting when they put the plan together.
• New marketing strategy for farm or ranch business may be needed now
• The wait for higher prices may be a long one after seven profitable years for most.
• The goal of a marketing plan should be to make a profit every year.
Well, the wheel has begun to come around again, and this fall, many producers may find themselves caught in the open — with very little if any advance sales, and an ever-increasing operating loan as well as other debt to service. The reaction for many producers will be to store as much as they can and attempt to wait it out for higher prices. Only time will tell if this is the right strategy. They can be assured that their lenders will be keenly interested in what plans they have for marketing this year’s crop. If grain is stored and prices fall further, how will the additional losses be offset? Will producers use put options to place a price floor under stored grain? What if sales are needed this fall to meet financial commitments? Will those sales be replaced by call options, to place the producer back in the market should it move higher? How much relief will be provided by the revenue coverages in crop insurance, and did producers protect the production that was not covered by the revenue insurance program? How will declining futures prices affect the coverage provided by the same insurance program for next year?
Based on the statewide reports for the North Dakota Farm Business Management Program, the average farm, based on sole proprietors only, increased its farm debt from $421,120 at the end of December 2006 to $713,230 by the end of 2013, while increasing its assets from $855,457 to $1,937,795 (on a cost basis). Farm size increased by 200 acres from 2,381 to 2,581 acres, of which 1,746 and 1,882 respectively were crop acres, with the balance in pasture and rangeland. This increase in debt, accompanied by a 99% increase in operating expenses, will place additional pressure on producers to market accordingly.
So, is marketing still an important part of the overall management picture? You bet it is. As prices tighten up and margins per acre become tighter and tighter, producers will find themselves looking at alternative methods of marketing, whether it is in advance cash sales, hedging with futures, hedge-to-arrive contracts, or the use of put and call options — perhaps combined with some of the aforementioned marketing tools. Marketing clubs and groups will find themselves being renewed as members search for and share marketing ideas. No one can predict if prices will suddenly or slowly rebound, or stay at current levels for some time. The one thought to keep in mind is that if the farm or ranch has a marketing plan that produces a viable profit every year and that profit will cash-flow all the immediate needs of the business, the farm has a very good chance of being successful and being around for some time.
Metzger is the Region 3 Farm Business Management Coordinator at the Carrington Research Extension Center, Carrington, N.D. Contact him at 701-652-2951 or email@example.com.
This article published in the October, 2014 edition of DAKOTA FARMER.
All rights reserved. Copyright Farm Progress Cos. 2014.