Published on: 13:13PM Sep 01, 2009
In my previous post I wrote about ways to cut option costs. What can really be helpful is looking at the big picture with regard to marketing expenses.
The big picture truth is this: Marketing is an input cost, and should be viewed the same way you view other inputs on your farm operation. You can’t do without fertilizer or chemicals, and cutting back on these important inputs usually leads to lower yields and reduced revenues.
The same is true for marketing. Farmers who actually have a budget for marketing free themselves to make better decisions, and they harvest the rewards from this more professional approach.
This has been a year of cost-benefit weighing with regard to input expenses. So let’s do a cost-benefit analysis of a marketing situation you may experience:
There are a great many ways in which producers can go about their marketing to better manage risk. One of the most simplistic ways is to use puts to forward price part of the production, and forward contracts to price the remaining percentage of production. Crop covered with forward contracts can be covered with calls to take advantage of a market rally should a substantial price move occur.
Assuming a cost of 16 cents per bushel for puts, 150 bushel-per-acre corn would equate to a $24 per acre input cost. If you capture 50 cents of a price move, the return will be $75 per acre. (50 cents is the minimum December futures move from 1993 to 2003. Recent years certainly have been more volatile and have offered more opportunity, and risk.) That is more than a 3:1 return ratio.
At the same time, if a bull market develops and a substantial price rally occurs, calls could return as much as $2 per bushel, for the equivalent of $300 per acre. That is a return ratio of well over 10:1.
When you consider the escalating costs of all farm inputs, the returns per dollar invested in marketing compare well to the returns of other input costs. Yet many producers find it very difficult to write the check for the marketing expenditure. A field without proper fertilizer or pesticide application is obvious to its owner and all the neighbors. Every day that you drive by that field, you are reminded that you should have done a better job.
For some reason, marketing expenditures seem more optional! That's because there is a chance prices may go sharply higher, and having done nothing will be the best alternative. In the past, if prices went lower, the farm program was there to rescue you. The cost of taking that risk is much greater now, and will be much greater in the future. Missed price rallies can be just as expensive as pricing and selling too low. The extra income obtained from pricing properly in a bull market may be critical to the long-term survival of many farms.
It’s time to adapt to meet these challenges. Lay your strategies out in advance. Don’t try to guess where the market will go. Invest in marketing, and expect a reward for marketing done well.
There’s also another key benefit to thinking this way: A marketing budget puts you in control to make good decisions. Without a budget, cash flow and emotions may control you and limit your ability to follow-through. Take the emotion out of your marketing. Have a budget, be strategic, and confidently expect to see the rewards for your strategy and discipline.