Farmers have a variety of motivations when it comes to marketing, which directs their approach and the strategies they use.
Low-cost operations. Some farms are exceptionally low cost. Land costs are likely limited to property taxes, and their motivation might be driven more by logistics, such as the time and effort required to move a crop from the farm to the next link in the supply chain.
The goal for this farm might be: Don’t mess this up. To do that, they could use a marketing strategy designed to secure a price near the average price for the year.
Highly leveraged operations. Some farms are highly leveraged with costs in the higher one-third of the national average. Land costs are likely adding to production costs, and their motivation might be driven by generating enough revenue to at least cover those land costs; profits and building working capital can wait until later. An understanding of production costs is vital for this operation, and when a low-level positive ROI is offered by the market (at a reasonable yield expectation), it should trigger sales. How aggressive the sales are will be a real-time decision, but make a sale.
Somewhere in between. Some farms are average. Land costs vary widely for the middle one-third of producers, and their marketing motivation might be driven by building working capital. In this case, an ROI marketing plan works well. Again, a complete understanding of production costs is necessary. If you know a 12% positive ROI will allow your business to make a specific investment, it’s a no-brainer to pull the trigger on aggressive sales at that point. Even if you think that could expand to 15%, this goal-based strategy should make for a regret-free sale.
Any ROI is better than no ROI
Another good reason to run an ROI analysis is to understand just how good or bad marketing opportunities are at any time. For example, if an early season weather rally drives new-crop corn futures to $6.25, it can be difficult to pull the trigger on sales not knowing if weather will result in a sub-APH yield. But if $6.25 futures represent a significant ROI at your APH, the analysis might be the incentive it takes to at least start a new-crop marketing effort.
If crops find relief with cooler temps and timely rains and prices fall back from those highs, use the ROI analysis to prevent a “bad” sale. There are times farmers must manage losses, but if prices are grinding lower, sales can become a “give up” rather than a decision. If you know $4.75 futures result in a low-level positive ROI but returns turn negative at $4.50, don’t let futures get to $4.50 before locking in a price. From there, be prepared to manage additional risk with futures or options.
