The importance of having a marketing plan

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Published on Friday, June 17, 2016

By Gary Smart

Farm Management Specialist, Manitoba Agriculture

If you want to maintain a profitable farm business, developing and evaluating a marketing plan is essential.

Having a solid marketing plan in place will help you make sound decisions that minimize risk and improve your returns.  A successful plan needs to be assessed on an individual farm basis, as every farm has different financial needs and what returns are required for it to be profitable.

Here are some important aspects to consider when creating a marketing plan:

Know your cost of production

This should be the starting point and cornerstone of any marketing plan.  Knowing the cost of production is the first step in deciding what a profitable grain price is. This is because you can determine the break even price per bushel, based on realistic numbers (average yield projections/actual yields), and can determine what price is required to lock in an acceptable profit.

Prior to the growing season, it is important to sit down and plan what crops look the most favourable, analyse your costs and do your projections to see what will provide the most profitable returns.

Every year, Manitoba Agriculture publishes Cost of Production guidelines that can help you through this process. You can find them at manitoba.ca/agriculture/business-and-economics/financial-management/cost-of-production.html.  

Monitor and analyse world events and their effects on market trends

When crops, and consequently yields, are affected throughout the world, supply and demand becomes the main driver of market prices.  If yields are being negatively affected throughout the world, supply becomes an issue and may create an opportunity to lock in optimal prices.  Companies and end users, fearing a shortfall in production, may offer premiums to compete for your commodities, which can often drive prices up.  When ample supply is being projected, prices will often stay the same, or even go down.

As a result, it becomes important to monitor how harvest is progressing.  If the actual harvest comes in below projections, it may be possible to see an increase in price.  Continually analyzing the market and world events becomes a key component of a marketing plan, as closely monitoring supply and demand allows you to take advantage when favourable price fluctuations occur.

However, it is also important to assess your own fields and determine their potential before committing to quantities or qualities, because these factors that drive prices may also be affecting your crops.  

Use available tools and resources

Don’t get too caught up in the daily information and what it all means.  Work with trusted professionals who can give insight to where the markets are at, where they may be heading and any contracting options that are available.

Communicate with buyers

This is beneficial in the event that a deal becomes available, so stay in touch with your buyers to take advantage of these opportunities.

Companies often have different contracts that allow for different pricing strategies that may provide a greater benefit when pricing commodities. Do your research to determine which one suits your operation.

Be aware of contract legalities

Most contracts have penalties and consequences if they are not fulfilled, so be aware of any premiums and discounts before signing. Once you commit, contracts can be very costly to get out of if you do not meet the criteria.

If the contract has an act of God clause, this may help reduce some of the risk.  If weather conditions have affected your crops, holding off until they’re in the bin and you know what you have may be the best approach.

Keeping good samples and binning crop separately can also help ensure your quality is consistent, and hopefully avoid discounts from mixing bad quality with good quality.

Consider storage requirements and bill payment deadlines

If you have inadequate storage and consistently have to sell off the combine, locking you in to accepting a price when prices tend to be at their lowest, it may pay to build a few extra bins to be able to hold grain longer to allow you to wait for more favourable prices.

Your financial position and cash flow obligations are also very crucial components to a marketing plan.  Cash flow around bill payment deadlines is very important to maintaining your farm’s viability.  Some producers will let bills go unpaid in hopes of a few extra cents a bushel, when their interest on that bill plus the damage they’ve done to their credit rating far exceeds the advantage of a higher price.  Taking advantage of interest free cash advances will allow you to meet your financial obligations, while holding onto your grain to wait for more favourable prices.

Planning and monitoring the markets well ahead of time may allow you to forward contract and lock in favourable prices when companies are offering deals ahead of harvest time. Some of these contracts may allow you to sell off the combine, providing immediate cash flow while also eliminating the need for storage.  Forward contracting will also allow you to contract and sell your grain when financial obligations are due.

As new technologies, varieties and advances in agriculture continue to occur, the potential for higher production from year to year increases.  Typically, when there is little grain movement, companies will honour existing contracts before taking spot deliveries.  As a result, using forward marketing with pricing mechanisms backed by delivery agreements becomes even more important to your market plan, especially if cash flow and financial obligations are required during these times.

Having a pre-set marketing plan, and sticking to it in a disciplined manner, is an important factor to avoid unnecessary price risk.  Make sure to analyze and evaluate your marketing plan and strategy on a regular basis.

Conclusion

Marketing should be an ongoing activity and your plan should be reviewed regularly to make sure it is working for your operation.  You don’t always have to stick 100 per cent to your plan, because there will be times when adjustments are necessary, but continue to monitor it closely and be prepared to make changes if and when they’re required.

Marketing plans are designed to help manage and reduce as much risk as possible.  They should meet and hopefully exceed your cost to produce that crop, satisfy cash flow requirements throughout the year, remove emotional or panic selling and reduce stress.  Every farm’s situation and obligations are different, but hopefully you can develop a marketing strategy on how and when to sell your grain and make it work to your advantage.  

Manitoba Agriculture has developed tools for producers to use as part of their marketing plan.  These tools can be found on the marketing management page of the Manitoba Agriculture web page.  One tool, called MarketPlan, allows you to keep track of your grain production and sales and calculate breakeven and revenue based on input producer costs.  It can be found here: manitoba.ca/agriculture/business-and-economics/marketing-management/index.html. 

MyFarm is a more in depth crop planning workbook. It can help you analyze your whole farm on a cash basis, but it also contains a marketing component, so you can calculate revenues and profitability.  MyFarm can be found here: manitoba.ca/agriculture/business-and-economics/financial-management/myfarm.html.

For more information on either of these programs, contact your local farm management specialist by visiting: manitoba.ca/agriculture/business-and-economics/farm-business-management-contacts.html.