Posted by: usset001 | April 12, 2010

Price targets in a pre-harvest marketing plan

I received another interesting question via email, concerning the process I use to establish my price objectives in a marketing plan. See if you can follow my reasoning.

How do you establish the price target for each sale in your marketing plans? For example, in the 2010 pre-harvest marketing plan for corn, you identified price objectives for December corn futures from $4.05 to $5.55 per bushel. I understand the concept of breakeven + X to arrive at a target price, but your target prices shift considerably.  Are you ratcheting up the target price based on expected gains in the corn market? Do you also use a realistic range of value for a crop? That is, given world grain stocks and expected demand, do you establish a range in pricing and move within that range? If so, how do you establish the range?

You ask a very good question. How do I establish my pricing targets or objectives?

Here are a few points for your consideration. First, my 2010 marketing plan and price objectives were established many months ago (June 2009). Second, you may be surprised to learn that I DO NOT consider my price expectations or “outlook” in establishing these goals.

Here is the process I use to establish my minimum and maximum price targets in a marketing plan.

Step 1: I select a minimum price threshold based on local production costs (I consider the minimum price the most important piece of my marketing plan)

Step2: Identify a realistic maximum price objective. What is realistic? My approach is to look at history. I identified 4 years (see table below) with the greatest price rise from January 1 to the high in the contract delivery year (2006 for example: On January 2, 2006, the Dec’06 corn contract closed at $2.52. From January 1 to expiration, the highest price attained by this contract was $1.25 higher, or $3.77 per bushel). Note that the average price rise in these years is $1.53 per bushel. Based on this history, I can say that a $1.50 rise from Jan 1 forward is realistic (not probable, but it has happened before).

Chicago December Corn Futures, 1990-2008: Contract Years with the Greatest Price Rise from Jan 1 Forward

Contract Jan 1 price Highest price (Jan 1 to exp.) Highest price vs. Jan 1
Dec’08 $4.80 $7.88 $3.08
Dec’06 $2.52 $3.77 $1.25
Dec’95 $2.48 $3.43 $0.95
Dec’96 $2.97 $3.83 $0.86
    average $1.53


 Step 3: Use your judgment to adjust these figures. I adjusted my range to $1.50 ($4.05 minimum and $5.55 maximum), or modestly smaller.

Step 4: With the minimum and maximum “bookends” now in place, simple stratify the rest of your price goals in between the two.

While I consider the minimum price objective to be the most important part of my plan, I consider the maximum price to be the least important part. They are less important because I also use decision dates in pricing, and these can easily override my lofty price objectives.

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