10 top tips for your marketing strategy
16 April 2014
At last the drills are starting to roll in the fields around home, here in Stirling. While some in Morayshire are busy top-dressing their spring crops, the heavy Carse land is just beginning to dry out. However winter crops are looking well all over and in general things are looking promising for harvest 2014.
With the majority of crops well established, there is a limit as to what you can do to optimise the return these crops will make to your business. Apart from harvest weather, the biggest variable will be how well you market your cereals – not simply the price, because that will be dictated by events a long way from your influence, but how well you market your grain to achieve the highest average.
Now is a good time to start thinking about your marketing strategy, before harvest is upon you. A marketing strategy is about managing risk in relation to price and below are tips if considering your strategy
1. Know your Cost of Production
You need to know what costs your selling price has to cover, and calculating the cost of production will help in establishing a minimum target price.
However market prices are not directly influenced by your cost of production and it may be the case where the market is not going to cover these costs. In this instance, having a marketing strategy becomes more crucial, to ensure any gap is minimised. In this case you need to question your costs, and benchmarking against other producers can be both useful and enlightening.
2. Set a target price
Decide on the minimum price level at which you would be prepared to start making decisions. This should be based on your cost of production and will become your trigger point in the market-place.
3. Understand and monitor the market
Once you have established your trigger point, then monitor the market prices to ensure that you capitalise on any market movements in your favour. This can be done well in advance with futures trading open for a 32 month period. Before beginning to monitor markets, make sure you are familiar with market terminology and reliable sources of independent advice, such as cereals.ahdb.org.uk/markets
4. Know your basis
This is when it starts to become more complicated. A ‘futures’ price is effectively the price paid in to store. Your ‘basis’ is the difference between your ex-farm price and a specific futures contract, and will account for costs incurred such as storage, transport, quality etc. Your basis will vary depending on factors such as distance from port, and can rise or fall independent of price movements.
Your basis can be calculated by comparing the relevant futures price to ex-farm merchant quotes for the same time period.
5. Understand the tools available to you
Ensure you have an understanding of the various tools such as ‘futures’ and ‘options’, and find a risk management partner to act on your behalf. If you don’t understand it, don’t do it.
Grain merchants and co-ops should give you access to these tools as part of a physical forward grain contract, although you can access them independently of your physical grain.
6. Develop a strategy
Your strategy will be based on your trigger price, as well as cash flow, storage and any other business considerations. The strategy will determine whether you trade futures, options, spot markets or a combination, and in what relation to your physical grain production. It should also fit with your attitude to risk, risk profile, target market and market view.
- Risk profile relates to the proportion of your crop that is either un-priced, fixed price or minimum priced. If 100% is un-priced then your risk profile is high.
- Market view is your own and is based on the market information available to you and your view should influence your strategy. The less information you have available, the less accurate your view will be, and the lower risk profile your strategy should be.
- Your attitude to risk describes how much of a risk taker you are, but this should reflect the ability of your business to absorb that risk.
7. Trading Futures
Trading futures requires an initial cash deposit, and may require additional payments to cover margin calls if the market moves against your position, to keep your position liquid.
It is important to monitor your trading positions regularly so that you can get out of the market if you need to.
8. Buying Options
Options are effectively price insurance and should be included in your budget for calculating cost of production. The cost is related to the sale price of the grain.
- ‘Call Options’ are used to capture price rises on previous sales – if the market moves up you can use the option to get out of the original price and sell at the new price.
- ‘Put Options’ are used to protect the value of unsold grain.
Speculation is not risk management – don’t trade more futures or options than your physical grain. They only function as a risk management tool when balanced against your physical exposure to the market, so be realistic about yields and quality when deciding on your amounts.
Risk management is an on-going process and your strategy is specific to your business circumstances. You cannot take a generic plan and apply it to your business in any format other than as a guide.
If you cannot, or are unable to follow these steps, then use a partner who can.