Earlier this year, Texas A&M market analyst Mark Welch presented this little study at a conference. He started by listing five marketing approaches.
• Sell 100% of production at harvest (Oct. 15).
• Sell a little each month of the year (10% for 10 months beginning on Jan. 15).
• Market according to target price (total costs plus 10%).
• Sell based on seasonal price tendencies by the calendar (March 1, June 15, Aug. 1, Oct. 15).
• Sell based on seasonal price tendencies using moving averages to time sales.
He then asked the crowd which approach would lead to the greatest profit. I chose option 5. It seems the most complicated. I figured coming from an ag economist, the snazziest sounding approach would be the best.
Looking back at market prices, Welch applied each of these approaches from 2005 to 2010. It turns out option 5 was correct … once.
At first glance, the chart below makes a good case for tossing marketing strategies out the window. In actuality, Welch says it only highlights the importance of developing a strategy and sticking to it.
"You need to have a plan in place," Welch explains. "Ask yourself, 'What's an acceptable price?' Then, pull the trigger when you hit that benchmark. The volatility in these markets is not going away."
To put a marketing plan on paper, producers need to know three primary things: cost of production, cost of storage and what is an acceptable level of profit for their operation.
"If we don't know these three things, we're making an emotional decision instead of a business decision," Welch adds.
Looking back at the list of options, I picked number one (selling it all at harvest) as the worst potential strategy. Turns out, I was wrong again. It's been the best option two of the past five years. Still, Welch advises against such a strategy.
Instead, Welch advises spreading out the marketing risk throughout the year. In the future, production costs will only increase. He expects direct payments may soon be a thing of the past and increased crop insurance premiums a thing of the future. Solid marketing skills will only become more important.