How can you know your average marketing price will be in the top half of the price range when you don’t know the final price range when you make the sales? You can’t, but it is an excellent question which immediately differentiates two lines of thought, in fact, two paradigms which will take marketing plans in very different directions with widely different expectations.
What is a paradigm? A system of beliefs, ideas, values, and habits that is a way of thinking about a particular topic. In this case, the topic is achieving higher returns to assets with higher sales prices.
The first paradigm is the traditional approach to marketing which is to establish a system for price targets to trigger sales. The most common sales trigger has historically been subjective CoP (cost of production inputs) estimates which appear to guarantee a profit over your CoP, while not necessarily covering the overhead and other cash flow requirements. Nevertheless, the concept leads to statements like “I can’t go broke selling at a profit”, “I did good because I sold above my costs”, “My advisor is making me a lot of money”, and many more similar statements that translate to a false impression that the sales that covered CoP were actually competitive marketing decisions in the context of what was available, and actually covered total CF and not just CoP. In one sense, they are competitive prices because it is a similar performance to what peers are doing. Unfortunately, sales at average prices mean that they were probably in the bottom 30% of the prices that were actually available because of the disproportionate amount of grain sales that are made in the lower end of the price range.
The second paradigm is to not focus on specific price targets or dates, but rather to follow trend indicators and other systems which will bypass the CoP levels and follow the market to higher prices. In order for this approach to work, the sale triggers are based on market behavior rather than specific price targets which may be a total disconnect from the current S&D driven market. The essence of the second paradigm is to use objective rules to trigger sales which can be pretested to determine how effectively those rules would have performed if consistently applied over multiple years. A system based on a market based sales trigger provides no guarantee that the resulting average price will cover CF or even CoP, nor where it will fall in the percentile range. But, once the objective system has been documented to net higher net prices over time than traditional systems, it does guarantee it will maximize revenue or minimize losses better than traditional plans. The huge difference between the two systems is whether you believe that market behavior is predictable or not.
This is not an advocacy for one approach or another. It is simply an attempt to explain how the thought process and expectations are very different between the two approaches, and they should be expected to produce different results. So, let’s do side by sides now. With the second approach, you don’t know where your averages fell until the grain receipts are all reconciled, but sales will be made in the existing price range, and you are confident the resulting price will be high in the available price range. With the first approach, you don’t know when you plant the crop whether the market will come to cover your CoP or not, and certainly not individual CF numbers. If not, you have no marketing plan. There are no guarantees in the market, but the first approach is very attractive because there seems to be a more specific plan – which usually rides on the same expectation of the market rising as the second approach. Look again at the definition of a paradigm, and think about how much of your decisions are based on what you are familiar with rather than what may be just as real but unknown to you. I will address specific benchmarks for performance in another piece later. Questions, comments, and reactions are invited at all times. The more discussion of facts there is, the more understanding there will be of marketing alternatives and consequences.
Posted by Keith D. Rogers 18 April 2022