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The Business Side of Agriculture

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Posted Jul. 31, 1998

What is the single most important factor influencing the profitability of your farming or ranching operation? If several people were asked this question there would probably be several different answers given. I do believe, however, that if we were honest with ourselves as owners, operators and/or managers, that many of the responses to the question of profitability would sound quite familiar.

Marketing could be an answer that many producers would mention as an important factor influencing profitability. Consider the lost opportunity of income if you waited until June or July of this year to sell either of the two most important commodities to Oklahoma's agricultural economy ? wheat and cattle. Wheat prices declined roughly $1 per bushel since the 1998 crop was planted in the fall of 1997. Feeder cattle prices also declined substantially since calves were purchased late last summer and fall. How can marketing skills be improved? One item that ranks high on the list of possibilities is a written marketing plan. A written marketing plan does not have to be a sophisticated document requiring reams of paper.

A $5 calculator, a Big Chief tablet and a number 2 pencil are adequate. The calculator is needed to add up your costs of production and divide through by your acres or head so a break-even price can be established. Add to the break-even a profit objective, and now you have an asking price for your product. Once an asking price is known, decisions can be made regarding percentages of the crop or livestock to be sold at certain market prices.

Calculating an asking price allows a producer to know if the market is offering them a profit. Cattle producers often ask me if they should sell their calves for a certain price. There isn't a good answer to that question, unless you know what amount of profit that asking price is offering. When you know the market price that will make $20, $40, and $80 per head profit, then you can determine how many head you are willing to sell at what price.

For example, you might sell 50 percent of your calves when the market offers you $40 per head profit. You could sell another 25 percent at $60 per head profit and another 25 percent at $80 per head profit. If the market falls to $30 per head profit after you have sold the first 50 percent, then you could plan to sell the other 50 percent. The main point is to have a plan thought out when you start buying cattle or sowing wheat and write it down. Yogi Berra was once quoted as saying baseball is 75 percent mental and the other half physical. The same thing could be said about marketing agricultural commodities.

Written marketing plans can be changed if new information becomes available. The major benefit of the written plan is to keep from making "gut" marketing decisions. As producers we often get drawn into making marketing decisions influenced by our reactions to news, neighbors or by the banker. A well thought out marketing plan, that is communicated with and agreed to by the banker, should alleviate forced sales because the note is due at the bank.

If you are a cow-calf producer who raises your own replacement females, something you may want to incorporate into your marketing plan is the number of heifer calves to sell and to keep each year. A replacement heifer plan could be to hold back a constant dollar value of replacement heifers each year and let the number of replacement heifers vary throughout the cattle cycle. This would allow for a larger cowherd when prices were good and a smaller cowherd when prices were less. Profits throughout a complete cattle cycle could be higher under this type of plan.

Another item to consider in a marketing plan is the historical seasonal price pattern for your product. The graph illustrates the seasonal price pattern for the last 10 years at Oklahoma City for 500-600 pound steer calves. You will notice that the lowest price for the year appears in October. This is the time of year when many calves of this size come to market. If a producer with a spring calving cow herd could move the sell date(s) of their calf crop to earlier or later than this time-frame, it is likely that a higher price could be received. A wise man once said that a man should not drive his ducks to a poor market. Hauling calves to town in October could resemble that scenario.

A written marketing plan will not guarantee a producer a profit goal or even a profit. But in the long term, marketing commodities according to a well thought out plan should net substantially more dollars than marketing on feelings alone.