Managing the Margin: Developing a Rule Based Agricultural Commodity Marketing Plan
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Managing the Margin: Developing a Rule Based Agricultural Commodity Marketing Plan

[music] Hello, my name is Shannon Sand, I’m a livestock business management field specialist with SDSU Extension. Today I’m going to be talking about developing a dynamic commodity rule based marketing plan. What is a dynamic commodity rule based marketing plan? It is a plan that identifies decision points and actions, each operation should have a unique rule based marketing plan that reflects production costs, cash flow needs, and insurance coverage. The marketing plan should be aligned with the amount of risk the operation can tolerate. This can be accomplished by identifying the maximum amount of monthly value at risk the firm should assume. The marketing plan should begin when a producer wants to start managing a crops risk. This may start when a producer is beginning to purchase inputs or potentially even earlier, however all plans should start prior to planting. It is best to develop your marketing plan in two components pre-harvest versus post harvest. To identify a decision points in your marketing plan you must develop rules. What do we mean by a rule? Rules are based on the following structure if condition a occurs then action B follows. Rules can be based on various triggers that can include technical signals, fundamental signals, and/or specific dates. An example of a technical rule that could be included in a marketing plan would be if December corn future prices goes above the upper Bollinger Band using a moving day average of a hundred days and two and a half standard deviations. Then sell or hedge a specified quantity of bushels. Fundamental rules like technical rules can also be used in a marketing plan. An example of the fundamental rule would be if corn stocks to use decreases by one percent or more and a corn price increases by cents per bushel or more then you would sell or hedge a specified quantity of bushels. There are two outcomes that can occur based on this rule: one when the condition occurs resulting in the actions outlined or two the condition does not occur. When the producer develops a rule based marketing plan it allows for the producer to examine historical conditions to see how many triggers that the rules typically produce and also to determine the performance of the rules relative to alternative rules. If the rule condition does not occur or is not expected to occur frequently then the producer should think of contingency plans or secondary triggers to manage value at risk. This could be done by setting date deadlines where a certain percentage of bushels will be sold if the rule does not trigger. Certain rules can be developed where the rule is only active within a certain period of time The original technical rule also could be altered to a shorter term perspective where there is a greater likelihood of more conditions occurring. This can be done for example by decreasing the moving day average and/or reducing the number of standard deviations for the Bollinger Band in order to create a higher chance of signals. If this secondary rule still does not trigger then add a deadline trigger could be executed to sell a certain percentage of the crop by the deadline. This deadline could be set based on cash flow needs or other considerations. Developing a rule based marketing plan accomplishes two functions: It allows the marketing plan to be back tested using historical data to compare the performance against other strategies and the rule based marketing strategy plan could be shared with lenders to assist a producer in communicating how they are managing their operations risk. By increasing the transparency on how risk is being managed this can help lenders and farm stakeholders understand the importance of providing lines of credit or capital to me potential capital requirements when utilizing futures and/or options. For more information on this topic visit [music]

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