High R.P.M. Marketing(Revenue Probability Marketing)

Intuitive Agritech Systems, Inc.

David R. Olsen, President

Iowa Farm Bureau Federation

Ed KordickCommodity Services Manager

Opening Survey

Marketing Survey1. I have sold ___________% of my 05 corn crop.

2. I have sold ___________% of my 05 Soybean crop.

3. I have sold ___________% of my 06 Corn Crop.

4. I have sold ___________% of my 07 Corn Crop.

5. Forward Contracting and committing to delivery of My Crop

before Pollination (increases or decreases ) my yield

risk. Gut Reaction!!6. I typically forward contract __________% of my corn crop before

pollination.

7. I typically forward contract __________% of my Soybean crop

before August.

Marketing Survey8. T or F I have a written marketing plan every year.

9. A year with well below trendline yields and below loan cash prices would be

a

a. profitable year

b. breakeven year

c. unprofitable year

d. Only happens to people in NE, IL, MO, or my neighbor.

10 On a scale of 1 to 10 with 10 being the best, rate your overall marketing

results.

11 Optional: Total crop acres Farmed. ___________.

Marketing Survey

12. What % of my corn crop do I typically sell in the upper ½ of the

market?

13. What % of my corn crop do I typically sell at, near, or below loan

value?

14. If federal crop insurance didn’t exist, what is the maximum % of my

crop I would forward sell before pollination. ____________

15. With federal crop insurance, what is the maximum % of my corn

crop that I am willing to forward sell before pollination. ________

Goals of Today’s Seminar Shift from Emotional Decisions to the Use of

Probability Tools That Are more Rational.

An Introduction to Probabilities and How to Apply Them to Your Farm/Marketing Plan.

Cover the 3 pillars of risk probabilities for farming.

Introduce 5 new concepts of risk management

Bring All these Pieces together Into A Revenue Per Acre Model Instead of Price Per Bushel.

Write a Basic Marketing Plan for 2006 Corn.

A Simple Probability GameClick Here To Start Game

1 6 11 16

2 7 12 17

3 8 13 18

4 9 14 19

5 10 15 20

Number Correct:

Probabilities: Definitions

Probability deals with the likelihood of an event happening in the future.

The likelihood that an event will occur.– 70% Green, 30% Blue

The chances or odds of something occurring. For example, the probability of a coin turning up heads is 50%.

The Two Primary Laws of Probabilities1. Each event in and of itself is independent of the

previous event. Anything can happen and the exact outcome can not be predicted. Each Crop Year is independent and national or local yields are not

influenced by past production nor does it influence future production. Each Turn In the Game Was Independent of the previous and future

turns

2. A long series of random events provides the ability to predict the likelihood of the outcome of the next event Based on history, we can place the odds of producing a “normal” or

above trendline crop. Blue/Green game. We gave you the odds for each turn.

Source: Mark Douglas, Trading in the Zone

Do You Treat Your Marketing Decisions Differently Other Farm Decisions?

1. Delay Planting Due to Weather Forecast? (Some years late planted corn or soybeans do better than early planting.)

2. Delay corn harvest by 2 weeks into late Nov/Dec to let corn dry?

3. Less Fertilizer because of a forecast drought this year?

4. Alternative Crops? Wheat? Sorghum? Canola? Sunflowers?

Do you plan for the usual in your crop input decisions?

In your marketing, do you plan for the usual, or let the unusual determine your timing and decisions?

Assumptions

We are emotionally wired to fail in grain marketing. (Unique to humans and quite different from other animals.)

Every Producer has the skills to be a great marketer, but most don’t use them.

By managing your most probable risks first, you put yourself into a position to maximize revenue over the long term.

Use Corn for all the examples due to the time limitations

Emotions and Grain Marketing

Emotion Driven Method

Results are driven primarily by

emotion and luck

Rational Method

•Results driven primarily by

probability & planned approach

emotionprobability

emotion

probability

Decisions driven by:

Shift the balance to rational decision making

Three Pillars of High Probability/Low Risk

Marketing Strategies

1. Yield Risk Probabilities

2. Price Risk Probabilities

3. Time Risk ProbabilitiesTime Risk

Yield Risk

Price Risk

Local Yields, Top of the Revenue Matrix

Time Risk

Time Risk Probabilities: Corn

Probability Marketing

$1.90

$2.10

$2.30

$2.50

$2.70

$2.90

$3.10

O N D J F M A M J J

Time

Emot

ions

70% probability of lower prices

30% probability of higher prices

Today Future

Nearby Futures Contract Price Probabilities 1990 to Current

Nearby Futures Contract Price Frequency 1990 to Jan 2006

1535

152

468

590

484

451

374

336

240 243

171

127

75

35 34 26 19 22 3115 23

7

70

0

100

200

300

400

500

600

180

200

220

240

260

280

300

320

340

360

380

400

Price Range

Freq

uenc

y

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

110.00%

Key Question to Consider When Looking At Future Pricing Opportunities:

Will the current futures price be available when that contract is the

nearby month?

Frequency Cumulative %Less Than 180 15 0.37%

180 to 190 35 1.24%190 to 200 152 5.00%200 to 210 468 16.57%210 to 220 590 31.16%220 to 230 484 43.14%230 to 240 451 54.29%240 to 250 374 63.54%250 to 260 336 71.85%260 to 270 240 77.79%270 to 280 243 83.80%280 to 290 171 88.03%290 to 300 127 91.17%300 to 310 75 93.02%310 to 320 35 93.89%320 to 330 34 94.73%330 to 340 26 95.37%340 to 350 19 95.84%350 to 360 22 96.39%360 to 370 31 97.16%370 to 380 15 97.53%380 to 390 23 98.10%390 to 400 7 98.27%

400 + More 70 100.00%

Price Range

Dr. Robert Wisner

Dr. Robert Wisner

Managing Time Risk With a Marketing Plan

Pre ProductionTimeFrame

Pre-Planting Pre- Pollination Pre-Harvest Post-Harvest

2 Calender Years Before You Grow the

Crop

Jan. 1 to

April 30th of the year

You grow the crop

May 1 to

June 30th

July 1st to

September 30th.

October 1st. To

September 30th of the

following year.

24 months 4 months 2 months 4 months 12 months

How Much Time Do You Include and Manage

With Your Marketing Plan?

Handout Written Marketing Plan Worksheet

Price Risk

Price Risk Probabilities

Rare, Almost Never

Very Unlikely

Occasional

Somewhat Likely, Mainly happens in future months

Probable and Usual For Short Periods

Probable and Usual For Long PeriodsProbable and Usual For Very Short Periods

Corn Seasonal Patterns

$2.10

$2.20

$2.30

$2.40

$2.50

$2.60

$2.70

J F M A M J J A S O

Dec. Corn Futures (1996 - 05 Avg.)

Corn Seasonal Patterns

$2.10

$2.20

$2.30

$2.40

$2.50

$2.60

$2.70

J F M A M J J A S O

Dec. Corn Futures (2001 - 05 Avg.)

Soybean Seasonal Patterns

$5.00

$5.25

$5.50

$5.75

$6.00

$6.25

J F M A M J J A S O

Nov. Soybean Futures (1996 - 05 Avg.)

Soybean Seasonal Patterns

$5.00

$5.25

$5.50

$5.75

$6.00

$6.25

J F M A M J J A S O

Nov. Soybean Futures (2001 - 05 Avg.)

What % of the Pricing Opportunity For the Upper 1/3 of the price range the March Futures Contract Occurs Pre vs. Post Harvest?

Before Harvest After Harvest

Price Risk Probability:Upper 1/3 of Trading Range Study

% of Total Opportunity To Market in Upper 1/3 of Price Range that comes after Harvest

0%10%20%30%40%50%60%70%80%90%

100%110%

1970

1974

1978

1982

1986

1990

1994

1998

2002

Year

% of Total Opportunity To Market in Upper 1/3 of Price Range that comes Before Harvest

0%10%20%30%40%50%60%70%80%90%

100%110%

1970

1974

1978

1982

1986

1990

1994

1998

2002

Year

67% of the Time (24 out of 36 years) the March Contract Never Traded in the upper 1/3 of its price range after Oct 15th.

Price/Time Risk ProbabilitiesKey Concepts

Key Question: Will the Futures Price available today, be there when that is the nearby price?

Price Risk Increases the longer you are in the market.

The longer you have open positions or unsold grain, the more basis risk you accept

“Market Carry” gives you an opportunity to capture a premium. (Odds stacked in your favor!)

Market rallies are often negated by losses in the basis Don’t let market carry and basis slip away in the same year.

Set Price Objectives, Floors

What is an acceptable price?

How much am I willing to risk.

Price Objectives for all 5 time periods.

Yield Risk

Yield Probabilities

Rare Unlikely Small Normal Medium Chance Chance

Rare Unlikely Small Chance Normal

Trendline Yield

The Yield Probability Risk Paradox

Least Likely

Greatest Yield Risk

Somewhat Likely

Moderate Yield Risk

Most Likely

Minimal Yield Risk

The Greatest Amount Of Yield Risk Is Usually The Least Probable Outcome. The Most Probable Risk Is The Least Insurable. 3 Zones Of Yield Risk: Which one do you manage for?

A B C

InsurableNo Insurance No Yield Risk

Uninsurable

Yield Risk

Iowa Probable YieldsIowa Corn Trendline Yields

020406080

100120140160180200

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

Year

Yiel

d

Actual Yields

80% OfTrendline

25 bu. FromTrendline

Trendline Yields

0

5

10

15

20

25

30

35

Below80

80% to100%

100% +

Series1

Histogram

0

2

4

6

8

10

12

14

0.75

0.85

0.95

1.05

1.15

More

Bin

Freq

uenc

y

Frequency

Historical And Trendline Corn Yields For This AreaWarren Co. IA Corn Trendline Yields

R2 = 0.7329

020406080

100120140160180200

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

Year

Yiel

d

Actual Yields

80% OfTrendline30 bu. FromTrendlineTrendlineYieldsLinear (ActualYields)

Warren Co. Corn Yield Zones

0

2

4

6

8

10

75%

80%

85%

90%

95%

100%

105%

110%

115%

120%

Mor

e

Bin

Freq

uenc

y

0

0.2

0.4

0.6

0.8

1

1.2

Yield Risk Zone Frequency

0

5

10

15

20

25

30

35

80% and Below 80% to 100% 100% +

Num

ber o

f Yea

rs

Local Soybeans for IAWarren Co. IA Soybean Trendline Yields

R2 = 0.63

0

10

20

30

40

50

60

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

Year

Yiel

d

Actual Yields

80% OfTrendline7 bu. FromTrendlineTrendlineYieldsLinear (ActualYields)

Warren Co. Soybean Yield Zones

0

2

4

6

8

10

75%

80%

85%

90%

95%

100%

105%

110%

115%

120%

Mor

e

Bin

Freq

uenc

y

0

0.2

0.4

0.6

0.8

1

1.2

Yield Risk Zone Frequency

0

5

10

15

20

25

30

35

80% and Below 80% to 100% 100% +

Num

ber o

f Yea

rs

Key Concepts For Yield Risk Iowa is a great place to grow corn and soybeans. Know your Corn/Soybean Ratio for making crop rotation

decisions. We have very good chances to grow near to above

trendline yields in both corn and soybeans. We seldom drop below 90% of trend, let alone 80% of

trend or lower. Elwynn Taylor Odds for Drought

– Optimist or Pessimist

Revenue Per Acre Model

Putting It All TogetherRevenue Per Acre Model

Focus on a Revenue Per Acre Revenue can come from any or all of the following

–Grain Sales–Futures or Options Positions–Government Programs

LDP’s Direct Payments Counter-Cyclical Payments Crop Insurance

Net Revenue subtracts expenses from revenue Revenue is dependant on Both Price and Yield

Utilizing Break-Even Analysis

Break Even PriceBreak Even RevenueBreak Even Yield

How Your farm can benefit from knowing all three.

Limitations of any of the three

Target Break-Even Price?Yields

Low High

Expenses

Focus on Break Even Price?

Build a Basic Break-Even Revenue Matrix

Rare Unlikely Small Chance Normal

Rare, Almost Never

Very Unlikly

Occasional

Somewhat Likely, Mainly happens in future months

Probable and Usual For Short Periods

Probable and Usual For Long PeriodsProbable and Usual For Very Short PeriodsNorthern IL 2005 Northern IA 2005

National Yields(Futures Price Related)

Local

YieldsPre- Planting and Summer Opportunity

How To Build A Probability QuadrantBuild probability quadrants, teach how to figure one for themselves

Insurable10%

Uninsurable30%

Above Trend 60%

2.60 above25%

2.5% 7.5% 15%

2.20 - 2.6045 %

4.5% 13.5% 27%

Loan or Below2.20 Dec.

30%

3 % 9% 18%

Yield

Pric

e

Breakeven revenue matrix

ExpensesCat InsurancePrices.

•Expenses of $380 No Gov’t Programs, CAT Crop Insurance

?

Breakeven Yield: Minimum Yield Needed to Guarantee Profitability No Matter How Low Prices Go!

Breakeven revenue matrix,

Add Government Programs

Next Farm Bill Fixed Payment, No LDP’s?

Exercise: Yield Needed To Cover Expenses

Exercise. Bushels Needed for Breakeven At Loan

Expenses Per Acre___________ / Loan Rate _____________ =

Total Bushels Needed to BreakEven

Forward Contract ___________ Bu. at $___________ per Bu.

Total Expenses _____________

less Revenue From Contract _____________

= Needed Revenue _____________ / Loan Rate ________

= Remaining Bu Needed ________

+ Original Contracted Bu. ________ = Total Bu.

Insurable

No Insurance No Yield

Risk

The Greatest Amount Of Financial Risk Is Usually The Least Probable Outcome. (Insurable)

The Most Probable Risk Is The Least Insurable.

Best Way to Manage Production Risk

Key Concept: We are Self Insuring More than we used to!!

32 % chance 68 % chance

Cerro Gordo Co. Yield Zones

0

2

4

6

8

10

1275

%

80%

85%

90%

95%

100%

105%

110%

115%

120%

Mor

e

Bin

Freq

uenc

y

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

89% chance 11 % chance

Exercise: Dollars Above LoanHow Many Will You Protect?

My Normal Expected Yield _____________Number of Acres of Corn _____________Total Expected Bu. Produced_____________

Current New Crop Futures _____________Less Futures at 0 LDP _ $ 2.20 ______

Total cents per bu. above _____________Total bu. X _____________

Total Dollars Available above Loan

Impact of Marketing Above Loan And Falling Prices

Key Concept:

How Crop Insurance Works Rising Prices, Offsetting Dollars

No Harvest Price Option

Harvest Price Option

Risk = Amount of Unsold GrainAre You Marketing According the size of your FarmChanges in your farm operation

–Increased Acres from 5 or 10 years ago?

–Increased Yields

–Increased Productivity: Tile, Fertility, Etc.

Size of bet is amount of unprotected bushels

Unpriced

Not Hedged

PricedHedged

Size of BetThe Impact of Reducing Unpriced Bushels

Final Thoughts On Rational Probability Marketing

1. Know your edge or advantage over the market.– Price Trends (Upper 1/3?)– Yield Trends

2. Play that Edge in a consistent manner. Don’t guess.– If you have an advantage, don’t take the lower odds

3. A “Matching” strategy will decrease your odds of being successful. – (Do you take the 30% or 70% odds?)

4. Develop strategy before emotions are a significant part of the decision process.- How Much Does a Summer Weather Rally Affect Your Emotions?

Software DemonstrationLocal Breakeven Scenarios

Software Demonstration

Focus on Breakeven yield

What are realistic price targets and results of pulling the trigger if and when we hit those targets.

Crop Insurance Coverage Levels for 2005

Crop Rotation Decisions.

Corn Example

Breakeven Yield

1.

2.

3.

Maximum Risk / Yield

1. 1.

2. 2.

3. 3.

Soybean Example

Breakeven Yield

1.

2.

3.

Maximum Risk / Yield

1. 1.

2. 2.

3. 3.

How To purchase the SoftwareAnnual Subscription: Three Reasons for this

1. Crop Insurance products and rules change2. Governments programs change.3. Need to have you always updated to insure accurate calculations

Farm Bureau, Silver subscription, 2nd year free. $497 Renewals $197.

(About the same cost as buying the bronze for two years.)

Bronze subscription 1st Year $297, renewals are $147

1 Year Farm Bureau Membership included with any purchase or renewalCall 1-888-315-8179 Silver Product Code: NSV24FBS Bronze Product Code: NBZ12FBS

Contact Information

Intuitive Agritech Systems, Inc.David Olsen, President1209 2nd St. NWMason City Ia 50401Phone: 641- 512-1716Email: david.olsen@myfarmsoftware.comWebsite: www.myfarmsoftware.com Software information

Ed Kordick Commodity Services Manager

Iowa Farm Bureau Federation 5400 University Avenue West Des Moines, IA. 502667

Phone: 515.225.5433 FAX: 515.225.5419 E-mail: ekordick@ifbf.org Web.: www.iowafarmbureau.com