Using a Marketing Plan to Manage Market Risk

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Using a Marketing Plan toManage Market Risk

(originally titled: Risk Issues in Alternative Markets)

Denise Mainville

Agricultural & Applied Economics

Virginia Tech

May 28, 2006

Danville


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Introduction

Types of risk

Different risks for different markets

Role of a marketing plan in mitigating risk


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Types of Risk

Operational (short-term) risk

Price

Yield

Quality


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Types of Risk

Strategic Risk Concerns producers positioning in the market relative

to longer-term forces

Examples Buyer power

Entry of new competitors

Evolution of consumer demand

Policytrade liberalization, regulations

These longer-term factors have direct influence onoperational risk

Producers have less ability to influence these factors,but can also do more to anticipate and plan for them


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Different Risks for Different Markets

Consider a spectrum of market types

Open Markets Contracting Alliances Vertical Integration


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Different Risks for Different MarketsAs you move from L to R along the spectrum, the nature of

the market and risk changes

Commodity Markets (e.g. soybeans, cattle)

Many buyers & sellers

Readily available info Operational risks predominate (Price, yield, quality) Risk mgt. options may include

Hedging w/futures & options Crop insurance

Revenue Insurance

Open (Commodity)

Markets

Contracting Alliances Vertical Integration


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As you move rightward across the spectrum Fewer buyers & sellers

Info less available about quality, price, volumes sold

Investments become more specific to relationship

As you move R, operational risk mitigated somethrough relationships (e.g. contracting)

Strategic risk becomes predominant



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Contracting

Price, yield risk reduced, however other riskscan increase

E.g. Make an investment to qualify for acontract, but what will it be worth if buyerdecides not to renew contract? Gives buyer

strategic advantage in negotiation



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Alliances

Issues of opportunism may be lesspronounced

However you become more subject to upsand downs in market as you share risk



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Vertical Integration

You decide to undertake your own marketingactivitiesyou therefore accept all risk, must

undertake strategic action to protect market Risk management strategies include product

& market diversification, even more key is

undertaking strategic analysis prior toinvestment



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Using a Marketing Plan to Mitigate

Risk


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The Marketing Plan

Good marketing plans dont startw/marketing

Marketing as commonly used refers to

how to get people to buy what you haveproduced.

A sound marketing plan must start w/the

decision of what to produce Must start with assessing both operational

and strategic risk


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The Marketing Plan

Consider several alternative enterprisesthat interest you (not just 1)

Only 1 gives you no alternative

After analysis, the seemingly less attractivemarket might win you over


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Consider 3 questions for each alternative

Q1. What are prices relative to productioncosts that you anticipate and investmentrequirements to enter market?

Snapshot of market

Indicates short-term attractiveness and feasibility of

entering market


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Q2. What are trends in the market in termsof levels and variability of product & inputprices, and how will that affect profitability

in the near-medium term? This question still relates to operational risk,

however hints at longer term issues

It is a retrospective question, however, looksat how things have been as if they willcontinue in the same manner


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Q3. Where is this market going over themedium-long term? Does the product meet consumers evolving

demand (quality, novelty, convenience, low-carb, etc.) (if not demand may decline overthe long term)

Is competition increasing due to changes in

technology or trade regulations? What is happening among buyers?

Consolidation? How might this affect you?


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This third question relates to the factorsunderlying supply & demand, the forces whichdetermine price and other trends considered inQ 2.

However it looks to the future, and allows you toanticipate major changes that may be on thehorizon

Doesnt mean you will necessarily decide not toenter, but a key means of risk management isanticipating issues and planning for them aheadof time.


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Each question is relevant to each market,however immediacy of strategic questionsincreases as you move rightward


Q 1 --Today

Q2--Trends

Q3

Evolution


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Marketing Plan

In developing a marketing plan, need to

Identify strategic and operational risks inmarket, and tools available to deal with them

Match them with own Goals & values

Financial situation

Risk tolerance level Cash flow needs

Anticipated production costs


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Using a Marketing Plan to MitigateRisk

A Marketing Plan allows a producer linkGoals, values, objectives with Reality

Goals, values and objectives are what the

producer wants to respond to

Reality includes not only what the market istoday, but also what it is likely to become

tomorrow


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Marketing Plan

A Marketing Plan that reduces risk mustconsider

Short-term profit potential

What are todays prices, what are your likely costs ofproduction, and what investments are required?

Strategic issues An attractive market (one with high potential profitability) is

likely to attract more than just you

Is there anything to keep others from entering and drivingprices down?

Geographic advantages (e.g. farmers markets)

Production advantages (quality or price)


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Steps in a Risk Management Plan

1. Identify Specific Goals

To make as much profit as possible vs. To

make $10,000 in profit each year for next 5

years Specificity allows you to work back to

performance needed to achieve goals (ex. X

acres w/Y cost of production sold at Z price)


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2. Identify & Evaluate AlternativeEnterprises of interest

Can I get into the market (what investments

are needed?)

Can alternatives meet goals (profit potential)?

How variable are the parameters (price, yield,

quality) that must be adhered to in order tomeet goals?

Am I willing to bear the risk involved?


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3. Project to the Future Is this a market that is attractive to everyone

or is there some aspect of it that gives me an

advantage? High profit potential can attract many producers,pushing down prices

Is the market limited by geography, productionrequirements, or other issues that can limit entry?

Do you have an advantage (geographic,knowledge, production, or relationship) that givesyou an advantage?


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Factors affecting entry Size of market (a small market might be too

much trouble for the biggest players)

Geographic location of market (do you havethere location advantages)?

Nature of production High perishability & close to market

Cultural factors Relationship with buyer

Familiarity with market niche


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4. Consider Long-term Issues The decision to enter a market need not last a life

time, but as necessary investments increase, youneed to look further to the future

How is demand for this product likely to change? Does it meet consumers demand for products that are

convenient, tasty, nutritious, novel, low-carb, etc?

How is supply likely to change? Are technologies coming on board that will reduce costs for

someone or make entry easier? (e.g. mechanized harvest, newseed varieties)

Are new entrants likely to come on board due to changes inpolicy and/or technology? (E.g. China & apple concentrate,Mexico & tomatoes)


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4. Think Strategically

What strategies can I use to protect myselffrom risk?


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Conclusion

Different markets carry different risks

In choosing an alternative market, musttake a broad and informed view of risk tobe faced

Addressing strategic risk early allows youto anticipate and deal with operational risk

By evaluating multiple options, may endup in a different market than you thought


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Resources

Risk Management Association

www.rma.usda.gov

National Ag Risk Education Library

www.agrisk.umn.edu
http://www.rma.usda.gov/http://www.agrisk.umn.edu/http://www.agrisk.umn.edu/http://www.rma.usda.gov/


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Risk Issues in Alternative

Markets

Denise Mainville

Agricultural & Applied Economics

Virginia Tech

Documents

Using a Marketing Plan to Manage Market Risk