High R.P.M. Marketing ( R evenue P robability M arketing)

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

2. Opening Survey

3. Marketing Survey • I have sold ___________% of my 05 corn crop. • I have sold ___________% of my 05 Soybean crop. • I have sold ___________% of my 06 Corn Crop. • I have sold ___________% of my 07 Corn Crop. • Forward Contracting and committing to delivery of My Crop before Pollination (increases or decreases ) my yield risk. Gut Reaction!! • I typically forward contract __________% of my corn crop before pollination. • I typically forward contract __________% of my Soybean crop before August.

4. Marketing Survey • T or F I have a written marketing plan every year. • 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. • On a scale of 1 to 10 with 10 being the best, rate your overall marketing results. • Optional: Total crop acres Farmed. ___________.

5. Marketing Survey • What % of my corn crop do I typically sell in the upper ½ of the market? • What % of my corn crop do I typically sell at, near, or below loan value? • If federal crop insurance didn’t exist, what is the maximum % of my crop I would forward sell before pollination. ____________ • With federal crop insurance, what is the maximum % of my corn crop that I am willing to forward sell before pollination. ________

6. 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.

7. A Simple Probability Game Number Correct:

8. 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%.

9. The Two Primary Laws of Probabilities • 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 • 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

10. Do You Treat Your Marketing Decisions Differently Other Farm Decisions? • Delay Planting Due to Weather Forecast? (Some years late planted corn or soybeans do better than early planting.) • Delay corn harvest by 2 weeks into late Nov/Dec to let corn dry? • Less Fertilizer because of a forecast drought this year? • 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?

11. 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

12. Emotions and Grain Marketing • Emotion Driven Method • Results are driven primarily by • emotion and luck • Rational Method • Results driven primarily by • probability & planned approach Decisions driven by: emotion probability emotion probability Shift the balance to rational decision making

13. Three Pillars of High Probability/Low Risk Marketing Strategies Local Yields, Top of the Revenue Matrix • Yield Risk Probabilities • Price Risk Probabilities • Time Risk Probabilities Yield Risk Price Risk Time Risk

14. Time Risk

15. Today Future Time Risk Probabilities: Corn

16. Nearby Futures Contract Price Probabilities 1990 to Current Key Question to Consider When Looking At Future Pricing Opportunities: Will the current futures price be available when that contract is the nearby month?

17. Dr. Robert Wisner

18. Dr. Robert Wisner

19. Managing Time Risk With a Marketing Plan How Much Time Do You Include and Manage With Your Marketing Plan?

20. Price Risk

21. 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 Periods Probable and Usual For Very Short Periods

22. Corn Seasonal Patterns

23. Corn Seasonal Patterns

24. Soybean Seasonal Patterns

25. Soybean Seasonal Patterns

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

27. 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.

28. Set Price Objectives, Floors • What is an acceptable price? • How much am I willing to risk. • Price Objectives for all 5 time periods.

29. Yield Risk

30. Yield Probabilities RareUnlikely Small ChanceNormal Trendline Yield RareUnlikelySmallNormal Medium ChanceChance

31. The Yield Probability Risk Paradox 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 Somewhat Likely Moderate Yield Risk Most Likely Minimal Yield Risk Least Likely Greatest Yield Risk Uninsurable Yield Risk No Insurance No Yield Risk Insurable

32. Iowa Probable Yields

33. Historical And Trendline Corn Yields For This Area

34. Local Soybeans for IA

35. 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

36. Revenue Per Acre Model

37. 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

38. Utilizing Break-Even Analysis • Break Even Price • Break Even Revenue • Break Even Yield • How Your farm can benefit from knowing all three. • Limitations of any of the three

39. Target Break-Even Price? Focus on Break Even Price? Yields Low High Expenses

40. Build a Basic Break-Even Revenue Matrix RareUnlikely Small ChanceNormal Rare, Almost Never Very Unlikly Occasional Somewhat Likely, Mainly happens in future months Probable and Usual For Short Periods Probable and Usual For Long Periods Probable and Usual For Very Short Periods Local Yields National Yields (Futures Price Related) Pre- Planting and Summer Opportunity Northern IL 2005 Northern IA 2005

41. How To Build A Probability Quadrant Yield • Build probability quadrants, teach how to figure one for themselves Price

42. Breakeven revenue matrix • Expenses of $380 No Gov’t Programs, CAT Crop Insurance • Expenses • Cat Insurance • Prices.

43. Breakeven revenue matrix, Add Government Programs ? Breakeven Yield: Minimum Yield Needed to Guarantee Profitability No Matter How Low Prices Go!

44. Next Farm Bill Fixed Payment, No LDP’s?

45. 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.

46. The Greatest Amount Of Financial Risk Is Usually The Least Probable Outcome. (Insurable) The Most Probable Risk Is The Least Insurable. No Insurance No Yield Risk Insurable

47. Best Way to Manage Production Risk Key Concept: We are Self Insuring More than we used to!!

48. 32 % chance68 % chance 89% chance11 % chance

49. 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

50. Impact of Marketing Above Loan And Falling Prices Key Concept: