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Denise Mainville Agricultural & Applied Economics Virginia Tech May 28, 2006 Danville
Introduction
Types of risk Different risks for different markets Role of a marketing plan in mitigating risk
Types of Risk
Operational (short-term) risk
Price Yield Quality
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 on operational risk Producers have less ability to influence these factors, but can also do more to anticipate and plan for them
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Open Markets
Contracting
Alliances
Vertical Integration
Contracting
Alliances
Vertical Integration
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Open Markets
Contracting
Alliances
Vertical Integration
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Contracting
Price, yield risk reduced, however other risks can increase E.g. Make an investment to qualify for a contract, but what will it be worth if buyer decides not to renew contract? Gives buyer strategic advantage in negotiation
Open Markets
Contracting
Alliances
Vertical Integration
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Open Markets
Contracting
Alliances
Vertical Integration
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Consider 3 questions for each alternative Q1. What are prices relative to production costs that you anticipate and investment requirements 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 terms of levels and variability of product & input prices, 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, looks at how things have been as if they will continue in the same manner
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This third question relates to the factors underlying supply & demand, the forces which determine price and other trends considered in Q 2. However it looks to the future, and allows you to anticipate major changes that may be on the horizon Doesnt mean you will necessarily decide not to enter, but a key means of risk management is anticipating issues and planning for them ahead of time.
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Each question is relevant to each market, however immediacy of strategic questions increases as you move rightward
Q3 Evolution Q2-Trends
Q 1 -Today
Open Markets
Contracting
Alliances
Vertical Integration
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Marketing Plan
In developing a marketing plan, need to
Identify strategic and operational risks in market, 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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Marketing Plan
A Marketing Plan that reduces risk must consider
Short-term profit potential
What are todays prices, what are your likely costs of production, 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 driving prices down?
Geographic advantages (e.g. farmers markets) Production advantages (quality or price)
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Cultural factors
Relationship with buyer Familiarity with market niche
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Conclusion
Different markets carry different risks In choosing an alternative market, must take a broad and informed view of risk to be faced Addressing strategic risk early allows you to anticipate and deal with operational risk By evaluating multiple options, may end up in a different market than you thought
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Resources
Risk Management Association www.rma.usda.gov
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