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Is average good enough?

Agriculture.com Staff 07/24/2009 @ 12:50pm

Many farmers are very confident producers. Some also sell on a regular basis, believing they will, in the end, receive an average price. The question: Is average good enough when it comes to marketing? A good example is dairy producers; they sell milk monthly. At the end of the year, they have sold twelve months of production and can calculate an average. Right? Not necessarily. They may receive an average monthly price, but this could be much different than a midpoint of a range of prices offered.

The flaw with average pricing theory is that the market does not offer a range of prices over time that has as many time periods with price equally higher and lower. If that was the case, in order for you to have a competitive edge compared to another producer, you would need only to produce more or have lower input costs. The argument is likely moot because there is no probable way to capture a true average market price due to your actual selling periods. The point, you would practically need to sell daily. However, for the sake of this perspective, we will assume achieving an average price is possible.

Farmers strive to be the best producers, as well as input buyers, they can be. If you are accepting an "average" price, you may be on the road for financial challenges compared to your counterparts who take a more proactive approach to pricing. Our bias and encouragement is for farmers to recognize they, in fact, can do marketing well. Putting time, energy and effort into marketing will generally pay dividends in the long run. For some, making the decision to hire a professional is probably a step in the right direction if time or lack of discipline is a concern.

Making marketing decisions is often challenging and sometimes even discouraging. However, marketing is like football - if you continue to march down the field play after play, trying to do the right thing as well as having a strong defense, you are likely to win games, seasons and, once in a while, even a championship. Striving to be an average football team will never win championships. No coach or sports organization sets a goal to be average.

In the not-so-distant past, a dairy producer told us that he markets monthly and captures an average price. Therefore, he does not need to think about marketing. Since then, milk prices have collapsed from $20/CWT to $10. Prices have traded lower for eight months, and his average for the year will be well below what was offered. He no longer has the same belief regarding marketing. Unfortunately, striving for average will likely lead to many dairy producers struggling with long term debt or leaving farming. Are you striving for average, or are you strategizing for better than average?

If you have questions or comments, contact Top Farmer at 1-800-TOP-FARM ext. 129 and ask for Bryan Doherty.

Many farmers are very confident producers. Some also sell on a regular basis, believing they will, in the end, receive an average price. The question: Is average good enough when it comes to marketing? A good example is dairy producers; they sell milk monthly. At the end of the year, they have sold twelve months of production and can calculate an average. Right? Not necessarily. They may receive an average monthly price, but this could be much different than a midpoint of a range of prices offered.

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