Benjamin Franklin once said; “If you fail to plan, you are planning to fail.” While he probably was not referring to crop price risk management, not understanding how to create more robust crop marketing plans can lead to a disaster.
Unpredictable weather conditions, exchange rate fluctuations and other factors create a lot of uncertainty. When the future is uncertain, Rosenhead et al. (1972) suggested a concept of robust decision-making. It simply means that if there is a best-case value and a worse value for a variable in your crop marketing plan, rather choose the worse value.
Examples of best-case values leading to a disaster…
- Your deliverable harvest during the pre-harvest period was too high, and your final harvest yield or the crop’s grading is worse than expected. You committed more to fixed delivery contracts than you can deliver, and now you are forced to buy in crop at a loss just to honour your contracts.
- During the pre-harvest period, you made your planned harvest yield too high and now your final harvest yield is lower. This lowering of your harvest yield results in a lower profitability of all the transactions you did before harvest, which can be very disappointing.
Thus, the best crop marketing plans can still fail if the variables you use are not robust enough. With a more robust approach CropsProfit can create value by guiding you towards more safe and profitable transactions. When you now get an instruction to do a transaction it really means business!
Suppose you were using a more robust approach with your planned harvest yield, and now the final harvest yield is higher. This increase in harvest yield will result in a higher profitability of all the transactions you did before harvest, creating a pleasant surprise.
Here are important variables in CropsProfit and how to approach each of them to create more robust crop marketing plans:
1. Break-even cost
Find out more about what break-even cost is.
2. Deliverable harvest
More about what your deliverable harvest is here.
3. Harvest yield
Learn about how to estimate your harvest yield.
4. Put options
Read about how put options work and what good opportunities they might present.
5. Profit goals
Here are some helpful tips about how to set your profit goals.
There are limits to how robust crop marketing plans can be, and at some point, you will be pricing yourself out of the market by being less profitable than the average crop farmer. This means that the market price will seldom be high enough for you to do profitable transactions.
Rosenhead, M. J., Elton, M., & Gupta, S. K. (1972). Robustness and optimality as criteria for strategic decisions. Operational Research Quarterly, 23(4), 413–430. CrossRefGoogle Scholar