2. Price targets: Here are a few things to consider when writing a plan and establishing price targets or objectives… Production costs: As a seller of commodities, do you know your cost of production? When prices are above production costs, sit up and pay attention to selling opportunities. But be careful! Your commodity output price may depend on the cost of another commodity input (milk to corn, cattle to corn, etc.). If this is the case, you cannot view output costs in a vacuum – they should be viewed relative to the value of the input. This is called margin management, and you need to think hard about your particular commodity. Should you focus on prices or margins? Budgeted input costs: As a buyer of commodities, do you know your budgeted input costs? When prices are below budget, sit up and pay attention to buying opportunities. Again, be careful! Your commodity input may produce another commodity output (corn to ethanol or corn to hogs, etc.). If this is the case, you cannot view input costs in a vacuum – they should be viewed relative to the value of the output. Should you focus on prices or margins? Basis: If the commodity in question has a futures market, you must understand basis, or the cash price relative to the futures price. This is particularly important when you are choosing a pricing tool. Cash pricing tools lock-in the basis, while futures prices tools separate the basis decision. Fundamental outlook: Yes, I challenged you to write a plan assuming you had no idea where prices were headed in the year ahead. But you can hardly ignore the fundamentals. What do the experts think of the outlook for prices in the commodity in question? If stocks or supplies are increasing building, we might expect lower prices. Answer this question; Based on the current supply and demand situation, do you expect prices to be higher or lower in 12 months? Technical outlook: Yes, I challenged you to write a plan assuming you had no idea where prices were headed in the year ahead. But you should not ignore the trend, particularly a
188 Applied Economics 3411/5411, 2018 Lecture Notes Copyright © 2018 Edward Usset. All rights reserved. strong trend. Are prices trending higher or lower? Differentiate between short term and long term trends. Is the market overbought or oversold? Do your homework on the technical side and remember that the trend is your friend. Historical price viewpoint: Are prices high or low with respect to the last 5 or 10 years? We should always look for opportunities to buy low or sell high. Historical view of relative prices: Are prices high or low relative to a substitute commodity. You can compare barley to corn, canola to soybeans, wheat to corn, cattle to hogs, etc. Are prices high or low relative to input or output prices. In this case, compare hogs to corn, cattle to corn, milk to corn, ethanol to corn, etc.
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