Commodity Marketing and Risk Management - Essay Example

Commodity Marketing and Risk Management INTRODUCTION Marketing is the process which moves goods from the producer to the final consumer while "risk" is uncertainty that affects an individual's welfare and often associated with adversity and loss [2]. This paper looks at marketing as potential business risk that needs to be managed just like any offer risk in a company's operation and discusses different ways to reduce marketing risk by focusing on the strategies and factors that matters. Definition of Terms "Marketing risk" is any marketing related activity on event that is uncertain leading to the variability and unpredictability of process [3]. Uncertainty of prices and inability to accurately forecast market prices create a high level of risk. Understanding the marketing process and the basic theory of supply and demand may help combat marketing anxiety. Suzanne Karberg, an Instructional Design Specialist from Purdue University Indiana, defines the following basic marketing terms and concepts about the market and how it works [4]. A broker is an agent who negotiates the buying and selling of contracts for commodities. The term options refers to a contract which convey the right to buy or sell a designated commodity at a specified price during a stipulated period. Hedging means to buy or sell commodity futures as a protection against loss in the cash market. Futures means to buy or sell commodities for future delivery. Spreading sales means selling commodities throughout the year rather than just one part at harvest. Marketing Risk Market risk. Of all the risk that deserves regular tracking by management, market risk may be one of the most important. Market can change and no organization is immune to the ebbs and flows the marketplace . Market risk includes the risk of not having a viable market for the product or commodity. For example, if a producer grows his crop without a contract, he faces the risk of not having a market for the crop. Business Risk Contract. Contract risk is the risk of contact default by the producer or the contractor. Several component contract risks are: contract default, contract termination, not understanding contract terms, product contract violators and payment risk. If the contractor is unable to pay, it may leave the producer in the position of unsecured creditor. Terminator of a contract can also generate serious losses. This is especially true when the producer has incurred high production expenses. Where bailment contracts or personal service contracts are used, the conditions for terminating by the contractor can be viewed as a risk factor. Financial Risk Investment. Investment risk is the risk associated with returns on a long-term asset. There are two main components of investment risk : variability in returns and loss of the asset. Variability in returns is the result of annual change in the costs of revenue associated with the asset. Loss of the asset may be a result of fire, or other peril, and is often covered by property insurance. Production Risk Yield risk is simply the risk of lower than expected production. For example, a farmer's produce is affected by factors such as weather, variety risk, unknown yield crop and pest pressure. Relationship Risk Relationship risk is the risk of adversely affecting relationship with buyers, supplies or other resource providers that are critical to the success of the operation several sources of relationship risk are: Landlord - access to land Lender - access to capital Supplier - access to critical supplies including genetics, production technology and knowledge. Buyer processor - access to markets, revenue opportunities, and market knowledge. Marketing Strategies to Avoid the Risk The best way to manage risk is by developing a strategic plan using the full range of risk management tools available. Some of the known risk management strategies are: Product Diversification One of the most important tasks a marketer faces, whether launching a new product or service or re-energizing a mature brand, is to find value proposition that matters most to prospective customers. Herein, lay a number of challenges: one, the value proposition, also known as brand's positioning, must be differentiated from existing players in the market; two, the positioning must be relevant to the targeted market while ideally serving a need which current players originally failed to address; three, the value preposition should meet the needs of untapped market making it profitable and finally buyers must be willing to pay for the differentiation while perceiving the product or service as affordable. Applying this value differentiation strategy, a survey was conducted in California, in the winter of 2000, by member farmers of the Small Farm Workgroup for new or alternative crops enterprises that will help then diversity this crop mix and improve revenue stream so they can remain viable [5]. Market related issues and production costs and return information are the top two issues identified by the members which affect the commercialization of new crops. Internal Marketing Strategies Marketing to the target market and consumer segment has come to be called "external marketing". But every company has its "internal customers". These are the people in the marketing sales department, and those in the other departments including especially, manufacturing, supply chain, finance, and human resource. The internal marketer wants the internal customers to change their behaviors as well as change this behavior's underlying values and attitudes. To conclude, true success in any enterprise results from laying out a well thought out marketing plan, following the plan, adapting to unforeseen problems, and always keeping one's head above water. Notes 1 Alcorn State University, "Managing Marketing Risk", [on-line]; from http:// www.alcorn.edn/outreach/tarmmanagement/ market.htm.;accessed 18 September 2005. 2 "What is Risk", [on-line]; from http://agmarketing .extension.psu.edu/commodity/whatrisk.html. 3 Alcorn State University, Ibid. 4 Suzzane Karberg, "Developing a Sensible and Successful Marketing Attitude", [on-line]; available form http://www.CES.purdue.edu/extmedia/EC/EC - 673.html ; accessed 16 September 2005. 5 University of California, SFW - Product Diversification Project, [on-line]; from http://groups.ucanr.org/newcrops/product _diversification_ _ Econ/ 6 C.R. Zulauf and S.H. Irwin, "Marketing Efficiency and Marketing to Entrance Income of Crop Producers" Review of Agricultural Economics 20, 308 - 331. Works Cited Alcorn State University. " Managing Marketing Risk" [on-line] from http://www.alcorn.edu /outreach/tarmmanagement/market.htm.; accessed 18 September 2005. Anderson, K.B. and H. P. Mapp. "Risk Management Programs in Extension." Journal of Agricultural and Resource Economics (1998) 21 : 31 - 38. Karberg, Suzanne. "Developing a Sensible Attitude", [on-line]; from http://www.CES.purdue.edu/extmedia/EC/EC - 673.html ; accessed 16 September 2005. University of California. SFW - Product Diversification Project, [on-line] http://www.CES.purdue.edu/extmedia/EC/EC - 673.html ; accessed 16 September 2005. "What is a Risk". [on-line]; from http://agmarketing .extension.psu.edu/commodity/whatrisk.html. Zelauf, C.R. and S.H. Irwin. "Marketing Efficiency and Marketing to Entrance of Crop Producers". Review of Agricultural Economics 20 ; 308 - 331. Read More