An Economic Analysis of Pre-Harvesting Marketing Strategies and Financial Performance

Risk is an important concern in the management of a farm business. The rising input prices along with the variability in the farm commodity prices may result in a risk environment. Government programs have generally provided income support to farmers. However, there has been considerable discussion regarding this support in recent years. The farm act of 2002 and farm bill of 1999 are good examples of such discussions. These uncertainties emphasize the need to improve information for farm's income risk management, and make some one ask if there is not out there any alternative way of managing income risk besides government intervention.The literature shows that marketing strategies may be used to improve income risk management on farmers. This study is aimed at showing how pre-harvest marketing strategies may be used to manage income risk, using a portfolio approach in which three chosen marketing strategies are combined in a portfolio. The optimal marketing strategy combination is estimated assuming a safety first decision model. The optimal marketing strategy is then used to estimate optimal production portfolio under the specified scenarios. Cash marketing and optimal pre-harvest marketing scenarios are then evaluated in a financial model.Results generally indicate that opportunity to improve farm profitability, liquidity, and risk exist for the optimal pre-harvest marketing strategy. Results indicate that the optimal marketing strategy would include for the corn case 24% cash on spot marketing strategy, 54% forward contract marketing strategy, and 22% hedge to arrive marketing strategy. For the case of Soybean, the optimal marketing strategy would include 37% cash on spot marketing strategy, 30% forward contract marketing strategy, and 33% hedge to arrive marketing strategy.Comparison between optimal pre-harvest marketing strategy and cash on spot marketing strategy shows that the optimal pre-harvest marketing strategy has higher rate of returns to assets and equity, high debt repayment capacity, lower level of risk, higher level of liquidity, and represents a situation in which farmers has higher level of probability of repaying debt in nine out of 10 years.