- Unpredictable weather conditions, exchange rate fluctuations and other factors create a lot of uncertainty.
- When the future is uncertain, a concept of robust decision-making is suggested. [1].
- 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. Not understanding how to create more robust crop marketing plans can lead to disaster.
- Here are important variables in CropsProfit and how to approach each of them if you are not sure which value to use;
► Break-even cost: Use your higher estimate.
► Deliverable Harvest: Use your lower estimate in your pre-harvest period, and after your harvest is completed make it 100%.
Pre-harvest, is the uncertain phase for the harvest yield of a season.
With rain-fed crops the harvest yield is very uncertain, and typically the average harvest yields of your previous ten seasons can be used. A ten-season average may seem very long, but according to research, rainfall roughly fluctuates in 10 to 20 year wet and dry cycles, and you must keep this in mind for more accurate planning, but it is your choice. [2][3]
With irrigated crops, the harvest yield is less dependent on rainfall, and the more robust approach is to use the average harvest yields of your previous ten seasons.
If you do not have harvest yields for ten previous seasons available you can use the lower estimate of what you think the harvest yield would be. If your estimate is higher than your final harvest yield, your pre-harvest transactions will not have the profits you aimed for, literally throwing money in the water.
If at any time during the pre-harvest period your crop is hit by a severe drought, flooding, frost, or any other type of disaster, you can typically lower the harvest by 10% to 20%. In the spirit of robust planning, harvest yields do not have to be increased when conditions are expected to be above average, but again it is your choice.
You can update your pre-harvest yield if you can get very reliable harvest yield estimates.
Post-harvest, update the harvest yield to reflect the season’s final harvest, and remember to make the deliverable harvest 100% as well. From now on the harvest yield is certain and the guess work for the season is over.
► Put Options: Put options are expensive and you want to buy them only when there are good profit opportunities in the pre-harvest period. Remember to update the cost of put options regularly.
► Profit Goals: Set them realistically, and if you want to, a little bit inspiring. The sales per marketing cycle of your total harvest should rather be smaller than larger, typically around 5% for your ideal profit goal and 1% for your lowest profit goal.
- 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.
- Suppose you were using a more robust approach with your harvest yield in the uncertain pre-harvest phase of a season, 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.
1. 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
2. Vines, R. G. (1980). Analysis of South African Rainfall. South African Journal of Science, September 1980, Vol. 76, pp. 404-409. Retrieved from https://journals.co.za/doi/pdf/10.10520/AJA00382353_1881
3. Malherbe, J., Landman, W. A., & Engelbrecht, F. A. (2014) The bidecadal rainfall cycle, Southern Annular Mode and tropical cyclones over Limpopo River Basin, Southern Africa. Climate Dynamics, Retrieved from https://repository.up.ac.za/bitstream/handle/2263/41920/Malherbe_Bidecadal__2014.pdf;sequence=1