I thought it would be good to talk about a profit management fundamental or what some would call risk management.  When we consider what is important in marketing and profit management, price is a component of the overall measurement and management program.  Price gets all the attention and for good reason but it is only a piece of the puzzle.  We all want to better understand why or when or how much when considering price but many times these things provide more distractions than benefit.  Our primary focus needs to be profit and maximizing it.  Many times we get distracted by what could happen or what just happened and we lose track of the objective and our goals related to profit.

For this reason, I thought it appropriate to discuss a topic that is a first step in good profit management.  This topic is position and is very basic to all profit management.  Understanding your position is the foundation of good profit management and it is worthy of review.

Our position is a very important first step in profit management.  It is important to first understand we have the position and then what type of position we have.  The implications of the position then help us manage the risk that is associated with it.  If we are to start truly thinking in terms of profit, we must truly understand our position.

One of the hardest things to keep straight is implied position, open position, and actual position.   Here are some explanations.

Implied position is when a going concern (someone who expects to stay in business) considers the fact that they will have product to sell and have inputs to buy.  For clarity I am going to focus only on the product or output side but the reverse will also be true for the input side.  With an implied position there is no physical product yet but there is the assumption that the product will be produced at some time in the future.

Here is an example of an implied position.  For 2009 we plan to plant 500 acres of corn with an expected yield of approximately 200 bushels per acre.  Our implied position is 100,000 bushels long.

Implied position can change as our estimate of production changes and these changes need to be considered when determining how much we have to sell.

Actual position has to do with physical inventory, and sales.   An actual position could be unsold inventory creating an actual long position.  Or actual position could be sales that are against production that has not been harvest creating an actual short position.  When we look at actual position we may consider a basis position and a futures position separately.  We could have a futures or HTA actual position of short but not have locked the basis.  With physical inventory and a short futures position, we would have an open basis long position.

My point is not to confuse you here.  I promise.  Please stay with me.

One last position type and this is an open position.  This is really what is undone.  This type of position is created when a portion of the position has been relieved or closed and remaining portion is still open or still needs to be closed.  In the example above, an HTA was made against inventory and the basis has not been set yet.  This unpriced basis would be considered an open position.

You may be saying to yourself, Ron you sound like you are writing a textbook and I feel asleep 3 paragraphs ago.  OK maybe you have a point.  BUT my hope is that we build an understanding of the risks we are managing.  That we not just look at the price of our product but rather we look at the components of the profit and we manage these things.  My hope is that we think about what we are managing.

We can not control price but we can manage the risks and create a profit.

Ron Marshall

651-301-9185