Farm supply co-ops and independent farm retailers are enjoying strong financial returns as rising grain prices in the United States enter their second consecutive year. The prolonged period of above-average crop prices leads farmers to increase their spending on agronomic inputs and services. However, while earnings in the agricultural retail sector are expected to remain favorable over the next 12 months, emerging structural challenges will lead to increased competition and pressure on profitability in the years to come.
Major agricultural input suppliers wielding greater market power, large agricultural companies with a growing appetite for more sophisticated technologies, and competition from agricultural equipment dealers competing for these services are among the main challenges facing retailers. farmers face the long term.
According to a CoBank’s new knowledge exchange report, the agricultural retailer of the future has the opportunity to earn more income from precision agronomic services and emerging sustainability management programs, in addition to sales of traditional agricultural inputs. The report suggests that the current operating environment provides a timely opportunity for agricultural retailers to invest in new technologies and position themselves to be successful in a rapidly changing market.
“The traditional approach of agricultural supply co-ops is to save above average profits when times are good, and then rigorously manage costs during the inevitable downturn, which is expected to begin in 2023,” says Kenneth Scott. Zuckerberg, chief grain and agricultural supply economist at CoBanque. “Unfortunately, this approach exposes co-ops to revenue volatility and declining revenue during downward cycles, which can often last five years or more. “
Instead of relying solely on commissions and product discounts, Zuckerberg sees the way forward for agricultural supply cooperatives to expand their offerings of precision agronomy services and earn more revenue from advisory services. and software fees. “Putting technology and information to work to help farmers manage their inputs and production is where agricultural supply cooperatives excel,” he said.
Favorable winds continue for agricultural retailing, near term
Agri-retailers have had three consecutive profitable agronomic seasons and are generally well positioned for fall 2021 given high grain prices and a favorable farm economy. The short-term outlook remains broadly positive based on strong farm income, constant demand for farm inputs and favorable cash flow. By partially compensating for this, retailers may face shortages of certain protective chemicals from Asia as well as high wholesale fertilizer costs that they may not be able to pass fully on to producers. .
Growing global demand for feed grains and vegetable oil generally positions US farmers and retailers for continued success in 2022. US corn and soybean inventories remain very tight and the demand imbalance between inventories remains tight. and use is expected to persist until at least 2023.
Over the next few years, agricultural retailers will face risks that will accelerate over time. The number of US farms continues to decline due to consolidation, with family and non-family farms seeking greater economies of scale to increase their profitability. As the new class of commercial agriculture businesses hire their own agronomic staff and demand more data-intensive precision agriculture services, agricultural retailers could lose their advantage as agronomic service providers.
Recent acquisition activity confirms that agricultural equipment manufacturers are accelerating their autonomous and precision farming service offerings, which compete with traditional agronomic advice provided by agricultural retailers. The consolidation of agrochemical and seed suppliers and the maturation of disruptive agro-tech startups represent additional structural obstacles.
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Beyond providing agricultural customers with improved tools to grow more profitably, the business case for expanding precision agronomy services by agricultural retailers is financially compelling. Precision capabilities can help co-ops attract and retain high-value customers, while recurring service fees provide a new source of revenue. From a risk-reward perspective, Zuckerberg sees revenue-sharing partnerships with proven technology service providers as a solid opportunity for agricultural retailers.
“The current environment is ideal for partnership structures as an opportunity for revenue sharing between retailers and suppliers,” he said. “The opportunities associated with technologies for everything from drone imagery to remote control detection for crop scouting up to precision seed recommendations and prescriptions is constantly expanding.
Source: CoBank, who is solely responsible for the information provided and is wholly owned by the source. Informa Business Media and all of its subsidiaries are not responsible for the content of this information asset.