The ‘Perfect Storm’ for Distribution Channel Change
You don’t have to be the ultimate observer to realize the U.S. ag retail marketplace is undergoing some massive changes in 2017.
Dozens of retailers, particularly cooperatives, have recently exited the industry via sale or acquisition. The number of product suppliers, likewise, is shrinking. Perhaps worst of all, the price of goods handled in the ag retail supply chain continues to rise while commodity prices and margins seem to be stuck in continuing downward spirals.
All-in-all, says Dave Coppess, Executive Vice President of Sales and Marketing, for Heartland Co-op, West Des Moines, Iowa, this is adding up to make life “a bit difficult” for today’s average ag retailer. “We are definitely in a period of change in the market,” says Coppess. “There are new business models beginning to pop up and they are threatening to destroy, or at least radically alter, the old ones. Everyone in this business will need to adapt to these new market realities — or they probably won’t be around for very much longer.”
As for how the U.S. ag retail industry has found itself in this “new market reality,” the list of impactful variables is a fairly long one. Yet, it all starts at the same place as it traditionally has — commodity prices. For several years between 2009 and 2013, commodity prices for corn and soybeans stood at all-time highs. For corn, this meant growers were getting more than $8 per bushel; for soybeans, the number stood at approximately $16 per bushel. As many market observers have noted for this time period, “making money with these prices being that high wasn’t very hard to do.”
Then, starting in 2014, record crop plantings/harvests for corn and soybeans began to depress prices. By the end of 2016, growers were only receiving $3 per bushel of corn and less than $9 per bushel of soybeans — essentially the same prices they had been getting for their crops at the start of the 21st century.
According to V.M. (Jim) DeLisi, Owner of Fanwood Chemical, the impact of this decline was keenly felt by the nation’s growers. “The agricultural market lost $15 billion in value between 2008 and 2016,” says DeLisi.
Naturally, with their chief source of income dropping, grower-customer revenues also fell during this same time frame. According to USDA data, grower incomes fell more than 50%, from slightly more than $100 billion in 2013 to slightly less than $50 billion by the end of 2016. (Somewhat on the bright side, the early data for 2017 shows grower income should rebound a bit to just over $63 billion). Perhaps more significantly, USDA says farm profits are down nearly 50% since 2013. At the same time, their expenses have only fallen 1.4%.
Pressure on Suppliers
With revenues in decline for their end-users, agricultural suppliers have increasingly looked to merge their operations to grow market share while decreasing costs. During the past few years, this trend has been particularly pronounced within the crop protection products/seed supplier sector. Here, multiple large companies have entered into merger agreements, including Syngenta/ChemChina, Dow and DuPont, and Bayer and Monsanto.
As DeLisi points out, the reason for all these mega-mergers ties back to one overriding factor — money. “New product development costs for both seeds and chemicals are in the range of $300 million to $500 million in development and registration globally,” he says. “Only the largest companies have the resources and leverage to both finance and then recapture this level of investment.”
For example, the newly merged DowDuPont is hoping to be able to cut $1.3 billion from the company’s combined agricultural operations within the next year or so through staff reductions and eliminating redundant costs. At the same time, a recent Texas A&M university study found that companies such as DowDuPont and Bayer-Monsanto might be able to charge higher prices for their seed brands after combining, with an average 2% increase for both corn and soybean seeds.
And it is little wonder why larger crop protection product/seed companies are looking at seeds to boost their profits. According to most market watchers, crop protection products are increasingly seeing pressure from new producers/suppliers as more and more active ingredients (a.i.s) come off-patent.
“In 2016-17, the number of generic products in the crop protection products marketplace will be exploding, both in terms of the chemistries available to produce and the number of companies that will likely start making their own versions of these popular products,” says Kevin Fry, Co-Owner of Fry Brothers, a Nebraska-based products wholesaler. “There are at least one dozen such a.i.s getting ready to come off-patent, including mesotrione, flumioxazin, and imazamox, to name a few.
“By the same token, there are fewer new molecules coming out to replace the older ones,” he continues. “This aligning low crop prices with lower priced off-patent products means we are seeing all kind of factors favoring some kind of alternative market distribution.”
Even the industry’s most popular a.i., glyphosate, is seeing more competition to attract customers. For instance, Xingfa Group — China’s largest producer of glyphosate — is setting up shop in the U.S. with the opening of Xingfa USA Corp. in Schaumburg, IL, just outside of Chicago. According to J. Bryan Kitchen, President, North America, Xingfa USA will begin offering its brand of glyphosate to the U.S. marketplace “shortly.”
The Alternative Distribution Chain
Of course, all this pressure on crop protection product prices from the supplier level has found its way down to the ag retail level. In fact, according to Heartland Co-op’s Coppess, profit margins for retailers on these inputs have dropped from 2% to 3% “into negative territory” since the end of 2013. “When you are working with a less than 1% profit margin on something, there’s not much room for error on the seller’s part,” he says. “That’s why you are seeing more retailers using their rebates from the crop protection companies to make their numbers add up.”
Putting all these market trends together, and agricultural market watchers say the time is right for some form of an alternative distribution model to take hold in the U.S. Already such models have been employed by growers in such places as India and Canada. According to Jason Mann, President/CEO of AgraCity in Saskatchewan, his company was viewed by many observers as a “market disruptor” in its early years for selling products directly to growers and by-passing the traditional ag retail distribution chain.
“With increased pressure on farmgate net revenues caused by weather, higher cost land and rents, equipment and technology costs, labor, and tightening of credit for farmers, our low-cost and efficient product offering and business model has bolstered our market position as a leading generic crop protection supplier,” says Mann. “We have been successful because our model resonates well with our stakeholders, the farmers, and the manufacturers looking for market access.”
In the U.S., recent start-ups such as Farm Trade and Farmers Business Network (FBN) are following a similar business model as AgraCity — selling products directly to growers at a set cost via the Internet. According to some market analysts, there are approximately 15% to 20% of growers who might be looking “only for the lowest cost on products” that could embrace this way of getting crop protection inputs.
“Firms like this could flatten the supply chain and might be the beginning of the ‘Amazoning’ for grower suppliers,” says Fanwood Chemical’s DeLisi, alluding to the Internet-centered retail giant and how its growth has impacted traditional “brick-and-mortar” retailers in recent years. “These companies have proven they can not only get these products, but move them all over the country to where they need to be, which hasn’t been the case for crop protection products over the past 25 years. There’s no doubt the Internet is coming to agricultural chemicals in a much bigger way.”
However, Fry Brothers’ Fry doesn’t believe the FBNs of the world will have the same effect on traditional ag retailers that Amazon did in the consumer retail space. “I see another viable alternative to the retail distribution for farmers developing and growing, but it will be difficult for this to succeed on a large scale because of the localization of the market,” he says. “Sure, there will be some market penetration by these companies, but there’s still a certain amount of knowledge and trust in agriculture that will be needed, and that can only come from established ag retailers. For many of these, a ‘slam, bam, thank you, ma’am’ approach with product suppliers that offer no guarantees on performance and won’t accept returns if there’s a problem just won’t cut it.”
Despite this fact, other market watchers believe that companies such as FBN have “opened a door into the retail marketplace based on low prices/little support that will never be closed again.”
Furthermore, ag retailers will need to “do their part” to keep grower-customers firmly in their corners. “The market is 100% the ag retailers’ to lose at this point,” says one analyst. “And if they don’t defend it, outfits like FBN will definitely make some inroads.”