CoBank Report Asserts Precision Services are Essential to Future of U.S. Ag Retail
The notion that ag retailers should more aggressively shift their business focus toward high-value service to farmers isn’t a new assertion by any means. At various points in recent decades market forces have worked to erode the retailer’s position in the crop production channel, which led to a greater emphasis on charging for services rendered.
Despite these pursuits, the service based ag retail model has proven elusive, as retail struggled to separate service fees out of product purchases that were traditionally bundled. Farmers have tended to resist paying a separate line item for services without an iron-clad value proposition, especially during times of low crop prices and diminished farm income.
Focus on service has not been the only lever retailers have pulled in reaction to market challenges. Retail operations have worked to get their logistical houses in order by improving and optimizing physical plants for maximizing efficiency. And mergers and acquisition among retailers has led to a leaner, more consolidated retail segment with fewer, stronger players.
The end of this season marks two straight solid years for Midwest rowcrops, a cycle that is expected to continue through the end of the 2022 season. But the forces that have driven those changes in the ag retail market will continue to put pressure on the retail channel.
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The current window of economic tailwind for the retail channel provides an opportunity for forward-thinking managers to hasten work on structuring their businesses toward fee-based precision agronomic service, and less on input sales margin. That’s the big takeaway from a fresh off the press report by CoBank’s Knowledge Exchange titled, “Precision Agronomy Services Will Factor Heavily in the Future of Ag Retailing.”
“The traditional approach for farm supply cooperatives is to save above-average profits when times are good and then manage costs rigorously during the inevitable downturn, which we expect will begin in 2023,” said Kenneth Scott Zuckerberg, lead grain and farm supply economist with CoBank. “Unfortunately, this approach exposes cooperatives to revenue volatility and declining earnings during down cycles, which can often last five or more years.”
As the tailwind shifts, manifold pressure points are set to accelerate, says Zuckerberg. These include increasing consolidation among farm operations, pressure from farm equipment manufacturers providing precision services, the increasing concentration of input supply from fewer manufacturers, and service from ag technology startups.
“The number of U.S. farms continues to decline due to consolidation as family and non-family farms seek greater economies of scale to boost profitability,” says Zuckerberg. “As the new class of commercial farming enterprises hire their own agronomy staff and demand more data-intensive precision ag services, ag retailers could lose their edge as agronomic service providers.”
He adds that recent acquisition activity confirms that ag equipment manufacturers are accelerating their offerings of autonomous and precision farming services, which compete with traditional agronomic advice provided by ag retailers. Consolidation among crop protection and seed suppliers and the maturation of disruptive ag tech startups represent additional structural obstacles.
Instead of relying on product commissions and rebates, Zuckerberg sees farm supply cooperatives’ path forward is to expand their precision agronomy service offerings and capture more income from consultative service and software fees. “Putting technology and information to work to help farmers manage their inputs and production is where farm supply co-ops excel,” he says.
To download the full CoBank report, click here.
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