Ag Retailing In Today's Economic Climate
Renowned agriculture business expert Dr. Dave Downey weighs in on the current state of ag retail.
May 4, 2011
Most business professionals in agriculture are optimistic about the future — at least in the short run, but larger, more sophisticated growers are demanding much more from their suppliers. Volatile markets for both crops and inputs are putting greater pressure on growers to produce crops more efficiently and achieve the highest yields possible.
How retailers take advantage of these unique market opportunities was the subject of CropLife Media Group's (CLMG) recent Webinar, "Ag Retailing In Today's Economic Climate," presented by Dr. Dave Downey, executive director and professor emeritus for the Center for Food and Agricultural Business, Purdue University. The Webinar was part of CLMG's State of the Industry coverage, which is sponsored by Monsanto's Acceleron Seed Treatments, Raven Industries, AGCO's RoGator and TerraGator, Specialty Fertilizer Products (SFP) and SST Software.
Our Changing Marketplace
The challenges ag retailers face today are greater than ever because of rapid changes taking place in the marketplace, Downey said.
"One of the most exciting things driving market changes has been the world population explosion," he said. "By the year 2050, there are going to be a lot more people to feed and that's good for agriculture. And it's not just the population that is growing, but the income level of many countries is growing as well, particularly in India and China. It has become a global marketplace."
Downey said there is also significant volatility in the market. "Countries like China can enter the marketplace and compete with U.S. companies for the same resources," he said. "This can suddenly make things unstable, and we've seen this happen in the fertilizer industry."
Other major changes occurring within agriculture include advances in crop protection, genetics and farm equipment, Downey said.
"More knowledgeable farmers are using better technology to get much more precise application," he said. "Farming has moved from just a way of life to a truly industrialized process."
Ag continues to face concerns regarding the availability of water, energy and labor, Downey added. There's also an increased focus on sustainable agriculture, food safety and worldwide government trade policy and regulation.
How Farmers Are Changing
One of the most important issues that has impacted ag retailers has been farm consolidation, Downey said. According to one 2007 study, 42% of the acres in the Midwest were controlled by 6% of farmers — a trend Downey said is likely to continue.
"It's purely a matter of economics," he said. "There is significant data that shows farm size is correlated with profitability."
In addition, more large farmers have purchased their own application equipment, according to the 2008 Purdue University Large Commercial Producer Study.
"That's a really interesting phenomenon since a substantial portion of ag retailers' income comes from services they offer," Downey said. "Yet, we continue to find that larger farmers outsource services less and do more on their own."
Downey also said larger farmers are more serious today when it comes to purchasing inputs. "We are finding larger, more industrialized farmers are spending their time planning and negotiating what they want from their suppliers," he said. "Some farmers believe they often know more than their local supplier. Ag retailers have to make sure farmers see them as the primary source of the latest information."
Keys To Success For Ag Retailers
Downey emphasized throughout the webinar growing an ag retail business today requires new and more sophisticated approaches.
"Historically, retailers have given away service and information," he said. "They knew it would be covered by the margins of fertilizer, seed and crop protection products."
Because retailers haven't insisted on getting paid for their added-value services, it has created a culture that has been difficult to overcome. "There's great temptation to use services and information as a negotiating tool and to give it away to our favorite customers," Downey said. "Once that happens, it's extremely hard to change it so you get paid for those services."
Ag retailers have now entered an era of industrialized marketing where success is based on value created, Downey said. Those who understand who their customers are, what services they are willing to pay for, and how to communicate that value effectively can gain a competitive edge.
"Much of a retailer's differential advantage will depend on the unique value created for targeted customers," he said. "Ag retailers who strive to understand their changing marketplace and adapt their business proactively are in a strong position to grow."