Market Overview: Recalibration Time

Hindsight is 20/20 goes the old saying, and today’s ag retailers are most definitely seeing things clearly. Considering everything that happened in the years leading up to 2009, most agree that it was inevitable that the good times would come to a quick, painful end. Still, some were caught off-guard when the dream years of 2007 and 2008 so rapidly gave way to the nightmare that 2009 became.

“During 2008, ag retailers had one of the best years they’ve ever had,” says Jim Shelton, agronomy manager for Landmark Service Cooperative, Cottage Grove, WI. “Heck, it was the best year anyone has ever had. Not to sound too bold, but I didn’t know this business could be so profitable.”

• Related Video: Market Recalibration

And the good times did indeed roll for ag retailers in recent years. In 2007, as the nation’s growers jumped on the corn bandwagon to feed the expected expansion of ethanol into the country’s energy pipeline, ag retailers ranked in the CropLife 100 saw their input and service sales increase more than $1 billion to $14.7 billion. In 2008, these sales grew more than $4 billion, topping out at a record $19.1 billion. In both years, all the crop inputs and services ag retailers offered to grower-customers — fertilizer, crop protection products, seed, and custom application — managed to simultaneously grow their total sales and market shares.

Charts: CropLife 100 Revenue (2000-09) | Net Farm Income (2009)

Likewise, grower-customer income increased to just shy of $90 billion, buoyed by high commodity prices for all crops. In the 20-plus-year history of the CropLife 100 retailer survey tracking industry fortunes, this was unprecedented.

The Trouble With Fertilizer

The first hints that this prosperity bubble was about to burst came in fall 2008. As ag retailer and grower-customer coffers grew, so did the costs for most crop inputs. In particular, fertilizer prices shot up at an incredible pace, doubling or sometimes tripling in a matter of months. Anticipating even higher prices in the months leading up to fall application work, many ag retailers were motivated to buy up as much fertilizer as they could store during summer 2008.

Then, the backlash began. Grower-customers stopped buying fertilizer. Prices began to drop, but a wet fall season kept most grower-customers from contracting for application work to be done.

“This was the most challenging year for profitability ever,” says Shelton of 2009. “Not because we had a lack of performance, but everyone got caught upside down on fertilizer. Many companies topped out their fertilizer inventories because they were afraid prices would go even higher. Other companies couldn’t get enough capital to do that and let their inventories go down. When the market crashed and burned, the companies that didn’t plan ahead looked like geniuses compared to the rest of us.”

Even with this serious decline, the overall numbers for ag retailers in 2009 weren’t that bad. For the year, CropLife 100 companies recorded $18.9 billion in revenue, off a mere 1% from the 2008 total. But, according to Shelton, this doesn’t paint a complete picture of the state of the industry in late 2009.

“Many companies end their fiscal years at the end of September, so profits were easier to come by with them missing the final quarter of 2008,” he says. “The bottom line is that fewer tons of fertilizer were sold in 2009, but the dollars received for those tons ended up being higher.”

Grower-customer income levels bear out this market view. According to the data compiled by USDA, net farm income for 2009 dropped 38% to $54 billion. This figure is off $33.1 billion from the 2008 number and almost $10 billion off from the historic net farm income average of $63.6 billion.

This decline hasn’t improved grower-customer moods, says Roger Gordon, agronomy manager at Grainland Coop, Holyoke, CO. “Not only was income down, but the weather in our area has been terrible,” says Gordon. “When I’ve talked with our customers on their attitudes regarding 2009, only around 30% say they are happy with how things turned out for them. From the majority, I’ve gotten a sigh of relief that they’ve made it through the 2009 season.”

Better Times Ahead?

“Through” isn’t quite the watchword for many ag retailers, however. Looking at the state of today’s ag retail industry, many dealerships and cooperatives will continue to suffer some serious hangovers from what happened in 2009 for a while yet. “As we move into 2010, we are still dealing with the headaches of fertilizer re-valuation and paying for business decisions we made in 2008,” says Landmark’s Shelton. “Right now, we are looking at making the same margins on some of these inputs that we did four or five years ago, back in 2004 and 2005.”

Retailers that stuck to their guns on fertilizer against the plunging open market price spent countless hours with growers trying to quell frustration and maintain trust. Both Dave Coppess, president of Heartland Co-op in West Des Moines, IA, and Tom Fullenkamp of Golden Furrow Fertilizer in Eldon IA, are moving toward a more “just-in-time” approach to purchasing nutrients. “We’ve stopped buying until the farmers start wanting to deal,” says Fullenkamp.

Adds Coppess: “After last year’s experience with the fertilizer meltdown and its repercussions, we are buying in small layers, trying to stay ahead of grower orders without bringing in excessive inventory.”

Still, according to data from the 2009 CropLife 100 survey, ag retailers are positive 2010 will be a good year for their businesses. When asked to rank their level of confidence in being profitable in 2010 on a scale of one to 10, 58% of respondents chose a seven or higher. Another 32% thought that 2010 would rank between a four and six on the profitability scale. Only 10% said they expect 2010 to be a three or lower.

Chart: Retailers’ 2010 Outlook

On the negative, in more recent phone interviews for this report, there was significant concern about profitability vs. sales.

Coppess’ note of caution was typical: “In terms of profitability, I am very concerned because of some of the aggressiveness of competitors trying to regain market share from the river market and alternative sources that sprouted up last year. People are fighting with price and not value.” This, he says, points to more traditional levels of profitability vs. recent years. In other words, it’s time to recalibrate.

Despite the challenges, most ag retailers remain positive that the industry can weather the next few years and emerge stronger by the middle of the 2010s. “I believe the future of the ag retail business is positive,” says Dan Kennedy, general manager for Ritter Crop Services, Marked Tree, AR. “As growers get larger, they will need more help to keep their farms profitable. As many of them double their farm size, they will need the expertise and equipment support only ag retailers can supply them with to be successful. Better yet, I think the large majority of growers realize that this is the case."

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