The New State of Ag Retail Distribution
Virtually everyone who watches the ag retail marketplace on a regular basis agrees that it is undergoing a transition of sorts. Market forces that have been building up over the course of the past four years or so are combining to challenge traditional ag retailers in ways they haven’t experienced since the “infamous 1980s.”
“We are in a period of change,” observes Dave Coppess, Executive Vice President of Sales and Marketing for Heartland Co-op. It’s for this reason that CropLife® decided to dedicate much of this month’s issue to the topic of The State of Retail Distribution.
As V.M. (Jim) DeLisi, Owner of Fanwood Chemical, pointed out in a speech at the AgriBusiness Global Trade Summit, today’s U.S. ag market uses a two-step process to bring products to growers. “While some is shipped directly to large growers, most distribution is through middlemen, some of which are non-profit co-ops,” said DeLisi. And this system worked just fine, he added, while commodity prices were high in the early 2010s.
Since that time, however, commodity prices have dropped significantly. This cut grower-customer income roughly in half between 2013 and today. At the same time, the price to produce an acre of corn and soybeans has remained high. In fact, according to USDA figures, growers on average need to sell their corn for $3.85 per bushel and soybeans for $9.15 per bushel to break even vs. their production costs for crop inputs, fuel, land, and labor — assuming they produce approximately 175 bushels of corn and 52 bushels of soybeans per acre.
According to most experts, this has created an environment where price, not service, is quickly becoming king. Indeed, many analysts have spawned the term “amazoning” to describe what is beginning to happen to the agricultural marketplace, alluding to how the Internet-based retailer Amazon has negatively impacted traditional “brick-and-mortar” retail stores. New entities such as Farmers Business Network have begun flexing their market muscle by promoting lower prices over everything else to increasingly price-conscious growers.
Of course, chasing price alone can have dire consequences, for the entire supply chain. For example, consider Vlasic and its experience with Wal-Mart. In the late 1990s, Wal-Mart began selling Vlasic gallon jars of pickles for $2.97 nationwide. These were extremely popular with consumers, but the profit margin for both Wal-Mart and Vlasic was approximately a penny per jar. Ultimately, this slashed millions of dollars in profits from both companies. In the end, Wal-Mart was large enough to absorb these losses. Vlasic, however, ended up filing for bankruptcy in 2001.
Whether or not the ag retail market ends up in a similar scenario as alternative distribution models begin to appear remains to be seen. However, the market is definitely changing — and not everyone agrees that this change will necessarily be for the better.