131 – Future of Agribusiness

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Ag retailers, grain elevators, equipment dealers – what do they look like going forward?

Especially with the current net income downturn that is going on in agriculture.  I think the game is changing and if this economic downturn lasts another year or two, it could change fast.

There is only so much gross per acre.  And, we all have to live off that gross, all of us.agribusiness grain elevator

I have nothing against agri-business, this is just business.  So what does the future hold???

The big get bigger, medium sized operations leave, retire, or get larger themselves.  Some down size to a more moderate size and get off farm jobs.  Sort of like, farm the most profitable acres and let the higher cost acres go, and get a job in town.  Go from a medium size farmer to a part time farmer.

This right here will change ag retailing.  a smaller part time farmer may need an ag retailer to do more of the field work for them.  Custom farming opportunities?

But, if a retailer loses too many medium sized customers what do they do for volume.

Most large and in the future more large operations do more for themselves.  Whether it be applying chemicals to hauling their own lime, to marketing their own grain through their own grain handling facility.  This cuts volume from the agricultural industry.  “Grab more of the pie for themselves.” Cradle to grave ownership of more of the total operations needed for their operation to run successfully.

“Cut out the middleman.”  In a lot of cases that may be you.

I also see in certain areas and markets an increase in direct marketing agriculture.  $8 “organic” square bale of hay.  Direct marketing of “home raised” beef.  Fruits and vegetables in farmer’s markets.  This will require a different kind of agricultural infrastructure.

Now some “organic: production is going to go big.  GPS cultivation, and the need for a certain amount of volume to spread fixed costs over.

Hog production is an example of how an industry has changed.  Grain farming is getting big quick.  Cattle feeding is coming back to the midwest and upper midwest.  Not as big as the mega feed lots in the great plains, but still large.  Dairy farming continually increases in size.

Going to be some re-alignment all the time. But, the economic crunch will cause this to happen at a faster rate.

Yes, some if not many of the large grain farmers will get in big financial trouble, but for everyone that fails, two more will try to get big to replace them.

Tight to non-existent profit margins only increase the velocity of change.

Gross dollars are much less than they were several years ago, when production costs were also less.  A lot less gross in many cases.  Not just grains but in the cattle sector also.  Everybody has to live out of that gross.  If farmers gross is $200 an acre less then they have $200 an acre less.  Yes, they were making money at those higher prices, but they were also spending it also.  Living expenses, land principle payments, boats, vacations, new car, new pickup, or a new shed on the farm.  It is gone.  Some also went in taxes.  And, in may cases from the extreme high gross dollars per acre many are down, $300,$400,$500 an acre.  Huge drops in gross and production expenses are much higher now.

Less medium sized farmers means less agricultural retailers.  I watch big guys buy all inputs wholesale and drive grain right past the coop elevator to their own grain complex.  Lots of agricultural input suppliers depend on 4 to 8 decent sized farmers to give them the volume to stay in business.  They lose a couple of them and they will have trouble.  Worse yet have 2 to 3 file bankruptcy with big bills outstanding and the retailer may be broke.  But, I will say I think one way in the future to get and maintain market share is to offer fall pay to your customers.  Not prepay for the next year but to finance your customers and get payment when they harvest their crop.  Provide actual 0% financing until the crop is harvested.

Grain elevators are also getting squeezed.  Elevators lose bushels to the big guys and to people who are expanding their land purchasing area, or farming area and haul those bushels back to their “home” elevator.  One way I think to gain market share is to pickup the bushels in the fall from the field.  Once you have those bushels you have them.

If gross does not increase it is going to get tough on agri-businesses.  Agriculture has to get to breakeven at some point and some of this is going to come out of ag retailers and other agricultural input suppliers. Break evens need to happen.

Probably long term we will have $100 to $200 less gross per acre than we did from 2008 through 2013.  Those 6 years were pretty good.

Implement dealers are already feeling it, but I think there is one or two more lean times just up ahead for them.  And, even if manufacturers get production down where there is not as many used machines, there still has to be money in farming to buy the new stuff.  It has to eventually be paid for out of the gross.

Seed costs are still too high.  The local retailer cannot do much to change what the major seed companies charge but eventually just like everything else seed has to be paid out of the gross.  Fertilizer has come down some, but it took major hikes in price during those good years.

I am not really guessing because I have been told by those who I think would know, but major seed and chemical input supplier company’s upper management really do not understand agriculture.

They are run by wall street guys.  They are more concerned about the stock price of their company than your and my survival.  And they should be concerned about their stock price, but on the same hand their customers have to somehow at least break even or they will lose market share which will drop their stock price.

Eventually it has to add up.

Last thing I do with this podcast is look at the costs involved and how the pie is being split up.

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