FIRST IN A SERIES: This special Business Skills series examines the importance of business relationship skills that can help you thrive in the global agricultural marketplace. Watch upcoming issues for more insights into valuable business skills.
Global competition is changing the playing field of agriculture. And if you don’t change with it, it may change without you.
“I think it’s just a matter of time before the cost/price squeeze happens in agriculture, which will push the entire industry to adopt industrial models that align producers with input and output suppliers,” says Moe Russell, president of Russell Consulting, Panora, IA.
“It’s not a new concept, yet a lot of producers struggle with it, because they feel such alliances will reduce their flexibility,” he continues. “I think just the opposite. I believe flexibility will improve in the long run, as growers gain pricing, supply and service advantages over competitors who are not aligned with the supplier. And some of these new partnership arrangements could involve profit sharing for both parties.”
Russell cites the example of one client that farms 12,000 acres without any on-farm storage. “They created a longer-term relationship with a nearby co-op who agreed to receive all their grain at harvest in exchange for sharing potential benefits of carry in the market for later delivery,” he says.
Granted, farmer-supplier relationships are nothing new. But as consolidation in farming continues at a faster pace — just as in industry — innovative producers seek innovative ways to partner with suppliers for the benefit of both parties.
While growers enjoy current high commodity prices thanks to the ethanol market, they also must find ways to deal with higher costs, greater competition, greater price volatility and a shrinking government safety net looming on the horizon. “I believe if farmers don’t start examining and implementing unique arrangements with suppliers, they risk the potential of not getting product they need at the right time,” Russell says.
Texas A&M ag economist Danny Klinefelter, who founded and directs a farm executive training program called TEPAP (The Executive Program for Agricultural Producers, http://tepap. tamu.edu/), says, “The only sustainable competitive advantage is the ability to learn and adapt faster than your competition. Progressive producers get ideas from industry and work to adapt business models to fit their agricultural operations. And that starts with a mindset change — from being a producer to being a farm manager, a CEO.”
Partner with input suppliers
Purdue ag economist Mike Boehlje (who also teaches at TEPAP) says, when analyzing the critical inputs of your farming business, think in terms of three categories: “One is the classic purchased inputs of fertilizer, seed, chemicals, machinery, facilities, etc. Category two is the parties involved in financing your business. And the third category is the landlords who rent you land.”
Regarding land, Boehlje says the current business climate for the next few years brings expectations by the landlord to share in the higher earnings achieved by the grower. “The challenge for farmers is to figure out how to respond to land supplier expectations,” he says. “Two dilemmas exist: What is an equitable sharing of the return, and how much flexibility can be put into the rental arrangement so that downward price movement is an option if prices fall?”
Boehlje suggests finding a way to share some of the risk. “Experiment with the concept of a ‘base rent plus’ scenario,” he says. “For example, if your cash rent was $150 last year, propose an increase of say $20 to $30 more per acre and include an optional payment if your yields/prices exceed a base level. And this is just one scenario of many possibilities.
“This establishes a sharing of the risk with the option payment. And if commodity prices decline a year or so later, you haven’t set the base rate so high that you have difficulty convincing the landlord to bring it back down.”
Boehlje doesn’t see the financial inputs area as being problematic on the surface. But the rising input costs, which he estimates to be 20 to 25% higher than those of last year, have the potential for greater margin compression and margin risk.
“With the cost of production in 2008 at, say for example, $3 to produce a bushel of corn — and a government support system that has not been indexed up beyond $2.30 — we’ve got margin risk to worry about if prices roll back to $2.50,” he explains. “Due to this potential margin risk, combined with the fact that a lender may need to provide a 20 to 25% larger operating line, growers should prepare to tell the lender how they will protect margins from potential price and yield declines. It all comes down to protecting yourself and the lender, particularly if we continue to bid up land rental rates.”
Last but not least is buying crop inputs. “With higher input costs, growers may be more tempted to shop around,” Boehlje says. “Granted, you need to know prices, but there is a cost associated with shopping around. Loyal [and larger] customers are going to get better service and easier access to production-increasing technology next year and into the future.
“It’s best to acknowledge that, under conditions of high grain prices, most input suppliers will be less willing to negotiate compared to past years when income wasn’t as good,” he continues. “And if you’re a grower who desires the best seed traits, specific seed size, first trials with the latest machinery technology, you need to cultivate deeper relationships with these critical suppliers rather than price shop every year.”
Bruce Vernon, sales and marketing manager for Mid Kansas Cooperative Association, says that supply and logistics relationships between manufacturers and dealers, and between dealers and growers, will win the day. “We must work with reputable manufacturers and build trust in them to get us product when we need it to satisfy our customers,” he says.
“Yet as farms get larger, with bigger equipment capable of running 24/7 during planting and harvest, that challenges us to build the best supply chain and grain-handling systems that can handle this pace. So the closer relationship we have with growers, the easier it is for us to supply the inputs and grain-handling speed they desire. There are a lot of unnecessary expenditures throughout the supply chain that could be made more efficient with better partnerships, saving everyone money.”
New partnership thinking
Price and basic services will no longer be the key factors in the relationship between growers and input/output entities in the future. “We encourage growers to form solid and mutually beneficial relationships with input suppliers so they become a preferred supplier — the guys that dealers and manufacturers turn to first,” Klinefelter says.
“One such example to think about,” Russell (another TEPAP teacher) says, “is to consider aligning with a fertilizer supplier for a longer-term contract of five years — where you agree on product needs, timing issues, equipment needs. If both parties focus on coordinating needed supply, then inventory risk and subsequent cost can be reduced. And who knows? Maybe some growers will look at becoming a warehousing partner to help suppliers, as well as help themselves.”
The possibilities are endless.