Buying group pool purchase orders for maximum discounts on inputs.
Bob Johnson is the ultimate shopper. From a modest office on his family's hog and grain operation near DeKalb, IL, he and three staff members buy farm products for 1,400 farmers. Every day, they handle invoices for seed, feed and short-line equipment amounting to more than $15 million a year.
"My job is purchasing agent for farmers," Johnson reports. He negotiates prices and buys farm inputs for members of Mid-West Co-ops, which probably ranks as the oldest and largest buying group in the Midwest devoted to farmers. The entire group of co-ops buys up to $50 million a year in products. Started in 1959, Mid-West's operations today include 29 local cooperatives scattered throughout Illinois, Iowa, Wisconsin, Indiana and Missouri.
Because of the cooperative's purchasing volume and reputation, it commands maximum discount levels on farm inputs. The discounts are passed on to members, allowing a typical member with 1,000 acres to pay prices similar to those paid by a 10,000-acre farmer.
Johnson, manager of Mid-West, estimates the co-op encompasses 1_1/2 million acres of cropland and 5% of the country's hog production.
The cooperative originally started with pork producers who pooled feed ingredient orders and made their own feed. Feed costs dropped dramatically. Today, many of those producers are still in business, due in part to lower input costs.
"Grouped buying gave us a competitive advantage over our neighbor," Johnson says, who is a partner in his family's 1,200-sow and 2,200-acre crop operation. "Now, it is survival that is at stake. We can't leave anything on the table. We have to use every possible tool to be competitive because our competitor is changing."
Grain farmers are learning this lesson now, too, he adds. With poor commodity prices and high-priced land, lower input costs are becoming critical. Farmers need to examine and seek lower-priced inputs to cut costs. Paying attention to purchasing habits is one way to do this.
Experience. Johnson has learned good purchasing habits through experience. He has been manager of his local group, DKM Co-op, since 1974. In 1984 he and his wife, Jeannie, also took over management of Mid-West.
Since the Johnsons became managers, Mid-West has added 10 local groups and about 500 farmer members. The growth comes through word of mouth; the co-op does not solicit members. In fact, members are forbidden to discuss "deals" gained through the cooperative for fear of alienating local dealers and suppliers.
Individual farmers can learn from many of the strategies Johnson employs to negotiate and purchase farm inputs for the cooperative. Here's a look at some of the co-op's buying practices that may help any farmer gain a price edge.
Maintain good credit
Nothing beats the value of good credit when negotiating prices with a supplier. "Suppliers know if they send us a bill with a 10-day cash discount, they'll have their money in 10 days and we'll take care of the rest," Johnson says. "This cuts [the supplier's] bookkeeping and collection costs."
Mid-West can maintain this reputation because it in turn accepts only cash from members. A member's order must be paid within 15 days of delivery. All co-ops in the Mid-West system operate on the same cash basis.
To head off credit problems early, some of the member co-ops require farmer members to complete a credit survey that asks them to estimate their purchases for the next year. The member's banker must sign the form, indicating that a line of credit or money is on deposit to cover the obligations. Members not filling out a survey form must send money along with each order.
"The survey is not a letter of credit or a guarantee, but everybody is on notice that we expect to be paid and there are funds available," Johnson explains. "We've never had a credit loss at DKM or Mid-West."
Farmers with money problems do not buy from the cooperative. "I noticed in the 1980s that some large customers became small customers," Johnson relates. "Their business shifted to companies extending credit. They evidently didn't want to put their fellow co-op members at risk."
"Cash is always valuable," Johnson advises. "If you have a reputation as a good cash customer who knows what you want, orders early and doesn't change orders, you will get better terms."
A farmer who can eliminate financing will do better in price negotiations than a farmer needing financing. "Suppliers like good clean business," Johnson says. "When they get into financing and don't know if they will be able to collect, that will be built into the price."
Seek impartial advice
Many of Mid-West's co-op members believe it is important to separate where they get recommendations for crop or livestock inputs from where they do their purchasing, according to Johnson. This eliminates questions about biased advice.
"History and credibility are worth a lot as a co-op and as an individual," Johnson says. Suppliers that have worked with farmers in the past and found them to be honest will generally offer them a better deal on everything from discounts to service.
"The golden rule applies in business," he adds. "Not taking advantage of people and being square with them is important, particularly in agriculture where you go back to the same suppliers over and over. If you treat them fairly and resolve problems or challenges in an equitable way, then you get a better deal down the road than if you hadn't."
Mid-West also gains purchasing power through a streamlined ordering system. Co-op members place orders through their local co-op. The manager places the orders using Mid- West's price lists. Invoices go to Mid-West for payment to the supplier and billing to the members.
Ordering through local groups allows a fast turnaround time for orders and cuts down on the number of staff members needed at Mid-West. Billing through Mid-West remains a big selling point to suppliers because they only need to work with one office instead of 1,400 farmers or 29 cooperatives, Johnson explains.
Feed and seed orders are handled differently. Mid-West collects and then places those orders. For seed, farmers must decide what they want to buy, often by gathering information from local seed reps. Mid-West negotiates a corporate discount or pricing structure for the whole cooperative system. Then the orders flow through the Mid-West office. The seed is delivered through local seed dealers to co-op members' farms.
"Historically, buying chemicals and seed early has had an advantage in that you get priority on hybrids or chemicals that will be in short supply, as well as early payment discounts," Johnson says. Usually, the co-op makes its purchases as early as possible. In the last two years, that policy worked against it. "If you ordered early (on seed), you were disadvantaged because several seed companies offered additional discounts to late purchasers," Johnson recalls.
The co-op participates in some pre-pay programs offered by equipment suppliers, such as bin companies. The programs require orders or payment in the winter to obtain the best discounts. The discounts are available until the money is used up during the next year.
Keep overhead low
After 40 years, the cooperative itself still doesn't own a desk or computer. Intent on keeping overhead low, the cooperative pays Johnson a management fee to handle the business. The fee is a surcharge included on all bills as a separate item. Johnson uses the fee to maintain his office and a small warehouse, pay staff and purchase computers and other office equipment. Most of the local co-ops also operate this way, including DKM.
Johnson expects that, in the future, orders and payments will be made over the Internet, reducing office costs even further.
"Traditional co-ops build infrastructure and overhead and become full-service entities," Johnson says. "They serve a large segment of agriculture but leave behind people like us who don't necessarily want to pay for all that infrastructure."
What's hot for 2000? Seed that has not been genetically modified will be in demand, Johnson predicts. "I suspect there will be an awful lot of interest going back to more conventional genetics," he says. "And I think seed companies will be hard put to supply enough conventional seed of good current genetics."
High-oil corn remains very attractive to cooperative members who raise corn to feed hogs, Johnson adds.
With the poor commodity markets, equipment is not a popular item right now. Co-op members are buying only to repair. And just a few purchased grain bins and augers for the 1999 harvest season.
Mid-West does not handle chemicals. But several local co-ops are chemical dealers. Even though DKM purchases $3 million in chemicals a year, Johnson still cannot negotiate a discounted price.All manufacturers set one price for each chemical regardless of the distributor or dealer.
However, as a chemical dealer, DKM usually receives manufacturer program payments that arrive in November or December. Usually dealers use these funds to upgrade equipment and maintain their licensed chemical facilities. But DKM does not own application equipment and only runs a modest, licensed bulk facility. It passes most of the money on to its members in the form of patronage refunds, and therefore the members are indirectly receiving a price break on chemicals.
Viable future. With half its membership in pork production and the other half dealing with low grain prices, the future of Mid-West may look cloudy. But Johnson is optimistic.
"Many of us are doing okay," he says. "We may not like the direction things are going. But we are figuring out how to fit in. The key is to look at what we're doing and adopt the tools that other businesses use."
A few other buying groups besides Mid-West Co-ops help farmers purchase inputs. An Ohio-based group called Premium Agricultural Commodities Inc. (PACI) has pooled fertilizer, chemical and short-line equipment orders for 25 years. Today, the 27 producers involved in PACI together buy several million dollars worth of inputs a year.
Joanie Grimes, PACI manager, says the group usually obtains a discount of 5 to 50% on straight retail prices. For the average PACI member with 4,000 acres, the price savings can make a big impact on a bottom line.
Grimes negotiates the prices with suppliers, promising certain volumes based on the group's needs. PACI producers together farm 120,000 acres of cropland.
A buying group like this is not for every producer. Grimes says members must be willing to give up some independence and work for the good of the group. At the same time, members must be willing to cooperate with one another and be loyal to the organization. "It takes a unique group to get that done," she adds.
Members gain other benefits from PACI besides lower input costs. Grimes says each member tests a product every year on 50 to 100 acres. Results are reported back to the group at monthly meetings. "The information we gather from one another is almost priceless," she says.
Now the group has branched into another area - marketing. Grimes seeks contracts for value-added crops and other marketing programs to make members additional dollars.
"The margins in agricultural business have gotten so small that there is only so much we can save," Grimes explains. "But as far as marketing, there are different areas we can tap where our return is so much greater than anything we can save on inputs."
Acknowledging that the future of farming will be tough for everyone, Grimes adds, "But if anybody is going to make it, these guys will."