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America's bountiful crops feed the world, but low commodity prices and increased production costs are taking a toll on agricultural producers’ margins. ‘Farming smarter,’ by taking advantage of technological advances, could hold the key to the industry’s future sustainability
The United States is known for its industrial innovations in auto manufacturing, aerospace and the IT sectors, but its crop production continues to earn it a reputation globally as the world’s food basket.
Between 2009 and 2016, the United States Department of Agriculture estimates that US agricultural exports topped US$1 trillion, making it the strongest period in US history for this kind of export.
The country is blessed with fertile land in a range of climates, allowing a wide variety of produce to be grown in the US. But a sustained period of low commodity prices, higher input costs (machinery, equipment, fertilizers, seeds, pesticides) and lower overall returns from crops have increased pressures on farmers’ profit margins.
“Farmers have experienced low-to-near-breakeven crop prices for two-to-three cycles now,” says Leroy Startz, director of food, beverage & branded products at ING Capital. “Until there’s a turnaround in the price they receive for their goods, farmers will be focused on production efficiencies and increasing volume output while minimizing input expenses.”
With a large portfolio of US-based poultry, pork, cattle feed and dairy production companies, and a smaller portfolio of seed and fertilizer manufacturers, ING’s Food & Agricultural finance division is well placed to understand the pressures on agricultural retailers and producers. “We need to have a healthy overall farm economy to support the entire agricultural supply chain,” says Startz, who grew up on a grain, cotton and cattle operation on the coastal prairies of Texas. “If crop producer and supplier margins continue to erode, and firms decide they can’t profitably sustain their business anymore, that will possibly lead to reduced crop acres, more supplier and farm consolidation — and ultimately better margins. This could also lead to higher crop prices. While higher crop prices are great for the farmer and supplier, this would result in higher feed cost, which will impact the livestock and poultry segment of our portfolio.”
So how do you maintain a strong customer base in a low-margin environment? To help producers and agricultural retailers address the new market realities, ING Food & Agriculture is having different conversations with its customers, mostly around enhancing inventory management for retail providers, which helps farmers streamline the costs of fertilizer, seeds, insecticides — and generally, farming ‘smarter.’
In the past, when prices for a specific crop were low, most food producers would plant less of that crop until prices improved again. However, Startz says producers can leverage advances in farming machinery, technology, and crop genetics to help them better manage and control their volume output.
He estimates that between 60% and 70% of US farmers now use some form of precision agriculture: smarter machines that can help producers more accurately determine the right amount of seed, fertilizer and chemicals required for different parts of a field. These newer forms of technology can help farmers use inputs more efficiently to maximize production and reduce costs. “Agricultural equipment and technology providers are delivering improvements such as driverless tractors, which will change the face of agriculture over the next two to three decades,” says Startz.
However, the cost of these new technologies must be weighed against the efficiencies they deliver for producers. Startz says farm equipment manufacturers and agricultural input suppliers will also need to work out how to charge appropriately for new equipment technologies and new services to sustain the necessary investment in this arena while protecting the overall profitability of their businesses.
In the current environment, most of ING’s agricultural clients are aggressively cutting costs to eke out greater savings and efficiencies. One area that has changed dramatically in response to low commodity prices is supplier inventory management and managing credit risk. Startz says agricultural retailers have invested heavily in their credit departments to better understand the credit risk profile of their producers—and their ability to pay on time.
In the past, agricultural retailers’ inventories were managed using less-scientific means. In a low-margin environment, Startz says companies need to move to “just-in-time” inventory management so they are not holding too much stock, which could ultimately impact the carrying cost to the retail supplier, leading to higher input costs for the end producer.
Improvement in profit margins for producers and suppliers is no longer a question of just waiting for crop prices to return to normal levels. With producers and agricultural retailers having to contend with variables such as climate change, growing international competition and increased global demand for cheaper sources of food, as well as the usual market dynamics of supply and demand, a different approach is needed to sustainably reduce margin pressures.
By farming smarter, producers can better respond to unpredictable events in the production cycle and minimize the impact of fluctuations in crop and agricultural input prices on production costs and output.