Low Margin Outlook to Shift Ag Landscape

Baseline operating margin projections for grain & oilseed (G&O) farmers point to sustained pressure over the ten-year forecast, due to a combination of sluggish farm commodity prices and relatively sticky input prices. From a cost perspective, we believe seed pricing is likely to cede little ground as a percentage of direct costs in the coming years, while tariffs and environmental pressure in China look likely to keep pesticide pricing competitive.

In the short run, fertilizer prices will likely rise modestly from their current lows but then level off. Cash rent appears supported by competition for productive land from well capitalized operations. Our recent forecasts indicate that corn prices will remain below USD 3.80/bu for much of the next decade and that average marketing-year soybean prices will not surpass USD 9.30/bu within that timeframe, ultimately forcing acres to move out of soybean production.

Operating margins and efficiency are often dictated by scale, and this structure may offer a future for operations with strong balance sheets and a keen understanding of their marginal costs vs. marginal returns. However, scale alone may not be sufficient to define the successful farming operation of the future; farming practices need to change going forward. Given our baseline commodity G&O price outlook, we believe farming operations need to shift the paradigm away from the ‘practice of farming’ to the ‘business of farming’, taking a long-term strategic perspective rather than a season-to-season approach. Commodity prices are just one component of the equation, and, while we advocate a keener control of costs, we believe farmers need to keep broadening the metrics to include financial indicators such as ROI to better manage risk and unlock the potential value of moving closer to the end consumer.

Eschewing traditional G&O production practices may be a change in the cultural paradigm for farming operations, but we believe it offers a range of opportunities for farmers and input providers at a time when long-term growth and margins look pressured. Forging closer ties with end consumers who value different practices (such as organic or sustainable practices) can offer value to both farmers and input providers. Greater technology adoption (digitization/datarization) forms the basis of this process. Farmers need to consider the virtues, as well as the costs, of increasing the use/sharing of data that leads to more effective applications of resources/inputs and acts as a framework within which they can move closer to the end consumer.

Farmers

Moving up the value chain is often suggested as a strategic direction for farmers, though not always with a clear path to success. However, with low commodity price forecasts, tight margins, changing consumer trends, increased technology adoption, and modern facilities (such as Rabobank’s organic transition loan offering), the farming ecosystem is evolving to give greater optionality and incentives to farmers.

How this comes about will depend upon each farm. However, technology will ultimately form the platform of this transition, as consumers look to greater traceability in their food. Growing niche products to specification may allow greater value creation for farmers. However, niche products can quickly become commodity products, suggesting farmers need (1) greater adaptability and flexibility in their operations and (2) contract production security when looking to diversify.

Greater technology adoption may seem a luxury in a low-priced commodity environment. However, it will create efficiencies. Digital technology is a pre-requisite to datarization (i.e. the conversion of digitized information into a quantified, usable format that allows farmers to adopt a more analytical decision-making process); in turn, the data collected facilitates a breadth of benefits. For today’s farmer, the returns are already here. For example, our research shows that datarization (and having a clearer understanding of marginal cost vs. marginal return in greater granularity) can lower operating costs by ~USD 20/acre across a 2,500 acre G&O operation through granular and efficient use of inputs, based in part on adoption of variable rate technology and granular cost control. For tomorrow’s farmer, technology and data offer even greater benefits, with algorithmic predictive models working in tandem with farmers and, in some areas, supplanting decision-making and further improving efficiency.

Input Providers

The datarization of agriculture could have even more profound implications for input companies. For input providers, the days of growth in farmer spend driven by improving commodity prices and trait adoptions in corn and soybeans seem to have passed. For seed and pesticide companies, maintaining reliance upon a row crop portfolio (i.e. corn and soybean) will likely leave players fighting for a dwindling slice of the pie.

Input companies will likely face the question of what business they are in. If they view themselves as pure-play physical input providers, they are likely to face margin pressure, as farmers become increasingly agnostic toward agricultural brands. However, if they view themselves as ‘agricultural services companies’, embracing a portfolio of farm input/extension services offered to farmers through the adoption of data, AI, machine learning, and predictive measures, they will be better positioned to adapt to the challenges of the coming years.

Additionally, as some farmers may push into alternative crops, opportunities will arrive for portfolio realignments. Looking beyond the traditional platforms that have provided input companies growth may be the path of the future. More pointedly, on seeds, staple commodity crops have carried the weight of R&D over the years, and a number of the specialty crops that farmers could look at lack genetic diversity. Seed companies in these specialty crops with parental lines and established seed production systems are likely to fair better than those looking to start from scratch.