Growth From Value Creation: Re-Evaluating the Farm Inputs Value Chain

Logic would have it that a farmer’s willingness to invest in inputs should be a function of the value that those inputs create, with a simple formula for value being yield multiplied by price of commodity. However, a time series analysis of recent history reveals a disparity in the significance each variable (yield or price) had in driving input pricing growth. From 1975 to 2004, yield growth was the greater predictor in determining an input company’s ability to take pricing, while the underlying commodity’s price increase held sway from 2005 to 2012. Beyond 2012, a dislocation appears to have created a flaw in the theory that input prices serve as a function of the value they create.

Input companies’ ability to drive farmer productivity has essentially made them victims of their own success. Secular trends point to burdensome carryout deflating corn and soybean prices at the same time that improving technology and genetics limit seasonal risks. However, a broader interpretation of improving technology offers opportunities for input companies to partake in process prescription and drive the industry’s response to one of the key consumer trends of today – conscious understanding of how and where food is produced.

Three Opportunities for Input Companies to Partake in Process Reform

How input companies could partake in this process can be seen in three different yet overlapping examples, each in their own way re-evaluating the farm inputs value chain:

E-commerce – For farmers, e-commerce acts as the nexus between agronomic and financial decision-making. Intuitively, this ecosystem could, with complementary technologies, allow farmers to take a keener, more granular view of their marginal costs vs. marginal returns. This approach by farmers could impact product demand for farm input companies. However, e-commerce offers two clear opportunities for input companies: 1) greater supply chain efficiency, and 2) ability to connect farmers downstream.

On-farm data collecti on – Data collection forms the basis of process certification and quantification. However, data collection faces issues: multiple sources collecting data in the same ‘language,’ the ownership of data, and the consistency of data, for example. Addressing these issues comes with its own set of challenges. However, an open source ecosystem that can consistently collect data across a multitude of systems in a common language will add value to farmer and company.

Process certification – The global value of process certification (and quantification) in farming is hard to quantify. However, it opens an opportunity for mutual value creation and re-evaluation of the value chain. If every corn, wheat, and soybean acre planted in the US this season were ascribed a USD 15/acre carbon sequestration value, that would translate to a USD 3.3bn market. Beyond this, the proliferation of label claims within the broader agricultural ecosystem continues to grow at a time when society scrutinizes processes and supply chains even further.

From Production Growth to Value Creation

Currently, top line numbers for input companies come with their own formula for value: number of acres planted multiplied by the quantity of product applied per acre multiplied by the product price, with swings in revenue a function of sensitivity to one or more of these variables. With growth in many of these variables stymied by secular trends, the battle for farm share by companies may not be driven by current position, but by the actual value that these input companies can create for farmers. Facing a consumer increasingly concerned with how crops are produced, this could beckon a re-evaluation of the farm inputs value chain.