Navigating a Tight Ag Economy
With low commodity prices, farmers are looking to reign in input costs to hit break-even points and companies are slashing seed prices, but experts say that might not be the best strategy.
Corn prices have been at or below $4 a bushel for 27 consecutive months and it’s expected to remain that way into 2017, according to Darrel Good, a University of Illinois agricultural economist. Soybeans are in a similar situation with prices between $8.50 and $10.50 for most of 2016.
If you look at the October Purdue/CME Group Ag Economy Barometer, more than half of farmers expect widespread bad times in the future. As such, Will Secor, a Purdue University ag economist explains that farmers are more price sensitive and focusing on getting input costs under control. Seed is definitely a part of that.
However, farmers still want performance, Secor says. “I’m not sold that lowering prices is exactly what they’re looking for,” he adds, questioning companies’ moves to undercut the competition by slashing prices.
Robert Hill, an economist and owner of Caledonia Solutions, a market research and consulting company, says seed companies are use to selling into a high-profit environment. “Now the economic picture has changed dramatically for the major Midwest crops, and there is good reason to question seed pricing strategies,” Hill says.
In 2015, most companies were able to hold prices. Gary Schnitkey, a University of Illinois ag economist, reports that seed costs decreased by $2 an acre between 2014 and 2015 and that another $2 drop was expected between 2015 and 2016.
Seed prices have been sticky to come down, Hill notes. But all agree that there’s been quite a bit of give reported for the 2017 crop year. DuPont, Dow and Syngenta have all dropped their price on even their most elite varieties and other companies are making significant savings deals on bulk or exclusive purchase agreements. Monsanto is reported to have done some pricing adjustments but not on their newest innovations.
“There’s certainly some benefit in dropping prices to make the sell short-term, but in the long-term it’s really a lose-lose situation for companies,” Secor says, noting that you erode trust in previous messaging and show just how much margin is built into your prices.
He says if you are lowering prices, the key is to communicate why you are doing it. “It is not a lower quality product … it is that we are trying to help the farmer succeed in the long run by lower prices in a tough time,” he says. “That can really help build relationships in the long run and build brand equity.
The idea of lowering prices is that you’ll sell more, enough to offset the lower price. It’s a give a little to get more concept.
But Secor cautions companies looking to slash seed prices, as it could do more harm than good. “Be very careful about lowering prices, because it’s really hard to increase prices,” he says. “There are unintended consequences, such as the expectation that you will always be able to lower prices and that the brand doesn’t have as much value.
“I’m not saying that you shouldn’t lower prices, but you really need to think through it. Think through not just this season, but future seasons as well.”
Identify What Customers Value
No two farmers are alike. Secor recommends talking to customers and learning what it is they value. Then you have to determine how best to communicate the value that you can deliver, he says.
“Maybe instead of cutting seed prices, you cut back on the service your provide,” he adds. For example, Secor says he was talking with a group of farmers and some of them are “pretty independent,” so services to them is being on time and delivering the right product at the right amount at the right time, and that’s it.
However, others might want to know the ideal planting time, variety and plant population recommendations.
“Service means different things to different people,” Secor says. “You have to hone in on what your customers want and what type of products drive that value.”