What is the state of competition within agriculture? No, a Cornbelt farmer is not competing with his neighbor to be able to sell grain to the local elevator. Yes, you may be competing with a neighbor to cash rent some adjoining acreage. But competition in agriculture is up a tier, where seed, fertilizer, chemical and other input suppliers are trying to get your attention. They spend a lot of money on advertising to get your attention. Competition is high among those companies, but what are the market forces that are pushing and pulling, and what are the changes underway in the companies that are supplying crop production inputs?
The companies that provide seed, nutrients, pesticides, machinery, as well as capital and other inputs are healthy competitors and frequently fierce rivals. But as one buys out another and the overall number of suppliers diminishes, the price competition has not diminished. Yes, prices are going up for all inputs, but if there were only one or two major suppliers, prices would be much higher than they are now. An economic analysis indicates that those suppliers have some high fixed costs, in laboratories, land, equipment, and capital and their goal is to increase market share so they can spread their cost over more units sold. And the high fixed cost aspect of market share competition will continue to be a prominent feature in agriculture. That is the contention of Purdue economist Mike Boehlje, who was joined by economists Michael Rahm of Mosaic Fertilizer and Michael Swanson of Wells Fargo.
Their analysis of industrial competition includes some wide ranging dynamics, such as those found with the fertilizer industry. N, P, & K all come from different sources and from different parts of the world, some of which may require substantial transportation or security for workers. In actuality, the suppliers of plant nutrients have diminished in number, as well as the number of countries where they operate. However, an economic index of the number of suppliers still indicates competition is low for supplying plant nutrients. The economists say firms compete on the basis of price and cost efficiency, and one of those methods is to ship trainloads to Cornbelt warehouses where the product can be stored for localized distribution, and significant freight savings.
While the farm equipment industry is also a provider of key inputs, it has not recorded the same volume of mergers and buyouts as has been seen in the seed and chemical industries. The economists say concentration is moderate and has decreased very slightly. There are more than1,600 companies and the 50 largest have not seen much concentration increase. The market share for the 8 largest only increased from 60% to 65% between the 1997 and 2002 ag census. With the low value of the dollar, the value of US agribusiness has been very attractive to foreign companies.
In addition to competition and mergers, the economists say another important dynamic is the loss of a competitive advantage. Pointing to the nitrogen industry which is only 60% of what it was 15 years ago, it has lost market share to foreign producers when US natural gas prices rose. Phosphate production is about half of what it was when it peaked 12 years ago, because of the cost of developing, extracting, and processing lower quality phosphorous.
Another dynamic is the entrance of a new competitor from a foreign nation, such as Chinese makers of glyphosate. Several entered the global market seeing export opportunities, but also to help develop their domestic agricultural industry like India. The economists say, “The ability for this new capacity to disrupt international trade and prices will be very difficult to assess for strategic planning purposes in more mature markets.” The move came with the expiration of the Monsanto patent on Roundup.
Just like farmers who are price takers, many agribusinesses are also price takers and have to accept the prices set by the suppliers of their inputs, such as steel for farm equipment. The larger market for steel is the auto industry, which can bargain for a price, but the farm equipment industry is at a lesser advantage. The economists say it is the same with energy prices, because the price of energy is set by the energy trading markets, and the crop input maker has to accept the prices for energy commodities.
On the other hand, do the crop input makers have any advantage with their target market, the Cornbelt farmer? The economists say with the increase in farm size and reduced number of farmers, there are still a lot of operators, which leaves them with minimal bargaining power in dealing with suppliers. While it may not seem fair, many suppliers may work to decrease compatibility with other suppliers and that increases the cost to farmers.
One of the significant dynamics in the crop input industry is the development of technology, since any increase of plant population to raise yield will also demand more fertilizer and crop chemicals. The economists say retail distributors will play a larger and more critical role in managing plant nutrition. A complimentary development may be the use of GPS equipment that will allow more accurate placement of inputs and decrease both waste and fuel. The economists say, “Those input suppliers and distributors who respond with these new products and services will have a competitive advantage in the future.”
What else is driving change in the crop input industry? National, state, and local government regulation will be a major driver of change with regard to economy of scale. As farmers find it more difficult to deal with environmental regulation, any supplier which can help farm operators get over that barrier will have a good lock on business for a while. The economists say there is another chain of action that needs to be considered, and it starts with the processor of the commodity. If the processor pressures the farm operator for significant change, then it flows back down to the maker of the input. If the supplier of the input can respond to the change, it will be the supplier to the future.
Summary:
The increasing importance of the triple bottom line— economic, environment, and social—multiplied by the internationalization of the value chain and the increasing demand for food, fuel, and fiber as the population grows will put performance demands on all aspects of the value chain, including on input suppliers. These interactions increase the need for companies to manage and mitigate the increased risks of the global economy. Those suppliers who can respond to these new dynamics will be the suppliers of the future.
http://www.farmgate.illinois.edu/archive/2011/01/crop_input_supp.html
The companies that provide seed, nutrients, pesticides, machinery, as well as capital and other inputs are healthy competitors and frequently fierce rivals. But as one buys out another and the overall number of suppliers diminishes, the price competition has not diminished. Yes, prices are going up for all inputs, but if there were only one or two major suppliers, prices would be much higher than they are now. An economic analysis indicates that those suppliers have some high fixed costs, in laboratories, land, equipment, and capital and their goal is to increase market share so they can spread their cost over more units sold. And the high fixed cost aspect of market share competition will continue to be a prominent feature in agriculture. That is the contention of Purdue economist Mike Boehlje, who was joined by economists Michael Rahm of Mosaic Fertilizer and Michael Swanson of Wells Fargo.
Their analysis of industrial competition includes some wide ranging dynamics, such as those found with the fertilizer industry. N, P, & K all come from different sources and from different parts of the world, some of which may require substantial transportation or security for workers. In actuality, the suppliers of plant nutrients have diminished in number, as well as the number of countries where they operate. However, an economic index of the number of suppliers still indicates competition is low for supplying plant nutrients. The economists say firms compete on the basis of price and cost efficiency, and one of those methods is to ship trainloads to Cornbelt warehouses where the product can be stored for localized distribution, and significant freight savings.
While the farm equipment industry is also a provider of key inputs, it has not recorded the same volume of mergers and buyouts as has been seen in the seed and chemical industries. The economists say concentration is moderate and has decreased very slightly. There are more than1,600 companies and the 50 largest have not seen much concentration increase. The market share for the 8 largest only increased from 60% to 65% between the 1997 and 2002 ag census. With the low value of the dollar, the value of US agribusiness has been very attractive to foreign companies.
In addition to competition and mergers, the economists say another important dynamic is the loss of a competitive advantage. Pointing to the nitrogen industry which is only 60% of what it was 15 years ago, it has lost market share to foreign producers when US natural gas prices rose. Phosphate production is about half of what it was when it peaked 12 years ago, because of the cost of developing, extracting, and processing lower quality phosphorous.
Another dynamic is the entrance of a new competitor from a foreign nation, such as Chinese makers of glyphosate. Several entered the global market seeing export opportunities, but also to help develop their domestic agricultural industry like India. The economists say, “The ability for this new capacity to disrupt international trade and prices will be very difficult to assess for strategic planning purposes in more mature markets.” The move came with the expiration of the Monsanto patent on Roundup.
Just like farmers who are price takers, many agribusinesses are also price takers and have to accept the prices set by the suppliers of their inputs, such as steel for farm equipment. The larger market for steel is the auto industry, which can bargain for a price, but the farm equipment industry is at a lesser advantage. The economists say it is the same with energy prices, because the price of energy is set by the energy trading markets, and the crop input maker has to accept the prices for energy commodities.
On the other hand, do the crop input makers have any advantage with their target market, the Cornbelt farmer? The economists say with the increase in farm size and reduced number of farmers, there are still a lot of operators, which leaves them with minimal bargaining power in dealing with suppliers. While it may not seem fair, many suppliers may work to decrease compatibility with other suppliers and that increases the cost to farmers.
One of the significant dynamics in the crop input industry is the development of technology, since any increase of plant population to raise yield will also demand more fertilizer and crop chemicals. The economists say retail distributors will play a larger and more critical role in managing plant nutrition. A complimentary development may be the use of GPS equipment that will allow more accurate placement of inputs and decrease both waste and fuel. The economists say, “Those input suppliers and distributors who respond with these new products and services will have a competitive advantage in the future.”
What else is driving change in the crop input industry? National, state, and local government regulation will be a major driver of change with regard to economy of scale. As farmers find it more difficult to deal with environmental regulation, any supplier which can help farm operators get over that barrier will have a good lock on business for a while. The economists say there is another chain of action that needs to be considered, and it starts with the processor of the commodity. If the processor pressures the farm operator for significant change, then it flows back down to the maker of the input. If the supplier of the input can respond to the change, it will be the supplier to the future.
Summary:
The increasing importance of the triple bottom line— economic, environment, and social—multiplied by the internationalization of the value chain and the increasing demand for food, fuel, and fiber as the population grows will put performance demands on all aspects of the value chain, including on input suppliers. These interactions increase the need for companies to manage and mitigate the increased risks of the global economy. Those suppliers who can respond to these new dynamics will be the suppliers of the future.
http://www.farmgate.illinois.edu/archive/2011/01/crop_input_supp.html
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