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CONFRONTING THE NEW REALITY FOR RURAL AGRI-BUSINESS
FUTURE ROLE OF THE INTERNET

Industry considation is but one major force reshaping ag industry structure. According to Michael Boehlje, professor of agricultural economics at Purdue University, the Internet is also driving structure change.

Boehlje cautions: "There’s a real question as to whether or not an ag e-commerce site can be, by itself, a money-maker. The well-publicized fulfillment problems consumer e-commerce firms experienced last Christmas would be even more devastating given agriculture’s time-sensitivity."

Nonetheless, Boehlje expects, farm suppliers will face more discount price competition as a result of e-commerce. "But," he says, "the real issue is fulfillment. If you can’t fulfill, it doesn’t matter how many Internet orders you take. You need both ‘bricks and clicks.’"

"Some companies plan to use the Web as a vehicle to source business, relying on someone else for fulfillment," Boehlje explains, "which may create some opportunities for forward-thinking local retailers who can provide dependable fulfillment services in their trade areas."

He also emphasizes that, "Price is not the entire issue with every farmer."

Thus, Boehlje predicts a market segment will remain with a strong preference for local suppliers. "Amazon-dot-com is not putting Barnes and Noble out of business!" he exclaims.

Boehlje also stresses that firms that do lose price-sensitive business to e-commerce competition should look closely at the true value of that lost business because it may have been more useful for generating volume than profit.

Farm suppliers also need to think about how e-commerce may reshape their relationship with manufacturers. "Farmers will still need service –local delivery of farm inputs, perhaps custom application of fertilizer or chemicals, or warranty service if it’s machinery," Boehlje says. "There may be an opportunity to redefine the business and transform it into a service company. That might mean employing a staff with more service personnel and fewer sales people."

Further, he says retailers need to think in terms of expanding the number of points of access for farmers. "Different farmers are going to want different access points: over the counter, via the telephone, through on-farm sales people, and the Internet," he says. "Rural agribusiness should think in terms of a boundaryless business environment. That’s the impact of the Internet."

The geographic and time barriers that new products and new competitors confronted in the past have been greatly diminished. The importance of that is truly profound.

"Rural agribusiness has a choice of responding to this dramatically changed environment, or not," Boehlje says, "but they should know, new players will come in and take business away from those who don’t respond."

Boehlje says the current situation with new technology is very different from at any time in the past.

"Agriculture has experienced change in the past," he says, "but there was always some time to see how the new technology or ways to do business proved out."



Following is the entire article, as it appears in the September issue of AgriMarketing:

To mariners it’s a "sea change." It occurs when unseen currents have quietly shifted beneath the surface and begun to carry a vessel in an unexpected direction. Sailors who don’t notice and react quickly enough to this kind of change can find themselves shipwrecked.

American agriculture has undergone a sea change in recent years. Advancing technology and globalization of the industry have profoundly and irreversibly changed its course.

Major agribusiness firms have responded to this change with mergers and partnerships to obtain an intercontinental presence and amass the capital required to support enlarged research and development efforts.

But local farm supply and marketing firms have generally kept their focus on meeting the needs of their customers. And as a result, they may not have recognized their potential danger.

PROFOUND AND IRREVERSIBLE CHANGE

Economists tell us that globalization is bringing an end to the dominance of the traditional American farmer in commodity agriculture.

Offshore producers with much lower land and labor costs than those of U.S. producers can now profitably produce and ship farm commodities to world markets. As a result, many American farmers face the prospect of ongoing losses unless they can reinvent their businesses.

"This kind of thing has happened before to other industries in the U.S.," says Michael Boehlje, professor of agricultural economics at Purdue University.

"Textiles are a good example," he says. "When American producers couldn’t compete with the low-cost labor of competitors overseas, American producers changed their operations and began producing higher-value, differentiated products."

Today, many farmers are considering alternatives to traditional commodity agriculture. These include contract production for a specific buyer that may involve value-added or "identity-preserved" crops and livestock.

However, this type of agriculture often involves the use of production inputs supplied by the contracting processor, rather than purchased from local farm suppliers. Moreover, the resulting farm production may bypass local marketing channels, as well.

Add the prospect of new e-commerce-based competition and it becomes obvious that farmers are not the only ones who may need to reinvent their businesses; much of the rural farm infrastructure in the U.S. may need to reinvent itself, as well.

THE SHAPE OF THINGS TO COME

Changes in farm supply marketing and distribution have already begun. In June of last year, Monsanto announced the consolidation of its seed and chemical sales staffs into a single, integrated sales team.

In December, Novartis and AstraZeneca announced their consolidation into Syngenta, a global seed and farm chemical manufacturer that introduced itself as "the first dedicated R&D based agribusiness company."

Also in December, "Aventis CropScience North America" was born when Rhone-Poulenc combined with AgrEvo. Aventis is self-described as, "world-wide leader in crop protection products and technology."

All three now link seed and chemicals together, raising questions about the future role of the traditional sales and distribution system for agricultural seed: farmer-dealers.

NEW BUSINESS MODEL

"Buyers of seed are coming to expect professional sales personnel –trained people with solid product knowledge rather than people who just sell seed as a sideline," Boehlje explains.

"If a product is not part of your core business, then you’re unlikely to give it maximum effort," he says. "Rapidly advancing technology makes it very difficult for a part-time salesman to stay current in terms of product knowledge and professional sales skills." Yet, it seems both are needed today to properly match the right products and services with a client’s needs.

Boehlje continues by pointing out that new technology is changing the costs and interaction between seed companies and farmers. "In the past, both ends may have wanted more contact with each other but that was impractical," he says. "Today, with the Internet, frequent contact is possible and as a result, both sides can gain opportunities to share information and reduce costs."

The result, according to Boehlje is the farm supply industry is moving toward a different business model. What’s more, he claims this is not just limited to seed and chemical suppliers.


INFORMATION AGE AGRI-MARKETING

"Farmer needs needs have changed," Boehlje says. "They have a better feel for what they need and they don’t want to talk to a retailer who knows less about a product than they do. They want direct contact with the manufacturer. They want to talk to the guy who makes the tractor!"

But that’s a two-way street. "Manufacturers want contact with farmers, too," Boehlje notes. "They’re looking for ways to reduce their costs and improve the market appeal of their products."

He suggests that using the Internet to reduce inventory costs is one way a machinery manufacturer might do that. By doing so, manufacturers can better produce exactly what a customer wants in terms of operational features, quality, and safety.

However, at this point he notes that there are not a lot of sales transactions over the Web. Rather, it’s producing a better-informed customer base.

"Presently farmers are primarily using the Internet to obtain bargaining information to use with their local suppliers," Boehlje says. "For example, this past spring suppliers reported farmers coming in to make chemical and fertilizer purchases armed with price information that they found on the Web."

Farm suppliers who bundle the cost of services into their price are going to need to take steps to assure their customers consider the value of those services when comparing service-free prices from other suppliers they find on the Web.

In most cases, farmers will continue supporting their local suppliers if they are considered "reasonably competitive." But what that constitutes is probably different in the mind of each producer.

"Economics continues to drive farmers to try to find ways to reduce their costs," Boehlje says. "They clearly see e-commerce as offering that type of potential."

REINVENTING FARM SUPPLY

Boehlje expects to see a general streamlining of the distribution channels for farm inputs.

In the old system, farm supplies moved from manufacturers through one or more wholesale distributors before reaching a retail distributor, which finally sold to end-users.

This system benefited manufacturers by accumulating orders for regional distribution and efficiently moving products to prospective users. It also benefited farmers by providing increased choice and selection. But with each step, another mark-up was added, increasing the price paid by the farmer in the end.

Today’s farmers can often order in larger quantities than their local suppliers did twenty years ago. Consequently direct orders from manufacturers by end-users are becoming increasingly common and are likely to become even more typical in the years ahead.

That raises questions about what will become of traditional farm suppliers.


COPING WITH CHANGE

"Farm suppliers need to recognize three things," Boehlje says. "First, there is no such thing as a typical farmer any more. They are increasingly different in terms of the sizes of their operations and their expectations of dealers and manufacturers. They are also increasingly different in the way they want to obtain information, and the way they want to be accessed by suppliers."

Boehlje explains that while there may be fewer farmers, they are becoming a more diverse set of people with desires and preferences that range from no service and the lowest possible price to the complete package.

"Secondly," he says, "it is becoming increasingly difficult to differentiate products like fertilizer and tractors on the basis of product performance because there is more product parity."

As a result, Boehlje feels farm suppliers will increasingly need to differentiate on the basis of their human resources by offering better information or service support.

He says the seed and chemical dealers that can offer more options and help than competitors will be the most successful.

Third, and finally, Boehlje points out the role of the local farm supplier will change as processors increasingly demanding unique characteristics in their raw materials.

"As producers become part of more tightly aligned production systems, processors and their growers will be telling their local suppliers exactly what they want and when they want it," Boehlje says.

"Raising corn with certain attributes will require particular fertilization and tillage practices," Boehlje says. "Local suppliers will need to perform in specific ways with more specialized service support or they won’t have a role."


FINDING A NICHE

Boehlje says that as a result of the changing environment for rural agribusiness, in the near term, local firms should expect to lose customers and experience compressed margins.

He recommends that ag retailers take a hard look at any opportunities they see emerging for potential involvement with identity preserved or other differentiated products and reassess their competitive advantage. "Their advantage now - may not be what it was in the past," he cautions.

Now, that may no longer be true. "The current pace of change is very different from anything previous – local firms may not even have a year to figure it out -so they’d better plan to have something in place to deal with it by next year!" he says.

"Firms that wait for two years for someone else to figure it out will find they’ve probably lost both customers and their moment of opportunity," Boehlje predicts.

"So, rather than sitting and waiting," Boehlje says, "firms should do something now: experiment. Try what computer firms call a ‘Beta Test’ or corporations call a ‘pilot project.’ Do more than one if you can."

In times like these, the worst possible thing you can do is "nothing." AM

Jon Setala is a marketing-communications consultant in River Falls, WI.


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