The agronomy and farm supply sector will be stressed through 2019, and profitability for ag retailers could face a multi-pronged threat. Poor weather last fall and so far this spring have combined with stressed farm financials to pressure ag retailer margins and impact farmer decisions that could reduce sales volumes, according to a new report from CoBank’s Knowledge Exchange Division.
Increased costs in the form of operating expenses for ag retailers, including labor, equipment and other expenses, will potentially rise due to a compressed or hard-hitting spring planting season.
“The near-term outlook for ag retailers and agronomy departments does raise some concern,” said Will Secor, grain and farm supply economist at CoBank. “As always, there’s a lot riding on spring weather. If farmers and ag retailers have ample time to get in the fields and make up time that was lost last fall, that will ease the pressure. However, a compressed spring will increase costs and could have impacts that last throughout the growing season.”
Three Drivers Impacting Farm Supply Outlook
Poor Weather – Bad weather throughout much of the Midwest last fall kept farmers and applicators out of the fields, pushing much of that fieldwork to spring. And now with flooding throughout much of the Midwest, that fieldwork will be pushed further into the year. As a result, ag retailers will likely be stretched to fulfill service requests. To meet the needs in their areas, some ag retailers may rent additional equipment, hire more seasonal labor or pay additional overtime hours. On the other hand, ag retailers that have significant capacity in labor or equipment may welcome a compressed, hard-hitting spring.
Stressed Farm Financials – As commodity prices have declined, farmers are increasingly price shopping and looking to cut costs. Variable costs like fertilizer, seed and crop protection products are key targets. Fertilizer volume and seed choices are becoming more constrained by farm finances. Farmers may pull back on macronutrient fertilizers and are less likely to apply micronutrients or try biologicals. Delayed farmer decisions can also be linked to weak farm financials. Combined with a decrease in prepays, ag retailers are facing greater inventory risk and more difficult inventory decisions. Accounts receivable risk for ag retailers will likely increase as cash farm income dropped nearly ten percent in 2018.
Fertilizer Prices – Fertilizer prices are expected to increase as the spring application season kicks into high gear. This should provide a good margin opportunity for ag retailers who purchased product before the run-up in prices last fall. Ag retailers who purchased inventory at high prices last fall that are still unpriced going into the spring, face uncertainty. If retail prices do not increase to meet the prices paid, margins will shrink.
“Profitability will be pressured for most ag retailers and agronomy departments in 2019,” said Secor. “The USDA is predicting higher farm income in 2019, which we could see the effects of in 2020. However, many farmers will be cash-strapped for the current planting season and that will certainly impact ag retailers.”
Source: Oklahoma Farm Report