As U.S. row crop farmers brace themselves for a third year of negative net income, Rabobank believes that – for at least the next 5 years – market forces will drive stabilization in profit margins near the long-term average breakeven levels. These findings are part of a new report, “Ch-ch-changes: U.S. Row Crops Near the Point of Stabilization,” from the Rabobank Food & Agribusiness Research and Advisory group. The report explores the period of tight margins U.S. row crop farmers are currently operating in and the ways in which farmer focus will change.
“There is no doubt that in order for U.S. row crop farmers to be successful and sustainable, they will need to readjust and reposition for the future,” says report co-author and Rabobank analyst Ken Zuckerberg.
“The most likely scenario is that high-value-added inputs, particularly specialty seed and crop protection products, will represent a greater portion of farmer wallet share, compared to machinery and bulk fertilizers,” notes report co-author and Rabobank senior analyst Sterling Liddell. “As the crop cycle transitions to stability, we see several implications.” As the crop cycle transitions to stability, we see participants across the value chain responding in different ways:
- Crop farmers will (still) need to conserve liquidity and maintain alternative sources of capital as the industry readjusts to a new-normal environment of lower profitability. This environment—along with the continued movement towards efficiency, conservation, and sustainability practices—will encourage the optimisation and/or reduction of certain crop inputs, with more consideration regarding planting decisions (acreage planted, crop mix, etc.).
- Farm inputs providers will need to deliver more value to cost efficiency-conscious growers, perhaps in the form of integrated and/or bundled solutions. In particular, we believe that seed and CPC companies will need to make strategic investments in R&D and rebalance product portfolios towards more specialty nutrient and advanced seed products, as the marketplace moves towards more integrated, value-based crop solutions. Fertiliser companies will need to make some difficult decisions in order to improve profitability and defend market shares. (Rabobank will provide more commentary on the fertiliser landscape in upcoming research.)
- Although the US farming industry has been consolidating for decades, the nature of the expected recovery in the row crop cycle will benefit larger-scale systems over medium and smaller farms. Therefore, Rabobank believes that small and medium-sized operations will benefit from exploring strategic partnerships/mergers and/or consider vertical integration strategies to earn adequate returns in order to attract capital. In our opinion, a rising interest rate environment without any meaningful concurrent increase in commodity prices will only accelerate matters.
A full copy of “Ch-ch-changes: U.S. Row Crops Near the Point of Stabilization,” is available by contacting Sarah Kolell: Sarah.Kolell@RaboAg.com.