A new report from CoBank has revealed that accounts receivable at farm supply co-ops and other ag retailers are growing, and so are the challenges they face.
The report shows that retailers are adjusting to a tougher economic environment accompanying the down-phase of the current ag commodity cycle, as current headwinds are directly related to the sharp decline in commodity prices that have reduced farm income and tightened farm cash flows. The downturn in fertilizer prices, along with a spate of mergers and acquisitions in the seed and fertilizer industry, have also aligned to further create adversity for ag retailers going forward.
“The drop in farm income over the past three years is the steepest decrease since the Depression,” says Tanner Ehmke, CoBank senior economist covering the grains, oilseeds and ethanol, and farm supply sectors. “Producer incomes have fallen more than 50 percent from 2013 to today and their debt-to-income ratio is on the rise. Not surprisingly, total accounts receivable for ag retailers posted an 11 percent gain for 2015, and that’s expected to grow in the year ahead due to ongoing farmer cash flow challenges.”
Retailers have become unsure about demand opportunties as farmers are continuing to stretch existing credit lines, cut costs and reduce pre-pay practices, creating a more price sensitive market that has formed additional competitive pressures on ag retailers.
Falling fertilizer prices have also made it difficult for retailers to maintain positive margins, and forecasts are calling for this slide to continue through 2017 as commodity values remain under significant pressure from abundant supplies in the United States and throughout the world.
“The biggest challenge for ag retailers going forward will be to manage inventory to sync with demand,” notes Ehmke.
The new wave of consolidation occurring throughout many major seed and crop protection companies is also creating increased ambiguity and insecurity about product offerings, prices, and competition in the industry, making retailers concerned about the potential consequences that reduced competition could bring to the surface. The consolidation wave could also leave ag retailers with less bargaining power, potentially reducing their ability to negotiate prices or rebates on volume sales.
Ehmke did mention that, on a positive note, USDA’s projections for 2016 call for only a 2 percent reduction in net farm income year-over-year, compared to 2015 when net farm income dropped 38 percent year-over-year and 2014 when it dropped 27 percent.