The outlook for agricultural retailers is generally favorable for 2023 following a year of record profits in 2022. However, the sector faces an emerging set of risks that could depress profit margins and challenge traditional business models in the years ahead. Lower levels of industry working capital, higher property insurance costs, and changing grower needs are three of the key issues that ag retailers will need to navigate over the next five years.
According to a new report from CoBank’s Knowledge Exchange, a downturn in the crop cycle—after several years of consecutive high profits—is likely during 2024 or shortly thereafter. The prospect of lower grain prices and financial pressure at the farm level, combined with the newly emerging risks, has business implications that ag retailers should begin preparing for now.
“Grain and farm supply cooperatives delivered tremendous value to their customers over the past three years of extreme volatility in prices and economic activity stemming from COVID-19,” said Kenneth Scott Zuckerberg, lead grain, farm supply and biofuels economist for CoBank. “Unfortunately, the post-pandemic world is one that features a variety of new risks. The good news is that ag retailers and farm supply co-ops can develop risk mitigation strategies before the eventual cyclical downturn occurs.”
Emerging Risks Flying Mostly Under the Radar
A significant percentage of U.S. farming operations, comprised mostly of mid-sized and non-family farms, are increasingly seeking more products and services than traditional farm suppliers typically offer. This group has demonstrated a strong interest in biologicals and other specialty nutrients, as well as advice on carbon monetization and ESG compliance programs.
Beyond specific product and service categories, more farmers of all types prefer to evaluate, order and mange input purchases electronically. Ag retailers that want to compete for these customers will need to adjust their business models accordingly.
Lower levels of farmer working capital during the current upcycle suggests growers will cut back on input purchases more dramatically during the next downturn. Total farming working capital during the 2021/2022 crop cycle peak averaged $138 billion. That’s down from $215 billion during the 2012 peak. (All figures in 2023 dollars as reported by USDA.)
The lower levels of working capital may be a result of strategic purchases of equipment while interest rates were at historically low levels. However, the reality is that farmers and ranchers will have less available cash to purchase inputs during the next downturn, unless they increase debt.
Additionally, the rising cost of property insurance is an emerging risk factor that will pressure farm supply cooperatives profitability. The cost of property-casualty premiums has risen between 25% and 75% for the 2023 season, largely due to an increase in claims from natural catastrophes.
Losses from extreme weather totaled $170 billion in 2022, compared to $155 billion in 2021, well above the long-term average. Zuckerberg said farm supply operators might want to investigate alternative risk transfer mechanisms, such as a self-funded captive insurance arrangements, to address rising premium costs.
Watch a video synopsis and read the report, Ag Retailers Prepare to Navigate 3 Emerging Risks.