What is in this article?:
- The plant input supply industry is composed of many diverse segments and companies that supply farmers with seed, nutrients, pesticides, machinery, capital, labor, and many other inputs — all driving change in agriculture.
Bargaining Power of Suppliers
For many suppliers of commodity inputs such as steel and energy for the plant input sector, the agricultural market’s profits are relatively opaque and their total consumption of the suppliers’ output small. This makes the agricultural input sector a price taker, but it also helps them maintain margins. For example, steel suppliers set the steel price primarily based on global construction and automotive demand; consequently, agricultural implement manufacturers have little power over the steel price they pay. But because they represent a small portion of the sellers’ markets, they are unlikely to be scrutinized heavily by steel sellers in an effort to wring special margin advantage. While this is not to say that steel sellers will not bargain hard with agricultural implement manufacturers, the majority of the steel seller’s focus will be on larger consumer driven manufacturers and contractors.
Similarly with energy prices, even large producers of plant inputs are a small part of an energy company’s market. So the energy producer has considerable power over the plant input supplier but the energy price is set by the consumer market, not the plant input supply market.
The power of human capital, as a supplier of labor, varies regionally, not necessarily due to the power of the individual worker but due to the demand for labor, especially specific skills, from other companies. For example, Mosaic faces considerable competition for skilled labor from other mineral industries as well as the tar sands developments in Western Canada. Thus, labor costs are high in this area and affect the size and type of capacity expansions.
Bargaining Power of Buyers
Even though farm size has increased and the number of farms has decreased, there are still many farmers. So they have minimal power in dealing with their input suppliers. Plus, farmers sometimes decrease their own bargaining power by maintaining preferred suppliers and relationships, and being unwilling to consider competitors’ products, because they are risk averse. In addition, many suppliers work to decrease compatibility with other suppliers and thus increase switching costs for farmers.
Farmers may see borrowed money as a commodity, but many do not shop their business to other lenders or even do a serious consideration of other lenders. This is seen anecdotally in the United States, and was found in a survey of German farmers (Musshof, Hirschauer, and Wassmuss, 2009). Farmers could make themselves more “bankable” which would increase the number of lenders who would bid on their business. Farmers, who maintain their financial records in an easy to supply and verify format and take the time to fill out the information required for a serious counterbid, can reduce spreads and fees and remove covenants—thus making lenders more competitive in their market area.
Plant nutrient distributors are consolidating and gaining bargaining power with input suppliers. Agrium is growing a large retail distribution business. More buying groups are emerging. Large distributors are building more import terminals and developing expertise to source product globally. These larger distributers are forcing their input suppliers to be more competitive in their pricing. However, since these distributors sell to many farmers, they are able to keep a larger share of the supply chain profit for themselves.