FMG Industry Analysis: Agronomy Services in 2021
A company operating in this sector historically provided seed, fertilizer and chemicals to farmers who produced crops. Now a company operating in this sector must be able to provide scientific and financial analysis to farmers to assist the producers in maximizing their return. Clearly the field of agronomy has evolved over time and requires a more sophisticated understanding of the science and the economics of farming. Agronomy combines biology, chemistry, economics, ecology, soil and water science, pest management and genetics to the production of food crops.
Agronomy services are provided by a combination of public and privately owned businesses, cooperatives, and state university departments specializing in this field. For this discussion, we will focus on the agronomy services provided by businesses and cooperatives.
The March 31, 2021 National Agricultural Statistics Service (“NSAA”), part of the USDA, indicates the number of acres of corn to be planted in the US is at 91.1 million acres, or a less than 1% increase over 2020, and the number of acres of soybeans to be planted in the US is at 87.6 million acres, or a 5% increase over last year. Wheat acreage is up 5% to 46.4 million acres. Winter wheat is up 9% to 33.1 million acres with spring wheat down 4% to 11.7 million acres. Cotton plantings are expected to be essentially flat at 12.0 million acres.
These changes can be very dramatic by state. For example, the Dakotas are expecting 8.9 million acres of corn, which is a 2.0 million acre increase over 2020. The planted corn acreage in Idaho and Oregon is forecast to be the highest on record.
Financial Considerations in 2021
With commodity prices reaching their highest levels since 2013, agronomy providers have an opportunity to sell additional products and services to agricultural producers. The graph shows corn prices over the past 30 years. Clearly there is an opportunity for producers and agronomy providers to increase revenues and profits this year.
The farmers are not tied to producing corn for $3.50 to $4.00 per bushel and may be open to increasing their input costs per acre. The increased input costs will be a combination of unit price increases and higher units applied per acre.
The next graph shows fertilizer prices over the past year:
Fertilizer prices are up 42% since last year.
With corn prices up 50% since last year, producers are considering ways to increase yields which means increasing their usage of fertilizer and other inputs.
As a result of these price changes and expected volume changes, lines of credit based on historic volume and price levels may be insufficient moving through the 2021 crop year. Lenders will need to consider price and volume in evaluating requests for increased lines of credit.
Because of rising prices, many farmers worked with their agronomy providers to lock in prices for the 2021 crop year. This means agronomy providers may have higher levels of prepayments from producers, and lenders will need to evaluate how much of those prepayments lock in prices and require the agronomy provider to lock in prices with its suppliers. Lenders will need to evaluate the fixed prices and volumes for both customers and vendors to ensure the agronomy borrower is not taking undue risk related to commodity prices.
Managing accounts receivable is going to provide opportunities and challenges. Producers should be able to catch up on carry over payables, which should result in a paydown of old receivables for the agronomy vendor.
However, receivable levels per farmer may need to increase to support higher prices and higher volumes. The credit policies of agronomy providers needs to be evaluated to address these changes. There may be a temptation for providers to allow higher receivable levels without considering carry over amounts from prior years, and price and volume changes.
Managing accounts payable will also provide challenges. Vendor supply lines may be insufficient to handle the increased volume combined with the increased prices. Agronomy providers may look to their line of credit provider to fill the void.
This year provides opportunities and challenges for agronomy providers and for their lenders. Sizes of lines of credit and working capital management will require additional attention and analysis. These changes plus the weather this year are impacting line needs. In some states farmers are in the fields two to four weeks earlier than normal.
Weekly cash flow forecasts are always a best practice for businesses, but with the changes this year, a weekly cash flow forecast, including a borrowing base forecast, is going to be critical to ensuring adequate lines of credit are available and working capital management is keeping pace with the changes this year.
Like what you read?
In case you missed it, these are the previous topics covered in our Focus Management Group Industry Analysis series:
Part 1: Crop Farming
Part 3: Restaurants
Part 4: Skilled Nursing Facilities