Expert helps agribusinesses serve producers in volatile times

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Source: Purdue University

Agribusinesses that have already purchased a portion of their fertilizer inventory will face some losses this year because prices have since dropped, said a Purdue University expert.

"There's going to be the desire to hold prices at a high level because a price was paid for them, but this will be difficult to do especially if the markets continue down," said Allan Gray, interim director for Purdue's Center for Food and Agribusiness. "If you've presold fertilizer to farmers, you're going to face pressure from them to reduce the price.

"Farmers are not willing to pay high prices now that prices have come back down. They may choose to switch crops and won't need fertilizer. Just because they've had a good couple of years, doesn't mean they will pay those high prices, if they can go across the street and get a better deal."

Gray recommends agribusinesses on the input side prepare to work through these types of challenges.

Not all agribusinesses are in the same situation as fertilizer dealers. The downward shift of the stock markets and commodity prices has the general economy sitting tight, but unlike the general economy some agribusinesses are facing piles of cash they weren't prepared for, Gray explained.

Earlier this year when grain prices were at their peak, agribusinesses in the grain side had to pay out large amounts of money to meet margin calls, Gray said. Now, with the unexpected downward turn, they are seeing the return of that money.

"If you have a lot more working capital than you've had in the last six months, don't feel uncomfortable about having those financial reserves sitting there. In volatile times like we're facing now, it's not a bad idea to have a little cash on hand."

Gray also said agribusinesses can expect to see an increase in credit requests. The financial crisis has not heavily affected agriculture and most banks that lend to agriculture have plenty of money to lend, but they are tightening their credit standards.

"This means they will be asking farmers for more information to prove their creditworthiness, which means at least at the margin there are going to be farmers who don't get credit," he said. "That would likely mean an increase in demand for retailers and those that serve agriculture to help finance those inputs."

Gray said it's important for agribusinesses to understand credit worthiness and one's ability to repay, and at the same time recognize the opportunity to serve agriculture.

"There is a use for that new working capital," Gray said. "If you receive credit requests from customers you don't normally receive credit requests from, ask a lot of questions. Make sure you understand their risk management plans and their repayment capacity."

Gray stresses the importance of asking questions. He also recommends keeping a close eye on accounts receivable to keep accounts, bad debt loss and estimates for bad debt loss in line. This will help to make sure a good reserve is available, because not all accounts credited will be able to repay during the next year, he said.

Finally, Gray noted that in uncertain times, agribusinesses should not lose focus of serving their best customers at the highest level. This can help them to maintain their competitive position so that they're around when the markets turn back around."

Designed to help agribusinesses keep their competitive edge, the Center for Food and Agribusiness will host their national conference Nov. 18-19 at Purdue's West Lafayette campus. Gray said the conference will focus on understanding producers and their desire for services and information, as well as their loyalty and sensitivity to prices. It will address agribusinesses' ability to improve their value offering to producers in good times and bad.

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