A Safe Bet?

(Progressive Farmer image by Matthew Putney)

Every year, row-crop growers bet that the seed, fertilizer and chemicals they choose will pay off at harvest.

Sometimes it does, and sometimes it doesn't. The weather is often the ultimate wild card.

Thanks to years of research, data collection, improved seed genetics and precision agriculture technology, several agricultural companies are confident enough to offer financial risk-mitigation programs to customers who buy their products or services. Most are variations of yield guarantees tied to the use of technology, specific inputs and agronomic practices, and the weather that provide rebates or cash back if targets aren't met.

It's a recent trend that's growing and likely here to stay, ag experts agree.

"You are seeing a tidal wave of change, even though it's only the first few ripples of companies offering guarantees," says Joe Young, president and chief operating officer of Growers Edge, Johnston, Iowa. The company partnered with Illinois-based Growmark to offer a yield guarantee program this year to the cooperative's customers who grow corn and soybeans.

Growers Edge, a small financial data company, is one of a handful of businesses to roll out guarantee programs in the past couple of years. Others include agriculture giants such as Bayer, Syngenta and WinField United, which is owned by Land O'Lakes.

Young sees guarantees as a way for businesses to differentiate themselves from the competition and to provide farmers with the confidence to invest in the latest technology and products during a down farm economy. It's also a way to back up high-yield and return-on-investment (ROI) claims.

"With the flood of technology and capital coming into the ag sector, all the companies are knocking on the same grower's door," Young explains. "They all say their stuff is great ... so how do farmers cut through the noise at the kitchen table? [Guarantees] will do that."

Companies insist everyone wins with guarantee programs. Ag suppliers sell more products. Farmers get yield and income assurances. Bankers have more confidence to provide sufficient operating loans.

Ben Riensche, owner and manager of Blue Diamond Farming Co., near Jesup, Iowa, is skeptical of whether farmers will truly benefit from the guarantee trend. But, that isn't stopping him from participating in Bayer's outcome-based pricing pilot program, which shares the risks and rewards of farming.

Riensche depicts farmers as the ultimate gamblers and ag input companies as the casino.

"Most people don't expect to get rich walking into the casino ... they kind of expect the house to win," he says. "They [companies] are looking for ways to extract more value from their products.

"But, if you are a young farmer without much capital or greatly expanded an operation and not in a position to take a lot of risk, [guarantee programs] could be a good management tool," Riensche continues. "If you are well-capitalized and have a great production system, and are already on the high side of average making production choices, this may not be for you."

WHY NOW?

A combination of factors spurred ag companies to start offering various guarantees. Improved data and research, consolidation in agriculture leading to a need to increase product market share, customer demand for innovative pricing options and a lumbering ag economy spearheaded by several years of tight or nonexistent crop margins top the list.

The U.S. Department of Agriculture projects nationwide net farm income this year at $97.7 billion, which is 30.5% below the market peak in 2013. Chapter 12 family farm bankruptcies increased nearly 20% last year from 2018 to 595 filings, according to the U.S. Courts data.

"The evolution of the input industry is beginning to accelerate," says Bruce Sherrick, a University of Illinois professor and ag economist. "Guarantees are a risk-sharing response that does make sense, even if incomes weren't compressed."

Company officials contend guarantee programs supplement, but will not replace, federal crop insurance.

After several years of offering weather protection programs in Australia and other nations, and two years of testing in the United States, Syngenta believed the time was right to commercialize it in the U.S. in 2020.

"The ag economy is tough," says Steven Patton, Syngenta marketing lead for digital ag solutions. "In light of uncertain weather, we desire to provide confidence to invest in a better crop."

GUARANTEE DIFFERENCES

For farmers seeking an income or yield guarantee, several options exist.

Bayer launched outcome-based pricing for corn last year as a pilot program in Illinois, Iowa and Minnesota. It will expand into other states this year and test different versions of the program. Ultimately, a yield target is set based on company research of a product and the farm's data and history from the company's digital ag platform, FieldView.

If the yield guarantee isn't achieved, Bayer will rebate a certain portion of the original price (specifics weren't available at press time) of the product. If the yield is higher than expected, the farmer shares a preagreed portion of additional income with the company.

"While we believe this innovative approach could be an attractive option for farmers to help manage on-farm risk, choice remains important, including the opportunity to purchase products from Bayer as they always have," according to a company statement to Progressive Farmer.

The Growers Edge and Growmark plans differ from Bayer in that neither company seeks a piece of farmer revenue when performance exceeds expectations. But, there is an additional cost besides buying inputs.

Growmark customers must utilize its seed, grid soil-sampling and variable-rate fertilizer applications, as well as follow nutrient- and crop-protection recommendations. Users pay Growers Edge a per-acre fee, which the company couldn't disclose at press time. It guarantees a field -- regardless of crop or location -- will yield 90% or higher of its 10-year annual production history average and the yearly county average. If the plan's performance doesn't meet or beat that threshold, the farmer gets money back.

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Growers Edge declined to provide specifics on cash-back amounts at press time.

"We analyze data and use our risk-management background to guarantee performance," Young says. "A 90% or higher guarantee may not sound attractive, but it lets a grower invest with confidence."

During a pilot program in 2019, Young says farmers averaged a 32% return on investment. He projects the company's warranty-backed product will cover 500,000 acres this year. Growers Edge is working on partnerships and pilot programs with other ag input companies.

Syngenta decided to focus on weather, a key variable to successful yields. To help customers confidently invest in their chemistry and technology, the Syngenta program will share the risk with producers if there's not enough rain during crucial crop-development periods.

A 20-year weather history is utilized to create a unique weather protection offer for any given farm, with up to 30% cash back on qualifying purchases.

When payouts occurred in U.S. test cases in 2018 and 2019, Patton says 15 to 20% cash-back payments were common. One individual payment exceeded $200,000.

"We want to stand with you, Mr. and Mrs. Grower, through our weather protection offer to defend your bottom line," Patton says. "Even with the volatile weather, we seek to help our partners stay rooted in agronomics. That's what the offer is all about."

FARMER FEEDBACK

Riensche offered several hundred of what he describes as his "toughest" acres -- rolling topography and limited water-holding capacity -- in Bayer's program last year. Program corn averaged 178 bushels per acre, 15% less than the yield prediction despite Riensche planting the DeKalb hybrid as prescribed and following nutrient, herbicide and fungicide recommendations.

Under the base formula, he's expecting $30 to $50 per acre back.

"The crop didn't perform as well as they hoped," says Riensche, noting a wet spring played a role. "Weather will trump the very best production plan."

Some young farmers or producers without much precision ag experience could benefit from company-mandated crop prescriptions and production guarantees, he says. But, growers like himself who have embraced technology and prescriptive farming for years may not.

Riensche plans to double acres in Bayer's program despite reservations. If production guarantees are the wave of the future, he wants to be ready.

"I applaud companies for trying ... you have to start somewhere," Riensche adds.

Mark Watne, a grain farmer near Velva, North Dakota, and president of the North Dakota Farmers Union (NDFU), is intrigued by yield guarantees to mitigate risk. However, he warns farmers to thoroughly vet contracts and understand how their data will be used. Companies say farmers retain ownership of data, and sharing it is voluntary but often a requirement for participation.

"From NDFU's perspective, we prefer farmers produce for the marketplace, and they burden the risk and rewards based on the ability to be profitable," Watne asserts. "With that said, it's getting harder to do so. That's where these [guarantee programs] pop up ... which have merit."

PROGRAM HIGHLIGHTS:

Syngenta Weather Protection Program

> Commercial release this year in the U.S. for corn and soybean acres.

> Syngenta shares the risk if there isn't sufficient rain during critical growth periods.

> Precipitation is tracked in 3- x 3-mile "weather blocks," with a 20-year weather history used for the offer.

> A robust weather database consisting of local ground stations and satellite monitoring agency data is used.

> If rain falls short of the target, farmers receive up to 30% cash back on purchases. The less rainfall, the higher the cash back.

Bayer Outcome-Based Pricing

> Currently a pilot program for corn.

> Climate FieldView use required.

> Establishes a yield guarantee based on agronomic information and past yield data using Bayer seed and chemical recommendations, or customized prescriptions.

> Farmers enroll as many or as few acres as they want.

> Multiple participation price levels are available based on risk protection.

> If yield is below expectations, the company will rebate a portion of the product price. If yield surpasses expectations, the farmer shares a preagreed portion of additional income with the company.

WinField United Advanced Acre Prescription Program

> Limited release in 2020 for corn and soybean acres.

> Service warranty for performance of data-backed prescription plan (seed, chemistry and more) and in-season adjustments.

> If customers don't get 95% of their annual production history, WinField will cover the cost of services.

> A 250-acre minimum required.

> Must be approved for secure financing to participate.

> The plan includes agronomist consultations and in-season optimization and tissue-testing.

Growers Edge and Growmark Agronomic Performance Product

> Growers Edge provides a performance guarantee for customers using certain specified products and agronomic practices.

> Growers Edge charges farmers a per-acre fee.

> Plans guarantee a farmer 90% of a field's average 10-year annual production history and county yield average or higher. All revenue is retained by the farmer.

> If the performance guarantee is not met, the farmer receives money back.

> Commercially available through Growmark for the 2020 growing season.

Azotic North America Envita Performance Guarantee

> Purchase and apply Envita, an in-furrow nitrogen-fixing bacteria, at labeled rates per use guidelines on at least 160 acres of corn by June 15, 2020.

> A test strip of at least 5 acres in the same field of application required.

> Apply nitrogen at recommended rates.

> If Envita doesn't increase yields by at least 3 bushels per acre, the customer can opt for free product in 2021 and agronomic support or $5 per acre cash back.

> Follow Matthew Wilde on Twitter @progressivwilde.

FOR MORE INFORMATION

> Azotic North America: www.azotic-na.com/guarantee
> Bayer: www.bayer.com/en/crop-science-division.aspx

> Growers Edge: www.growersedge.com/agribusiness
> Syngenta: www.agriclime.us

> WinField United: www.winfieldunited.com/product/advanced-acre-prescription-program

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