Marketing Programs and Farmer Rebates: Good or Bad?
Highlighting the reality of manufacturer rebate programs
Rebates: The ‘Gift’ That Has Gone Too Far - Country Guide
This was an interesting article on farm rebates. I thought it asked questions worth asking, though I don’t agree with everything in it. I appreciate the questions being asked and I wanted to highlight various pieces of it.
Programs are one of the most divisive topics in farming. There are varying opinions from all areas of the industry on them. Commentary consistently heard on the cons side is that they are tedious, take forever to pay out, bad for sound agronomic decisions/incentivize action outside the farmers best interest, cost farmers more, benefit big farmers disproportionately and many more. The reason they are done by manufacturers and even retails though I actually highlighted last week:
increase customer loyalty
increase the relationship with the customer (both distributor/retail and farmer)
increase share of wallet
incentivize adoption of new products
to acquire more information about customers
programs put a theoretical floor on pricing to prevent a “race to the bottom” in the instance of retails (commoditization protection)
They ultimately work for manufacturing companies more often than not for the above bullet points, which is a lot of what drives them.
The author goes through an example where a smaller farm of 1000 acres doesn’t qualify for the same rebate size as a larger 3000ac farm and states the following:
Smaller farm operations should be asking why this price discrimination is allowed to continue.
Lets zoom out of farming for a second and look at other industries.
If I want to start up and scale a frozen food company I need to find a co-packer and guess what? If I have a larger order size, my price per unit goes down. What about if I want to start a t-shirt company and look to a factory in China? Same thing. Economies of scale is a real thing, in every industry.
Plus, part of the incentive needs to be for larger farms to switch a higher p[percentage of their acres to a specific product, that’s where these number come in as well.
These predetermined rewards are not a win or freebie from the pesticide company. Rather, they represent interest-free loans from the farmer to a global corporation.
It’s an interesting point. One could make an argument that it supports working capital for the manufacturers and is an increased burden on farmers, but based on the way manufacturers accrue for the $$, it likely isn’t significant. But within this, that to me doesn’t signify that programs are inherently bad, it signals they can be improved through new approaches and systems to more readily reconcile programs in season (I covered this last week for those interested).
Programs are extremely complicated and unfortunately that is part of their secret sauce. They work because there are a lot of moving parts and considerations.
More importantly, are the pesticides that you must purchase to maximize your rebate the best products agronomically for your pest problems?
This is a fair question. But to me, this held more weight 10 or 20 years ago than today. Since the recent M&A, check out the big 4 manufacturers product portfolio’s objectively and what you’ll find is you can accomplish very similar outcomes across all companies portfolio’s.
I’d venture a guess that there is more detriment to annual farm profitability in North America because of incorrect weed ID, sub optimal timing of fungicide application, poor coverage of seed treatments or trying to save money with an inferior product (say a low end herbicide when a mid-high tier product should have been considered) than there is detriment because of poor decisions due to programs.
Does it occur at times? Probably. But if we focus on that negative of programs, we must also acknowledge the times they encourage more rapid adoption of innovative products that benefit the farmers bottom line and the output of the industry.
This brings us to an often cited pro side of supporting manufacturer programs: they drive innovation. As I alluded to above, I think they can. But it’s worth taking a deeper dive.
If we look at the big 4 manufacturers, they have increased their total sum of R&D sales in the last 5 years, but as a percentage of sales the numbers have all stayed relatively flat (big 4 annual reports show).
Is this reason enough to support programs and branded products? Depends on your stance.
Innovation has plummeted if judging by the output of new active ingredients:
In a lot of ways, it’s unfair to judge purely on output without considering other factors, like cost to bring products to market:
The price to bring new actives to the market from ‘95-’14 years almost doubled, and extrapolating out to 2021 I am sure it now has, meaning those R&D dollars do not go as far and every dollar spent on R&D goes towards other uncontrollable factors.
What’s interesting though is that in the last 20 years we have seen just as much active ingredient innovation from the Japanese chem discovery companies as we have the big 5! In July I analyzed a document and Sumitomo for example had the equivalent or more in terms of number of active ingredients discovered in the same time frame as FMC, BASF, Corteva and Syngenta, only trailing Bayer.
Of course I am focusing more on active ingredients because of talking programs and for simplicity sake, but it’s necessary to note innovation can come in others ways: patents, formulation knowledge, seed trait discovery etc. that I am not highlighting.
One point worth noting though is corporate VC: In the last 5 - 10 years more dollar are being allocated to corporate venture funding: Bayer, BASF, Syngenta and FMC all have corporate venture capital arms. I mentioned it last week, but in pharmaceuticals we see more innovation coming from start-ups and the same is likely in agriculture in coming decades. This means a robust corporate VC emphasis can do as much or more to drive innovation within agriculture. This of course means that maintaining specific margins on products is required to continually feed areas of the business like corporate VC.
So does supporting branded products and therefore programming help drive innovation? In theory, yes it should, but it will come in slower, less traditional places in the future.
Finally, most farms operate on high costs and low margins, so when they see an offer of a 15 per cent, 18 per cent and even 20+ per cent rebate, it prompts them to question just how much money the pesticide manufacturers must be making if they can offer their best customers such big discounts on their pesticide purchases.
Margin information is freely available, here is one consolidated overview from Starboard:
For context, these numbers are similar to slightly less than what one would see in a relatable industry like pharmaceuticals.
The author goes on to raise some good points about what drives loyalty, punctuated by this statement:
What farmers really want is value for their pesticide dollar. That means much more than price. They want great products at a fair price. They want product warranty and performance guarantees. They want personal service where everyone has access to information about the product.
Most importantly, farmers want a relationship with company personnel who can assist and answer questions.
Have the pesticide manufacturers gone too far by marketing through reward and rebate programs instead of service?
If we take a step back and ignore programs for a second, manufacturers have added value, in spades in the last decade!
Lets consider (note: I am speaking primarily on western Canadian initiatives - this may vary across geographies):
Manufacturers have continued to evolve products, whether it be with brand new active ingredients, or continued new mixes and combinations of actives that have a specific market fit. But what’s more:
They have increased personnel. Many manufacturers, especially the heavily programmed ones, have expanded their number of on the ground sales people to extend to individuals that solely focus on farmers. This directly enhances manufacturer/farmer relationships and the value that could be added to the farmer. Of course within this, programs are part of the tool kit that enables a more meaningful discussion between the sales rep and farmer in some cases.
On top of this, the number of technical people has increased as well; individuals solely focused on expanding out company trialling initiatives and technical expertise around products and their agronomic fit. I do not have data to back this up, but I would confidently say the number of well done trials done in conjunction with farmers has expanded significantly over the last decade.
Distribution capabilities have increased as well with manufacturers. This gives them a more fluid understanding of what’s going on in the market place and a better ability to ensure products get to where they need to be when they need them, an important part of service.
Many manufacturers have created more and more robust tools to support farmers. Whether this was with more physical books and training to help educate them on products and problems, or now transitioning to more digital tools to support. There is a lot of emphasis on supporting farmers with a better product experience.
What is compelling based on some info I pulled from Stratus Research, which was from the USA,, actually showed most farmers don’t mind programs:
Among those farmers who participated in a grower rewards program in 2019, 50% admitted that the program had an impact on their brand purchase decisions. Only 29% of farmers said that they ignore program offers.
There is more to add, but I think it’s safe to say if one considers how the industry has evolved over the last number of years, manufacturers have continued to invest in further supporting farmers to make better decisions and have stronger relationships (this doesn’t even include the additional support to retails).
Even on the “performance guarantees” comment, we might see those very approaches in the market in a more meaningful way in the future.
In reading through this you might conclude I am on the side of more programming, which isn’t necessarily the case. I actually groaned about programs for the majority of my career.
But what I see when it comes to programs are entrenched practices that work well for the organizations that hold a disproportionate amount of power over retails and farmers, that also ARE working to add value in ways outside of just programming everyone to death. The interesting part is that as these organizations continue to add value to the market place through people, tools and asset investment (say seed treater technology), they continually increase their influence over farmers and retails which actually gives them more weight to throw around in terms of keeping programs.
Generic companies, or organizations like FBN are working to erode this entrenched situation, but even if they are successful, it will not happen quickly.
I think the best bet to manage programs in the short term for farmers or retails is to identify ways to optimize programs and interpret programs in real time. This is something for example that organizations like Agro.Club* is working on.
Of course, there are challenges to this, but I think it’s more likely to get a better outcome than constantly telling manufacturers to get rid of the programs; the incentives aren’t in any manufacturers favour for a manufacturer to be the first to get rid of programs, or at all.
I do not see a short - medium term move away from programs, and even when there might be a move away from “marketing programs”, that’s when we will see new programs ushered in: outcome based pricing or carbon programs (although I think these are related) which actually will achieve similar things for manufacturers that marketing programs did, but they will have a different spin.