Business Week e.biz -- Strategies
Old MacDonald Has a Web Site
Online exchanges for farmers are cutting costs for seed, feed, and chemicals while boosting prices for products
On his pig farm in Arena, Wis., Rick Lawinger is planning to sell some swine, namely 230 castrated male feeders being fattened for market. But instead of making his way to the nearest livestock auction, Lawinger heads to his computer. For this herd, the journey to the slaughterhouse begins online. Lawinger has gone hog-wild for the pig auctions held every Tuesday at
Farms.com, an Internet farming and livestock exchange. When Lawinger first tried the Web site in late February, the 47-year-old farmer sold 300 pigs at $63 a head, even though he had estimated their value at only $56 a head. Now, Lawinger hopes to cybersell 10,000 pigs this year--his entire herd. "When local dealers come around looking to buy, I refer them to the Web site," he says.
Farming, one of the world's oldest industries, is learning some New Economy tricks. Hit by the lowest commodity prices in 13 years, farmers are increasingly looking to the Internet to hike sales and cut costs. The Web gives them a global marketplace to sell their products. Instead of driving to auctions and sales sometimes two or three states away--spending money on motels and restaurants and missing a day or two of field work--farmers can go online in mere minutes. And by cutting out middlemen such as dealers and distributors, sites such as DirectAg.com, XSAg.com, and Farmbid.com can offer savings of up to 30% on everything from seed and fertilizer to crop-protection chemicals. "With our profit margins so tight, those savings can mean a lot," says Alabama cotton farmer Larkin Martin.
The Internet and farming may seem like an odd couple, but in reality, they may be a perfect match. The farming industry is highly fragmented, with lots of buyers and sellers and a thick layer of intermediaries adding substantial markups at each level. That, say analysts, is fertile ground for a more efficient system, particularly online exchanges where buyers and sellers can haggle. "By cutting out all those extra layers, these farming exchanges are really putting downward pressure on prices," says Bruce A. Babcock, director of the Center for Agriculture & Rural Development at Iowa State University.
They're attracting customers, too. Already, an estimated two dozen agriculture e-commerce sites are up and running, with more in the works targeting the $826 billion industry. The sites appeal largely to the small and midsize independent farmer who doesn't buy in enough volume to demand rebates or discounts from dealers. While the online market is still young and many cybersavvy farmers are trying these sites for the first time this year, major manufacturers of farm products, such as DuPont and Cargill Inc., are heading to the Net. Goldman, Sachs & Co. predicts that $35 billion worth of farming commerce will be conducted over the Internet this year. By 2004, sales will skyrocket to $124 billion, when agriculture's share of the entire business-to-business online economy will be over 8%, the fifth-highest industry sector. "We're suggesting to all of our 1,000 members that they develop an Internet strategy," says Paul E. Kindinger, president of the Agricultural Retailers Assn., a trade group for nutrient and seed sellers.
Investors aren't ready to bet the farm yet. While the majority of farming exchanges are still private ventures, the most notable exception, eMerge Interactive Inc., a Florida-based e-commerce company that owns Cyberstockyard.com, has been floundering. On Feb. 4, eMerge closed its first day of trading at more than $47 a share, but it is currently trading around its asking price of $15. Analysts say there's a perception that agriculture is a slow-moving industry populated by Luddites. "It's not even bricks and mortar. It's dirt," says Marshall Cooper, executive vice-president of Kennedy Information Research Group, a Fitzwilliam (N.H.) market researcher.
Farmers may be more cybersavvy than people think. The number of U.S. farms with Internet access has more than doubled in the past two years, according to a report by the National Agricultural Statistics Service. In 1999, 29% of all U.S. farms were online, and 52% of farms with sales above $250,000 had Net access. Some experts note that farmers have traditionally been willing to adopt new technologies in areas such as weather forecasting, satellite imaging, and biotechnology. Why not the Net? "Farmers will look at any new technology that makes their jobs easier," says Babcock.
That doesn't mean there has been a stampede to the Web. Ben Zaitz, a North Carolina cattleman and founder of Farms.com, says he was laughed at by fellow cattlemen five years ago when he started his online business. "They thought I was crazy." Zaitz had grown frustrated with shrinking profit margins as the dairy business struggled through the '90s. He saw promise in the Net, got out of the cattle business, and in 1995 created Cattle Offerings Worldwide (COW), an online database of classified listings of beef and dairy cattle. Zaitz eventually branched out into grain- and crop-protection chemicals and changed the name of the business from COW to Farms.com. Then he added live auctions. In addition to the weekly pig auctions, Farms.com holds live cattle auctions every two weeks. Zaitz moves 15,000 head of swine and 5,000 head of cattle per week. The site has 1,000 registered customers, and Zaitz believes that more will follow as farmers get comfortable with livestock auctions on the Internet. "We had a difficult time proving to the industry that this would work," he says.
Pig farmer Lawinger doesn't need more proof. By reaching far beyond the Wisconsin area, Farms.com auctions have increased his hog prices an average of $5 a head--without spending extra thousands on advertising or traveling expenses to show the hogs outside the state. "This is a part of our business now," he says. "I couldn't be happier." Using Farms.com also gives Lawinger more quality control over the selling process. Pigs are highly susceptible to several diseases, and, by selling and shipping directly to buyers, Lawinger can keep his hogs away from potentially infectious animals in traditional auction pens.
Auctions on Farms.com work similarly to consumer auction sites such as eBay. The buyer and seller handle the transfer of funds and transportation of products, while the seller pays Farms.com a 2% transaction fee. Farms.com also generates revenue by selling classified listings and online advertising, but the real goal is to turn the site into an information-and-services portal, says CEO Robert Sparks, an agribusiness entrepreneur who was brought in to run the business in mid-March.
Livestock is just a small slice of the agriculture products being peddled online. Farmers spend $24 billion on animal feed annually and $7 billion more on seed, both of which can be bought in cyberspace. Launched in January, 1999, North Carolina-based XSAg.com sells seed and agriculture chemicals from manufacturers that include DuPont, AstraZeneca, and Bayer. Buyers can choose fixed-price products from an online catalog, participate in an auction, or name their own price for products, just as it's done on priceline.com. Buyers and sellers must register, providing banking information, regulatory-licensing data, and a shipping address. When a purchase is made, XSAg's bank, Bank of America Corp., automatically pulls the funds from the buyer's account and puts them in escrow. A freight company is dispatched to pick up and deliver the goods. The buyer has 48 hours to inspect the product. If there are no complaints, the money is transferred to the seller, minus a 2% transaction fee.
At XSAg, sellers have the option of remaining anonymous during the entire transaction. That way, a supplier that normally sells pesticide at $35 a gallon can unload excess inventory at $28 a gallon without angering his higher-paying customers. "Whenever you allow a seller to be truly anonymous, the savings can be outrageous," says Fulton Breen, founder and CEO of XSAg's parent company, XS Inc. Breen estimates that buyers can average more than 29% savings on products bought at XSAg. To date, the site has 50,000 registered users.
Texas cotton grower Jerry Brightbill started using XSAg.com in March, 1999, to buy herbicides and insecticides. He bought 15% of his chemicals through the site last year and saved $25,000. "It has been fantastic," he says. Brightbill plans to purchase nearly 40% of his chemicals online this year and hopes to save $50,000.
The low overhead needed to start an Internet e-marketplace allows many entrepreneurs to get rolling with little capital investment. Ted Farnsworth launched Farmbid.com last July with personal funds and loans from family and friends totaling $500,000. To date, he has 90,000 registered users. Farnsworth has been able to expand his Fort Lauderdale (Fla.) company from a strictly farm-equipment auction site to an agriculture portal offering news, weather, and online-catalog sales. "We want to be the Amazon.com of the agriculture business," Farnsworth says.
He has a long way to go. So far, Farmbid's largest transaction was $60,000 for a tractor. The smallest? "Two dollars for cow tags," Farnsworth says. "I was shocked people would buy them online." Farnsworth plans to add more commodities and livestock in the near future. Farmbid auctions are similar to consumer-product auctions such as the ones on eBay. Sellers select a minimum bid and determine how long the auction will last--anywhere from 1 to 30 days. The buyer and seller handle the transfer of funds and shipping of the items, and the seller pays a 5% transaction fee. Farmbid's fixed-price online catalog contains some 1,300 items from 12 suppliers, who pay a sales commission of 5% to 15%. "Suppliers can sell globally, and buyers can avoid the usual 15% to 20% markup applied by the middlemen," Farnsworth says.
Farmbid offers everything from John Deere tractors to New Holland manure spreaders. Gary Pope, a farming equipment dealer in Eau Claire, Mich., began using Farmbid in February to sell tractors and other equipment to augment his usual sales channels of trade-magazine ads and equipment brokers. In less than three months, Pope has sold $200,000 worth of goods online. He estimates that it would have taken nearly twice as long to do that through traditional channels. "I've increased sales at least twice as much," Pope says.
The real prize may be in ancillary services. Farnsworth's ultimate goal is to turn Farmbid into a virtual co-op, a buying club for farmers who can purchase agriculture goods in bulk and demand large rebates. He also wants to offer discount rates on insurance, banking, and travel to harried farmers. "Their scarcest commodity is time," he says. "There's a huge market out there for someone who can provide that convenience."
That may be the best way to rise above the growing online competition. With 15 suppliers and 20,000 registered users, Kip Pendleton, CEO of farming site DirectAg.com, is heading in that direction. In addition to selling machinery, seed, and animal-health products, DirectAg also offers financial services.
Otherwise, agricultural entrepreneurs such as Pendleton could get crushed. In March, agribusiness giant Cargill, chemicals manufacturer DuPont, and farming co-op Cenex Harvest States announced that they are developing an e-commerce mall called Rooster.com. Scheduled to launch on May 1, Rooster will sell seed, pesticides, fertilizers, and farming equipment. Rooster signals a change in direction for DuPont. The company's subsidiary, Pioneer Hi-Bred International Inc., the nation's top seed supplier, previously balked at the idea of online sales, insisting that seed was too complex. "E-commerce is here, it's real, it's not going away, and we need to figure out a strategy," says Tom Hanigan, chief information officer at Pioneer.
Although they're coming late to the game, the big guys have the edge. A successful online exchange needs volume, and major suppliers can attract the masses. The test will be whether sites such as Rooster can remain neutral, allowing equal access to a broad range of suppliers. "Farmers will get suspicious if they suspect an e-marketplace is in the pocket of a few large suppliers," says Forrester Research Inc. analyst Bruce Temkin.
So far, farmers such as Lawinger are sold on Web exchanges. The Net saves time, and for farmers, "time is money" is gospel. "This is definitely where the market is going--putting the producer in direct contact with the buyer," says Lawinger. Improving efficiency and cutting farmers' costs may be enough to turn these Web exchanges from cow chips into blue chips.e.biz online
For a Q & A with Farmbid.com CEO Ted Farnsworth, see ebiz.businessweek.com.By Darnell LittleReturn to top