Outcome-based Pricing Aims to Reduce Farmers’ Financial Risk
By Ben Nuelle, Associate Editor at Agri-Pulse
via Hoosier Ag Today - Jan 9, 2020
A recently developed pricing model is making its way into the seed industry, and one company is hoping it will be another tool for farmers to offset financial risk at a time when weather, trade, and commodity price uncertainty are plaguing the market.
Bayer Crop Science is continuing a 2019 pilot program again this year on outcome-based pricing. The model bases prices for the company’s products on a perceived value of how they performed during the growing season. It’s a more fluid pricing structure than traditional models, which have based prices on overhead costs necessary to make and market the products.
Think of outcome-based pricing like a flex-lease agreement, or a risk-sharing agreement between a farmer who rents crop ground from a landowner.
The farmer and company would agree on a base price for the seed at time of when the seed is purchased. If the yield from the crop at harvest is below what is expected, the farmer gets a refund. If the yield is higher than expected, the farmer would pay an additional premium reflecting the better yield.
“It’s all around choice,” Bayer Crop Science’s Chad Bilby said at a recent Farm Foundation forum. “We see this as another choice farmers can have in how they want to purchase seed or if they want to mitigate risk.”
But Bayer also sees this as a beneficial model to drive incremental sales. Mike Stern, head of Bayer’s digital farming efforts and the Climate Corporation, referenced that potential outcome in a December presentation, the slides of which were posted online. His presentation also included survey results showing 74% of farmers would be “more likely to purchase a product with outcome-based pricing,” and half of producers said they would be “likely to switch brands.”
Bilby said Bayer continues to get feedback from farmers about the pilot pricing model. One farmer participating in the program is Ben Riensche of Blue Diamond Farming Company from Jessup, Iowa.
“On one hand I can see this intuitive trade-off,” Riensche told Agri-Pulse. “By buying a bundle of goods from one manufacturer for a sliding price scale — small payments if it’s a small harvest, larger payments if its large, could be a good way to de-risk the system.”
He sees benefits of reducing input costs but is aware of potential downsides with the program.
Riensche noted the model could be a way of “inviting the fox into the chicken coop,” allowing companies to obtain yield data from the farmer to make the program work...