The Numbers Just Don't Add Up
In my role as CEO of Growers, helping to determine the price of our product is of vital importance to our organization. Understanding the process we use for setting our price has called into question how others in our industry set the price for the products they sell. Seeing the large increases in fertilizer prices over the last year, and understanding what I know about the true costs associated with the raw materials that are used in fertilizer production, has led me to explain out loud: "Where are these prices coming from? The numbers just don't add up!"
So, a little background: At Growers, we have always taken the approach of setting our price based on the actual costs involved in production (with the raw material cost being far and away the largest) and added a reasonable return on our investment. That process has served us well, as our product does a good job for our customers to add value for their investment in our product.
At Growers, we use the highest quality raw materials available in the production of our product. Those high-quality raw materials tend to be the highest cost raw materials that are used in most agricultural production. In addition, in the world of commercial agriculture production, we are a very small operation. Our ability to get favorable pricing on raw materials is limited by the quantity that we use.
Contrast that with others in the fertilizer marketplace. The actual costs for the raw materials that they use are much less than the raw materials that we use. And generally, they are much larger than we are and can get very favorable pricing because of the volume of raw materials that they use.
So, knowing that others in our industry are using much less expensive raw materials and that they can buy those cheaper raw materials at a much better price, why has the price of fertilizer risen so much over the last year? Over the last year, the price of Growers has increased about 20% and that increase is due entirely to the actual increases in our costs of raw materials and transportation. Others in the industry have raised their prices from 40-90%.
Knowing what I know about fertilizer production and all that goes into transportation, distribution, and marketing has made me say out loud, "Where are these prices coming from? The numbers just don't add up!" Well, the answer is actually very clear and does a good job at highlighting the difference between how we operate our business and now others operate their businesses.
To illustrate this, here is a real-world example that helps to show how others in the world of business operate their businesses. Some of the high-quality raw materials that we use come from overseas (as a rule, we buy locally and domestically whenever we are able) and the materials are shipped on standard sized shipping containers. Up until four months ago, the cost to ship a container from overseas to America was $2,000. It is now $20,000! Do you think the cost to the shipping company has increased by $18,000? Of course not. It is a clear example of the power of the marketplace and the natural force of supply and demand that has prompted that increase.
There is nothing wrong or illegal about that. It is how much of the world does business. But it does help to illustrate the differences in how we operate our business and how others operate theirs. Do you think the large increase (40-90%) in the price of most fertilizers was due to the increase in the costs of those fertilizers, or because the force of supply and demand had the power to increase the price? In my opinion, those prices went up because they could go up. Fertilizer companies saw the increase in commodity price and saw an opportunity to increase their bottom line by raising the price of their product. Not because their costs went up, but because they saw an opportunity to make more money.
Again, there is nothing inherently wrong with that way of doing business. But it does help to show that how we choose to operate our business is different than most others in our industry. We like the idea of being different, not for the sake of being different but because we think it helps to benefit our customers and builds long term relationships based on value and share success.
After 67 years of working hard to put our customers first, I feel those kinds of numbers add up just fine. Have a great fall and a prosperous 2022!
This is an excerpt from the Late Fall Growers Solution (2021), written by Rick Bobel, President of the Board of Directors.
Signup for our newsletter to stay in the loop
