The coronavirus crisis has shaken Europe at every level - including the agricultural sector. Export markets have been shut, various commodity and output prices have decreased causing substantial financial pressure for many farmers.
Not to mention the stringent environmental rules and regulations that the industry has been facing for many years, the scarcity of good employees, required unplanned expenses to adopt more digital processes, and the reliance on seasonal work depriving farmers from a positive cashflow throughout the year. The farming landscape is complex and increasingly challenging for many players, while the sector remains essential to continue to feed the world.
Flexibility and liquidity seem to be critical to anticipate today’s volatile markets and help surviving the current circumstances. However, in order to prepare the agricultural sector for this we need to move away from mainly ‘buying things’ to ‘experiencing’ outcomes.
Traditionally, the agricultural sector has been focused on ownership of equipment, meaning farmers are tied to a piece of equipment for years and remaining liquidity is limited. Liquidity that is needed to cover the costs of switching to improved technology or expanding the machinery park with additional equipment. Far from ideal if your business is being overwhelmed with volatility and uncertainty.
AGCO Finance closely monitors the market including the dynamics of retail finance. Under the current crisis circumstances, the market seems to be cautious about new investments, which is understandable. On the other hand, investments might create opportunities, think about replacing a less efficient machine which benefits the harvest and so your business. Beyond that, newer technology is more friendly to the environment enabling you to better comply with new regulations that tend to increasingly focus on sustainable farming operations. Take for example the Green Deal of the European Union committed to boost the efficient use of resources by moving to a clean, circular economy to restore biodiversity and cut pollution. Not surprisingly, the European Investment Bank (EIB) recently provided special funding, available also to AGCO Finance, enabling us to provide lower interest rates for more sustainable equipment, such as machinery with Stage V engines, that contribute to a greener economy.
Current circumstances ask for more flexible investment and machinery payment solutions. There is a promising trend tapping into this, Servitization. In general, fewer and fewer people are buying conventional products and services, instead more and more are seeking to buy the ‘outcomes’ that these enable. In other words, rather than ‘buying a car’ commuters want ‘mobility’. Servitization is a way to get access to equipment and services (installation, maintenance, warranty etc.) easily and economically by combining both into a single package. It can even be added to a pay per use contract to be most flexible.
Servitization takes you away from equipment ownership, to ‘just in time’ access the moment it is needed. Focus is not on owning equipment, but on experiencing ‘outcomes. It is about having access to equipment without carrying the responsibilities of ownership. A nice example are all-inclusive rentals from 6 up to 36 months; a financing solution including extended warranty, service and maintenance, thereby establishing peace of mind. Additionally, quite recently, connectivity services can be added, which is a steppingstone for precision farming.
Another way of benefitting from new tractors without buying commitment upfront, is the rent to try solution, offered by an increasing number of dealers, whereby customers can experience the machine on their field before they decide renting it. At the end of the agreed financing term customers can choose what fits them best: extend the contract, replace with a new machine, buy the asset, or simply return it.
Servitized solutions might help the industry moving forward by marrying flexibility, liquidity (cost transparency), innovation and peace of mind.
So, despite the tough circumstances, let us not be blinded by limitations and challenges, but think in possibilities. Financing solutions can be customized to customer’s revenue streams avoiding unnecessary cash flow burden caused by seasonal income or for example the COVID-19 crisis. Deferred payments or a bigger balloon payment at the end of the contract can be considered to ensure low monthly or seasonal rentals while benefitting from the use of the new machine.
The current market asks for flexibility to secure a healthy liquidity level. Servitization enables you to go even beyond that. In addition to securing investments, it facilitates more sustainable farming operations. Despite current uncertain circumstances, Servitization can help the agricultural sector to focus on their primary and essential objective continuing to feed the world in a sustainable way.