Big Ag Eyes Cut of Farmers’ Profits in New Pricing Program
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Agribusiness wants to dramatically change the way farmers value and pay for a bag of corn seed, to get a second bite at producer profits. Bayer, the world’s leading seed manufacturer, has been piloting an “outcome-based” pricing program that adjusts the cost of its seeds or agrichemicals based on how well its products perform. Farmers and antitrust scholars worry that goliaths such as Bayer will use this data-driven pricing program to further squeeze farmers and to lock more growers into the behemoths’ product bundles and digital agriculture platforms.
Bayer started its outcome-based pricing pilot in 2019. Rather than pay a flat rate for seeds or agrichemicals, the program sells products based on a performance guarantee, such as a specific crop yield or level of weed reduction. If the product doesn’t deliver, Bayer will refund part of the cost. But if the product exceeds expectations, Bayer will take a portion of farmers’ additional profits, perhaps as much as 50%, according to one report.
The pricing model is made possible by digital agricultural tools that analyze massive amounts of data to understand how different pesticides or seeds perform in different farming conditions. As a part of their mega-merger in 2018, Bayer acquired Monsanto’s leading digital agriculture platform, Climate Corporation, which collects data on more than one-third of all U.S. farmland. Bayer uses its growing trove of agricultural data to calculate these product performance guarantees, and Bayer requires farmers in the pilot program to follow the prescriptions from its digital agriculture programs.
While Bayer representatives say that outcome-based pricing helps farmers “manage risk,” the pilot has raised concerns among farmers, especially about sharing profits. “It’s an economic exercise by big corporations that are involved in oligopolistic pricing to extract more profit from the marketplace by using farmers’ own data,” said Philip Shaw, a grain farmer from Dresden, Canada and a columnist for DTN’s Progressive Farmer magazine. “It all has to do with increasing their margin; it’s a problem.”
Farmers argue that Bayer might unjustly attribute increased yields to its products, even though tillage, crop rotations, weather, and many other factors influence yields. Bayer representatives have retorted by saying that they rely on farmers’ historic data and require that farmers follow Bayer’s management recommendations to isolate the influence of the products. However, this assumes that farmers will not change farming methods from year to year. Bayer’s conditions would limit farmers’ management autonomy and remove incentives to innovate or diverge from Bayer’s prescriptions, posing a potential barrier to adopting or inventing new techniques and conservation methods.
Farmers and antitrust scholars also worry that agribusinesses will manipulate prices and squeeze farmers through outcome-based pricing. Shaw says that seed prices already vary by region, as seed purveyors can charge farmers more in areas where products perform better – but these price differences are not transparent. These discrepancies would only become more common and targeted with data-informed outcome-based pricing.
In addition to opaque pricing schemes, farmers have no way to see into the black box of Bayer’s predictive algorithms to find potential biases or to evaluate the accuracy of its performance guarantees. Agribusinesses have an incentive to underpromise, in order to avoid refunds and claim more of farmers’ profits. “You have this asymmetry in information,” says University of Tennessee law professor Maurice Stucke. “My concern would be, are [corporations] setting the benchmark too low in a way that they are going to get a greater share of the profits?”
In addition to concerns about incentives to underestimate and opaque pricing schemes, farmers worry that Big Ag will use their farm data to estimate their profits and price products at exactly what they are able to pay. Such personalized pricing, also called first-degree price discrimination, allows corporations to extract maximum amounts from consumers. “It used to be when you paid for a product, you paid for it and left,” says Shaw. “Now … they can really find out how well you are doing and … even measure the farmer’s gross margin and price the product higher, according to his ability to pay.” Indeed, concerns about ag data privacy and price discrimination recently prompted the farmland rental startup Tillable to cut ties with Bayer’s Climate Corporation. Tillable denies all allegations of price discrimination.
Outcome-based pricing could further entrench the Big Four’s control over seed and agrichemical markets and the burgeoning digital agriculture industry. By requiring participants to use its data services, Bayer is inextricably linking its digital farming products to seed and agrichemical sales. This locks more farmers into Bayer’s Climate Corporation platform and fortifies its competitive advantage over digital ag startups in the race to collect farmer data and build the most accurate ag-tech products. “Barriers to entry into the data processing component are enormous,” explains Peter Carstensen, professor emeritus at University of Wisconsin Law School. “The first mover advantages are, if not insuperable, at least very, very difficult to overcome.”
As a dominant provider of data-driven farm management recommendations, Bayer can strongly push farmers toward its products and further marginalize competitors. “The more you can do to lock out all these independent data services, the better you are as a seed-maker,” says Carstensen. “There is no way that Bayer is going to recommend that you plant Syngenta seeds or Dow seeds. … This builds in a whole new level of inhibition on the growth and development of independent seed producers.”
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