Internet Plus to Reshape Agricultural Input Distribution, Market Size to Reach Trillion-Yuan Level

Introduction

The 21st Century Institute of Macroeconomic Research believes that “Internet Plus” could potentially overturn the traditional agent distribution model of the agricultural input industry, pushing distribution channels to become flatter and triggering a chain reaction of change across the agricultural input industry and agriculture. Over the next five years, competition and cooperation among agricultural input enterprises and e-commerce enterprises around logistics, services and finance will become another main line of development. With agricultural input e-commerce at its core, a rural market worth trillions of yuan may take shape.

Dai Chunchen, Analyst, 21st Century Institute of Macroeconomic Research

Internet Plus agricultural inputs is forming a new blue ocean.

In the just-passed months of July and August, Taobao's agricultural input channel and JD.com's agricultural input channel were launched one after another, marking the official entry of e-commerce giants into the agricultural input arena. In recent years, leading agricultural input production and distribution enterprises such as Kingenta, Noposion and the national supply and marketing system have all marched into the e-commerce field, and a landscape of agricultural input leaders facing off against e-commerce giants has taken initial shape.

On the one hand, the new normal in agriculture brought about by the shift of agricultural business entities toward large-scale and intensive operations offers profit potential for agricultural input e-commerce; on the other hand, problems that the agricultural input industry has long faced in serving scattered smallholders, such as excess product supply, an bloated multi-layered intermediary channel structure and homogenized competition, have become increasingly prominent, and connecting agricultural inputs to the internet has opened a breakthrough for the transformation of agricultural input enterprises.

The 21st Century Institute of Macroeconomic Research believes that “Internet Plus” could potentially overturn the traditional agent distribution model of the agricultural input industry, pushing distribution channels to become flatter and triggering a chain reaction of change across the agricultural input industry and agriculture. Over the next five years, competition and cooperation among agricultural input enterprises and e-commerce enterprises around logistics, services and finance will become another main line of development. With agricultural input e-commerce at its core, a rural market worth trillions of yuan may take shape.

Reshaping the Agricultural Input Distribution Model

Compared with industries such as daily consumer goods that have a relatively high degree of e-commerce penetration, agricultural inputs were “online” five to ten years later, which is not unrelated to the fact that the agricultural input market is “hard to crack,” but the more important driving force comes from the upgrading of the agricultural industrial structure.

Around 2010, led by the acceleration of land transfer, agriculture entered the 2.0 era of large-scale and intensive business entities, followed by the emergence of the “Agriculture 3.0” era represented by agricultural informatization and big data from the Internet of Things.

On the one hand, land has been consolidated on a large scale in contiguous tracts, and new-type large-scale agricultural business entities such as large growers and breeders, farmers' professional cooperatives, family farms and leading agricultural enterprises have continued to emerge; on the other hand, against the backdrop of emphasis on ecological and environmental development, the Ministry of Agriculture proposed for the first time at the beginning of the year that by 2020 China's agriculture should reduce the use of chemical fertilizers and pesticides and achieve zero growth in fertilizer and pesticide use. These two changes constitute the current new normal of Chinese agriculture.

This new normal has greatly shaken the current “smallholder economy” and the distribution model suited to it. For a long time, China's agricultural production and operation entities have mainly been hundreds of millions of small households and scattered smallholders, typically characterized by small operating scale, extensive production methods and few, scattered plots of land. The current agent distribution model was developed precisely on the basis of small households and scattered smallholders. In this model, agricultural input products must pass through regional agents, city and county, township, village and other multi-layered channel intermediaries from the factory before reaching farmers' hands.

This agent distribution model has led to two major “pain points” in agricultural production regarding price and quality:

First, high prices. Agricultural input products are marked up layer by layer through multiple intermediary distribution links, with extremely high gross margins, forcing farmers to bear excessively high prices;

Second, quality is difficult to guarantee. Because the agricultural input industry has low entry barriers and is highly fragmented, making regulation difficult, quality and safety problems such as fake pesticides, fake fertilizers and mislabeled seeds emerge endlessly. Taking pesticides alone as an example, of the 1,086 pesticide samples drawn by the Ministry of Agriculture from 21 provinces in China in August this year, 130 unqualified samples were detected, an unqualified rate of 12.0%. Among them, 74 were found to be fake pesticides (where the declared active ingredients were not detected or other pesticide ingredients were added without authorization), accounting for 6.8% of the total number of tested samples and 56.9% of the unqualified samples.

From a theoretical perspective, e-commerce has the potential to alleviate the “pain points.” When farmers place orders online, agricultural input products can be delivered to farmers' hands by manufacturers or provincial-level agents, and this kind of flat distribution poses no technical problem. In addition, the supervision and credit evaluation systems of e-commerce platforms can also, to a large extent, ensure the “quality” of agricultural input products. However, in the past, small households and scattered smallholders placed few orders and required scattered delivery, so selling agricultural inputs via e-commerce was not realistic. With the arrival of the new normal of large-scale, intensive agriculture, agricultural input e-commerce now has realistic profit potential.

So far, agricultural input e-commerce platforms mainly fall into three categories: first, e-commerce platforms initiated by agricultural input giants, such as “Nongyi Wang” initiated by the pesticide enterprise Huifeng Co., Ltd.; second, e-commerce platforms initiated by agricultural input channel distributors, represented by the “Online Supply and Marketing Cooperative” established by the national supply and marketing system; third, new sections opened by comprehensive e-commerce platforms, such as the agricultural input channels already launched by Alibaba and JD.com.

Figures from the National Bureau of Statistics show that in 2014 China's agricultural input market size exceeded 2.2 trillion yuan. The 21st Century Institute of Macroeconomic Research believes that, relying on this trillion-yuan market capacity, carrying out value-added services around e-commerce platforms and relying on the brand and channels of e-commerce platforms to shift from the one-way flow of “agricultural inputs into villages” to the two-way flow of “goods to the countryside and agricultural products to the cities” will build a market worth trillions of yuan.

Breaking the Stubborn Problems of the Agricultural Input Distribution Model

The deep-rooted agent distribution model is the foundation on which the agricultural input industry depends for survival, and it is also a giant that agricultural input e-commerce cannot avoid. The current state of the agent distribution model determines that, in addition to playing the two cards of “low price” and “good quality,” agricultural input e-commerce also needs to face the following problems:

First, the problem of cultivating farmers' online shopping habits. The reality is that most older farmers have formed a “acquaintance economy” with retailers in their village or town, and buying agricultural inputs from acquaintances and enjoying their agricultural technical services has become the norm.

Second, the problem of “credit tabs” in the agricultural input industry. Farmers lack sufficient working capital and often use future harvests as collateral to buy fertilizers, pesticides and other products on credit. Coupled with intense homogenized competition, “credit sales” have also become an active choice for some channel distributors. It is not uncommon across China for farmers to buy on credit from retail stores, or for lower-level channel distributors to buy on credit from higher-level channel distributors.

Third, the problem of e-commerce platforms competing for profits with distribution channel distributors. By bypassing intermediary links to avoid markups, e-commerce platforms will inevitably take away the original customer base of distribution channel distributors. If the low-priced products sold by e-commerce platforms overlap with the areas covered by agents, they will greatly impact agents' sales, and there is a risk of collective boycott by agents.

Fourth, the logistics and delivery problem. Unlike ordinary consumer goods, most agricultural input products need to go through special logistics channels. The traditional agent distribution channels are complete in layout, but how to integrate them poses a huge challenge.

Fifth, the technical service problem. The need for technical guidance is another characteristic that distinguishes agricultural inputs from other goods. In traditional distribution channels, farmers can receive professional technical guidance services right in the fields, while e-commerce platforms, especially “outsiders” like JD.com and Alibaba, still need time to deploy equivalent technical services.

At present, various types of agricultural input e-commerce platforms are exploring solutions to the above problems. Taking Noposion's “Tiantianquan” as an example, it relies on transforming the original agent dealers into regional workstations and rural experience centers, solving the problems of service, logistics and profit distribution with dealers in one stroke. The recruited “Field Brothers” and “Field Sisters,” who can use the internet and understand technology, provide purchasing agency and technical services. In addition, Noposion has already launched the agricultural micro-loan platform “Nongfadai,” targeting the “credit tab” problem directly.

The 21st Century Institute of Macroeconomic Research believes that, at a time of excess supply of agricultural input products, relying purely on a low-price strategy will plunge agricultural input e-commerce into vicious homogenized competition similar to that of traditional channels. The key to agricultural input e-commerce winning the future lies in constructing integrated solutions for crops and varieties, and, with services at the core, laying out products, supply chains and rural finance to build an ecological chain of online-offline interaction. Agricultural input leaders have distribution networks and technical service advantages spread across the country, and need to turn these into momentum for their e-commerce strategy. As for e-commerce giants like JD.com and Alibaba that are “out of touch with the ground,” joining hands with agricultural input enterprises that have complete distribution networks, or competing to recruit talent groups that have worked deeply in rural areas for many years, will become their future direction of development.

For government departments, in addition to improving the rural transportation system and strengthening supervision of agricultural input products, a series of standards and guidance opinions on qualification review, logistics and delivery, and rural micro-loans also need to be issued, so as to build a growth environment for agricultural input e-commerce.