How did consolidation pressure begin and how has it evolved?
At Family Farms Group, our mission is to Keep Families on the Farm. More specifically, we are working to protect the model of the Owner-Operator farm. For the most part, the game board of the American farmer was set-up in the 1800’s. This is when it was established who would own the land and the amount of land that would constitute a farm – the definition of farmer fell out of this set-up: A farmer is a family that lives on several dozens of acres of owned land; labors, manages and oversees this land; earns their living off of this land; may produce livestock and/or crops on this land; and is responsible for the agronomic and business (capital management) aspects of the enterprise.
Fast forward one hundred years to the first half of the 20th century and the pressure of technological change starts to become evident. With new equipment and better infrastructure, consolidation pressure emerges.
Fast forward another one hundred years to today and the consolidation pressure is as strong as ever. In the Spring of 2019, witness one of the latest and narrowest planting windows in history, and witness (with deference to a few families) how today’s farmers took this tiny window in stride and got the job done! The market learned that we have enough farmers to do the job. The market learned that it will not have to change its ways; it will not have to leave a larger slice of the pie to the farmers. It may even be emboldened to see if the job could get done with fewer farmers in the future.
Will the consolidation trend in farming continue?
So, the consolidation trend of the last hundred years will likely continue into the next 100 years. It is even possible that the majority of the production will be done by entities that fail the owner-operator definition (the historic definition) of farmer. The possibility that there will be 10 “farmers” instead of 10’s of thousand farmers by the close of this next one hundred years is actually fairly real. And that is exactly what we want to avoid and that is exactly what this article and several to follow in a series are about. These articles will tell you how to avoid this fate.
Owner-Operators: Here's what you need to know
Let’s reduce all the financial noise to five numbers. If you will understand these numbers and track them as defined in the five articles of this series, you can survive as an established player.
If you are an owner-operator, looking to survive, simply understand and manage these five things.
- Total Capital at Risk (each year or cycle, producers both invest in and demand from an end-of-year revenue that is anything but certain – this risk needs to be quantified and held to a fraction of Total Equity)
- Operating Profit Percent (if you operate on tight margins, you have higher risk and are likely leaving money on the table – your capital demands must be rationalized against operating profitability)
- Return on Equity (ROE) (because farms almost exclusively use debt financing as opposed to equity financing, ROE gives feedback as to the competitiveness and sustainability of your particular blend of efficiency, leverage, and assets.
- Equity/Asset Ratio (the right ratio helps ensure you are not over-leveraged and can get access to operating cash)
- Asset Turnover Ratio (ATO) (farming is a capital-intensive business and your strategic purchase decisions can make that problem worse – ATO is one key dimension of competitiveness)
Each of these topics will be discussed in a substantial series of brief articles in the coming months. The first several articles will set the framework and justification for the series. These are business articles, not financial articles – but financials are one of a relatively small number of things capable of ending your farming career. That is why they have to be dealt with.
If you would like to discuss the need to track and understand these five financial concepts or if you would like to explore how AgriSolutions Inc. personnel can help you put together a financially rational, forward-looking capital and strategic plan, please contact us today!