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Limited Capital Access in Row Crop Consolidation

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We’ve discussed farmer age and use of technology as macro factors in consolidation of row crop agriculture. This article and the next will look at access to capital as the third vital factor.

In nearly every consolidating industry, capital plays a major and often-times defining role. What that means is those who have the capital have the potential to define how consolidation will occur. Let’s use pork as an example. Once Wendell Murphy defined a business model that permitted dramatic growth (consolidation) and he had access to adequate capital, the pork industry consolidated very quickly and dramatically, and the then-current players either weren’t able or did not want to compete. 

Consider this:

  1. With what technology permits us to do through google maps and other technologies, we can know nearly as much about a farm as being on the farm.
  2. When equipment power units can be operated in fields from a distance of miles or hundreds of miles, that changes the dynamics of farming and really the definition of what it means to be a farmer.
  3. When you can know the land, have instant access to what is going on with that farm (e.g., when seed is being planted, seeding rates, fertility, crop protection, weather, equipment activities, etc.) all at a distance, and you have almost unlimited capital, that will change the crop industry.

Let me draw a picture. A wealthy business person has a half billion dollars of capital that he/she wishes to invest in crop production. With half a billion dollars, that person could buy, equip, operate and staff 50,000 acres of prime Midwest real estate debt-free. With his or her business experience, he/she can select, hire and pay exceptional talent to run their farm operation. This person could choose to set up a large central building that would serve as a control facility for all their autonomous equipment. In that facility would be the essential ERP system tied seamlessly to the wholesale input suppliers for all work orders, purchase orders, monitoring of farming activity, inventory, and job status. This could be accomplished in the near future on 50,000 or, with debt, 100,000 acres widely dispersed across North America.

Technology is going to permit us to operate widely dispersed units. Management know-how to operate these large, sophisticated businesses is widely available. The only missing ingredient will be capital.

In this technological environment, management and processes are defined and replicable. All that is required is to pour in capital. There are enormous amounts of capital wanting to come into crop agriculture as evidenced by TIAA CREF with one trillion dollars in managed assets, which includes $5B in ag, Bill Gates’ Cottonwood Foundation managing 250,000 acres across multiple states, Farmland Partners and others.

Sound far-fetched?

Let’s look what happened in the livestock industry. 

When Tyson figured out the replicable production model for broilers, all he had to do was add capital and grow dramatically. Today, there are only about five similarly structured and managed chicken producers in the U.S. One out of four chickens in the U.S. is a Tyson chicken, and maybe one out of five in the world… I could go through the same scenario essentially for the beef feedlot, pork and dairy industries. The feedlot industry was started by Monforts and later acquired by ConAgra. The pork industry production and management process concepts were formulated by Wendell Murphy, sold to Smithfield Foods when the pork industry went through an economic collapse in 1999, and recently Smithfield was sold to the Chinese. All these firms had one thing in common - someone who was able to put in place management and profitably replicable process.  From that point on, all that was needed was capital.

Now, what happens if you don’t have half a billion dollars of debt-free or low-margin capital?

How do you compete?

We address this in the second part to this article on capital.

To finish this blog, I want to talk about some capital rules that are imperative for understanding and acceptance. Fighting the capital rules is like flailing at the wind.

Some truths about capital:

  1. Capital has no loyalty. It always seeks the individual or organization that can give it the highest reward. That is always, always, always true. If you want access to capital, learn how to reward it. It’s even Biblical. Remember the parable of the talents. The businessman gave each servant one talent. One servant invested his talent, worked hard, added more talents and was rewarded with the praise, “Good and faithful servant.” The third one hid his in the ground (did not reward it), so it was taken from him and given to the first servant to invest and use. Bottom line: You have to reward capital.
  2. You must play by capital’s rules. Like it or not, people with capital have no obligation to play by your rules. Period. That’s just a fact. What are some of capital’s rules?
    1. You must account for the money in generally accepted accounting practices such as GAAP. This involves a cost-basis balance sheet which asks what you originally paid for the asset less depreciation plus improvements. That is cost basis. It does not matter what the asset is worth. GAAP has been the standard accounting process for decades. We are not going to change it. There is no other option. Talk to your local accountant, but be sure he/she is not describing agriculture accrual accounting rather than true GAAP accounting. AgriSolutions is a good resource to contact with your accounting questions.
  3. He who bears the financial risk earns the bigger reward.
  4. Debt gets paid before equity.
  5. Those with capital are not your enemy. If you need their capital, they need to be your friend. It is your obligation, not theirs, to prove why your investment opportunity is superior to their other options.

 In my next blog, I’ll discuss capital access challenges faced by the individual producer. If you have questions about capital access and/or about GAAP accounting, please contact AgriSolutions Inc., at 618-372-7400.

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