Agriculture's Big Picture
AgWeb Editor Greg Vincent takes a big-picture look at agriculture and current events.
Will Consolidation Accelerate?
Oct 16, 2008
President of BioScience Securities Sano Shimado said Tuesday, according to a story in the Des Moines Register
, that agriculture is about to see accelerated farm consolidation because the ethanol bubble is on the verge of popping. Speaking to a group of venture capitalists in Des Moines, Shimado also said the recent round of strong exports we’ve enjoyed in American agriculture will cool because countries like China will become more self sufficient.
I agree. We will see considerable consolidation sooner rather than later. I’m just not sure I concur with the reasons. We will see rapid consolidation, I believe, for two reasons. First, competition will intensify to the point that some farmers will essentially be bought out of business by other farmers. Second, what I've heard called the "lost generation" of farmers--those in the their 40s and 50s--who were forced out during the Farm Crisis years of the 1980s, will soon retire and there are fewer farmers behind them to take over.
Long-term, unless we’ve become so distorted by the last two years that we think sub-$6.00/bu. corn and $12.00/bu. soybeans are bad, commodities should stay relatively strong. Granted, we are below expected breakevens for 2009 right now, but for how long?
With continued tight supplies and slowed expansion in South America for oilseeds, demand should stay strong in the near term. As supplies tighten over the next year we should see margins rise to above breakeven—even with skyrocketing production costs. Those margins just won’t be as spectacular as they were the past two years. Unless trend line yields take a drastic uptick, the world will continue to have trouble keeping up with demand.
Yes, China will become more self sufficient, as will India. But, and it's a big but, they are growing at such a rapid rate they cannot keep up. The worldwide recession will surely slow down exports, but even if we are in this recession for another year, the economy will pick back up.
Recession won’t stop worldwide population expansion either. Countries throughout the world, not just China and India, must become more self sufficient to feed a growing population, but that will only keep them on par with today. Food needs throughout the world will continue to grow as we add another 42% to the world’s head count and reach a projected 9.5 billion people by 2050. And a higher percentage of them will live and eat better.
I was visiting 53-year old famer Greg Wade of Stewartsville, Mo., the same day Shimado was speaking. Wade is a member of the "lost generation," and his neighborhood is a prime example what has happened in farm country.
There were nine kids in Wade's high school class who started farming after high school or college in the mid- to late-1970s. He’s the only one left. "The 80s took the rest out," he says. "There’s nobody out here like me anymore." That same round of consolidation will also be the primary symptom that drives the market consolidation we’re about to see in the next 10 to 20 years as these farmers move on to retirement. Why? There are even fewer farmers aged 40 years and younger behind him to take over. And as John Phipps pointed out in his Spring 2008 Perspective column, we won’t need them—well not as many of them anyway.
By the time I’m ready to retire (when I’m 85 based on the recent stock market, my IRA performance and life span increases) technology will allow farmers to farm vast amounts of ground that we probably can’t even fathom today. Technology and necessity will drive the consolidation we’re about the see.
We will see massive farm consolidation, but it will be because farmers will, in essence be bought out by other farmers as the “lost generation” moves to retirement. Land continues to become increasingly expensive, though we may see a plateau effect over the next year due to the recent sell off in commodities, but farmers who want land to expand will continue to stay aggressive. There will be a certain number of farmers who simply can’t stomach paying $300+ rents or $8,000/acre purchase prices for ground and, justified or not, they’ll have to compete with the guys who do. As this generation quickly goes out, the younger, more aggressive ones will take their places.
People will argue these farmers can’t stay in business paying high rents or massive prices for acquisitions, but that same argument went on through the 80s as many went broke and some expanded. Some people will go broke and there will be some “I-told-you-so’s,” from those who didn’t want to pay what the market will bear for cash rents or land acquisition. That’s fine. It’s a business decision everyone has to make.
But also rest assured there will be the guy just down the road who picks up 5,000 acres because another farmer down the road went broke. Or somebody will pay an extra $50/acre cash rent for 500 acres because he thinks he can make it work—even at outrageous land rents.