Unwanted Company Coming?
Dec 16, 2010
Agriculture is hot. It no longer plays second fiddle in the business world. While other businesses struggle, agricultural commodities are in big demand. What will our industry’s popularity mean for you? Broadly speaking, independent producers will have to envision and prepare for a world that doesn’t seem possible.
It’s important to remember that success is magnetic. It attracts others looking to gain. For some time now, you have experienced the impact that funds have on commodities. How long will it be before corporate America decides its money is better invested in farm ground and farming than making widgets in a factory with high overhead?
For a closer look at what this all means, let’s look to the future. In the coming years, global demand for agricultural commodities could continue at a rate that leads to very attractive, even unprecedented, levels of profitability for agricultural producers. Corn prices of $5 and $6 are almost becoming common.
My expectation is that permanent market volatility—something we are in the midst of experiencing right now—will lead to higher opportunity and risk. Farm size will increase dramatically and the number of farmers will decrease dramatically. But the major earth-moving impact? Strong profitability leading to the very real potential for substantial infusions of outside capital into production agriculture.
The rest of the economy is struggling and is likely to continue struggling for years to come. Why wouldn’t corporate America acquire a ravenous appetite for agriculture? After all, if corporations can realize attractive shareholder returns by, for example, owning farmland, they aren’t likely to turn their backs on the investment.
When corporations come knocking, bringing shareholder dollars to the door to buy agricultural land, many farmers will no longer be farming ground they own. Instead, they will be custom-farming for big corporations.
Think of the way a landscaping firm descends upon a community with lawnmowers, cuts grass and trims bushes, packs up the equipment, and drives back to its home base as the sun goes down. In the production agriculture version, you will own the machinery and provide the labor—you won’t control the land or your production. You’ll work on a margin for labor and a machinery investment, losing out on the opportunity to benefit from profitable prices brought on by volatility.
We could see producers forced to competitively bid for work, possibly online, in reverse auctions. In other words, your effort and machinery would be commoditized.
You’ll purchase equipment through large buying groups or corporations and have it delivered directly to the farm. The same goes for inputs. Financing will come through the same corporations that own the land.
What happens to your local banker, equipment dealer and other suppliers in this scenario? Without your direct participation in the local economy, they may well be gone. Consequently, they won't be there to donate for the construction of a new hospital wing, a new library, or renovation of your church. Your money will end up in the hands of multinational corporations, stockholders and foreign countries. Rural America as we know it could change dramatically.
The domino effect is not unlike what happened to George Bailey in the holiday classic “It’s a Wonderful Life.” You may recall that in the movie, George was given an opportunity to see the future and to take control of it, and he did so while he had the chance. Similarly, by maximizing profits and remaining competitive now, producers control the future of their farms and rural America.
Your challenge is to maximize profitability and financial strength. Take advantage of record prices when they come, and earn strong profits. This will be more important than ever, as volatility creates intense opportunity and risk. Producers who don’t position their operations for opportunity and risk will go out of business. When this occurs on a large scale, others will fill the void and reshape rural America.
Yes, this is an extreme scenario. However, when you think about the way success breeds legions of wannabes eager to grab onto coattails, it’s plausible to imagine others turning to agriculture to turn a profit and gain control. It has happened in chickens and hogs. Will crops be next? You have the ability to control your destiny.
Scott Stewart is president and CEO of Stewart-Peterson, a commodity marketing consulting firm based in West Bend, Wis. You may reach Scott at 800-334-9779, email him at email@example.com.
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