Top producers are about a year away from major opportunities to grow their businesses through mergers and acquisitions, predicts Danny Klinefelter, professor and Extension economist, Texas A&M University. Catalysts for those opportunities could include heightened lending restrictions by banks, the need for deep management expertise and increased supply chain scrutiny by agribusinesses.
More than ever before, producers need to hone their business knowledge.
“More farms will go out of business because of management obsolescence in this next cycle than because of [a lack of] technical knowledge,” says Klinefelter, who spoke at the Mergers, Acquisitions and Growth Conference in Kansas City this summer. The meeting was jointly hosted by Texas A&M, K·Coe Isom, Monsanto and CHS.
On the lending side, continuing implementation of Basel III reform measures will raise credit standards at banks internationally and require more risk-based capital liquidity. Those reforms are underway with oversight from the Bank for International Settlements, an organization that represents 60 central banks around the world and promotes financial stability. For farmers, it means more difficulty in accessing capital, giving those with more working capital a competitive advantage.
Meanwhile, top producers will be able to capitalize on economies of scale by pursuing mergers, acquisitions, joint ventures and other partnership strategies. Some operators looking to retire might even willingly be acquired.
“Before I have to sell out, why not preserve equity by going to be part of something?” Klinefelter says.
Lastly, agribusinesses will increasingly drive the marketplace toward a qualified supply chain model, again favoring large operators with proven expertise, Klinefelter says. Food companies will shrink their portfolio of producers to include only those with rigorous data collection, analysis and record-keeping. He points out Frito Lay once contracted with 1,000 potato growers and now works with 70.
Any federal efforts to regulate the definition of sustainability would accelerate that shift, so top producers should look to enter that supply chain and improve from there.
“You still have to be the best inside the herd,” Klinefelter says.