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Farming strategies for a challenging ag economic environment
Story Date: 12/11/2017
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Source: RABOBANK, DEC 2017
Although the row crop economy appears to be nearing a low point, Rabobank analysis suggests that U.S. growers will continue to face low growth, low margins, and thus low returns on invested capital, over the next five years. This, coupled with increasing export competition from Brazil, Ukraine, Russia, and other growing regions, means there is clearly a need for U.S. growers to reinvent themselves.
Summary
How to go about such a change often depends on a farmer’s circumstances, financial position (debt capacity and ability to attract equity capital), and long-term business aspirations. “The decision to undertake a strategic pivot is, however, very different for agricultural producers than it is for larger corporations, and is often influenced by farm lifestyle issues,” according to Ken Zuckerberg, Senior Analyst – Farm Inputs. “This is because many crop farming businesses are still family-owned and operated and involve multiple generations, which means the succession planning dynamic comes into play. Another key factor is access to capital, especially during a cyclical downturn.”
Faced with tight profit margins, growers can consider one of the following strategic choices:
• Adopt and adapt on-farm technologies and enhanced business enterprise management that optimizes applied capital through efficient input usage.
• Horizontal integration to achieve greater scale efficiencies.
• Vertical integration with grain storage and merchandising firms to capture margins that are currently collected by other parties; and
• Contract farming arrangements which can help ensure offtake certainty and capital management.
Given the current dynamics in row crop farming, the appropriate call-to-action for growers is to transform their business models now to ensure long-term resilience. While there is always a time to plant, it is now time to evolve.
For more of this story, click here.
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