Market News & Headlines >> Katie's Blog: How Consolidation is Changing Rural Agriculture
By Katie Hancock
From the outside, small towns never seem to change. From the inside, I’m noticing many changes. Why? Agriculture, which dominates many rural areas like mine, is experiencing rapid consolidation. We hear merger chat among large ag companies like Bayer and Monsanto, but the smaller towns are experiencing rapid change too. I want to share why consolidation is happening in small ag communities.
For those that don’t keep up with the farm economy, gross income has sharply declined over the past four years. Although expenses have declined too, they have not fallen nearly as much as gross income. According to my figures, on a percentage scale, gross income has declined twice as much as expenses.
Net worth is holding steady for most local farmers, but not without extra effort. This is where consolidation comes into play. Consolidation to me just means joining forces to become more efficient. This started around 2016 with farmers and then to grain buyers. A trickle effect into 2017 led into input suppliers. The current impact is rising cash rents.
So why are these changes taking place?
Farm consolidation. Many in the generation nearing retirement have quit farming. Some still own land and like to stay involved, but not on the management aspect. The managing party is moving to larger farms. Even those with another generation in line to farm are taking less risk by passing the baton. Some farm operations are growing in both aspects. Neighbors and family members are passing along land to new tenants. This means opportunities for rapid growth. Growth leads to fewer decision makers. Fewer decision-makers, larger volume, and lower economic returns change the way products are bought and sold.
Grain buyer consolidation. I am not a grain buyer, but I am confident the profit margin has shrunk for them as well. Farmers are more careful to seek the best basis prices. Discounts are carefully analyzed. Newly built grain storage means farmers don’t always have to go to the closest location. Plus, a few pennies can be enticing to travel a little further at harvest. Buyers that aren’t competitive are selling out or reducing employment and facilities.
Supplier consolidation. In the same way farmers are looking to increase gross revenue, expenses are also closely watched. More farmers take bids for seed, chemical, and fertilizer than in the past. Customer service and loyalty are less important if the price is significantly higher. The loyalty issue is interesting to me. I know many older farmers that bought because they trusted the particular seller. As farms and suppliers become larger, money starts to replace previous loyalties. I’m not discrediting the value of a relationship, but it’s hard to run a business on friendship regardless of the product price.
Land ownership consolidation. Ownership is changing hands, primarily due to age. As land owners pass away or quit managing the rental arrangement, the next set of owners have decisions to make. Mainly, who farms the land and what return can I make? If farmers are consolidating by choice or force, they are more willing to bid up for these new blocks of land. The loyalty to Farmer Jim who farmed the land for 40 years is quickly dismissed. I’m not saying it’s wrong to expect a high return on investment, but it’s creating a chain of competition for land. The biggest key that causes land ownership consolidation is when the biggest players start buying the land versus renting. This means they control more of the land and fewer rented farms are available. Again, this creates an aggressive rental environment. Those that can’t pay the high rent or and offer a quality routine of land management are not able to compete.
What’s bad about this for small communities? The next generation will struggle to find his place. With fewer businesses, one would assume fewer managers and a smaller population long-term. However, opportunities within the livestock sector are helping to keep young farmers in ag. For example, many farmers my age are building hog and poultry barns while working for a row crop operation.
I am proud to see farmers are managing for profit, but small towns are changing as a result. Population may take a hit, but there are still great families staying in rural communities. I myself plan to stay put. Bigger is not always better, but sometimes it’s what you need for survival.