Trends and Agribusiness
The businesses of producing agricultural goods, transporting them to where needed and turning them into consumer or industrial products have been notorious for requiring substantial capital but producing low margins. The return on capital ratios are especially low when compared with other industries. The natural way for agribusinesses to counter the big capital/low margin nature of their activities has been to become more efficient. This has led to the increase in size of the average U.S. farm and the consolidation among agribusinesses; a trend toward mergers and acquisitions that began in the 1970s and remains very active today.
Generally, there are two broad objectives when businesses merge or acquire another. They seek to increase their strengths and opportunities as well as minimize weaknesses and threats by doing the following:
- Combine duplicate functions
- Better utilize capacities
- Achieve economies of scale
- Spread risks
- Lower the costs of capital
- Improve management of inventories and cash
- Increase market power
Mergers and acquisitions of agricultural businesses have been a feature since World War II and first gained traction on the farm. Cash saved during the war allowed many farmers to expand their operations by purchasing their neighbor’s land. This began the trend toward fewer but larger farms, and the pace accelerated during the 1960s and 1970s. The increased mechanization of farming and the advent of bigger, more diverse, costlier equipment encouraged farmers to expand their operations so that the expense and upkeep of a $175,000 tractor could be spread over a larger production area. It is fair to say government farm programs that supported high crop prices and funneled most of the cash benefits to large producers effectively financed their efforts to expand.
(This article was originally published in the November 2016 issue of Ag Review as part of an analysis by Robert Kohlmeyer. Click here to find out more about subscribing to Ag Perspectives.)