The industry's Wal-Mart mentality may force you to change the way you farm
It's a question that was unimaginable, even a few years ago. Farmers have always been considered the backbone of agriculture. Without them, there is no food. At least that's the popular impression.
Well, explain that to the nation's former hog farmers. Their “backbone” and their value have been filleted out of the industry by its corporate powers.
“The hog industry didn't like the old structure, so they just built new buildings and structured it the way they wanted it to be,” says Steve Faivre, northern Illinois farmer and ag entrepreneur. From his corporate vantage point as Director, Agribusiness, Worldwide Agricultural Equipment Division of John Deere, it isn't difficult for him to see a similar future for crop farmers.
While folks have called what's happened to the hog industry a lot of different names, economists refer to it as industrialization. Basically, that happens when an industry links together the input supply, production, processing, distribution and marketing of products.
It's a Wal-Mart mentality that drives out costs and secures revenue through profit-driven business strategies. It tends to be driven by large-scale businesses and it is relentlessly efficient.
The farmer is no longer the customer for the industry, according to industry analysts. Rather they're one link in the food chain that strives to meet the demands of the ultimate consumer of the product.
Industrialized agriculture doesn't leave a lot of room for the independent family farmer. The three most likely scenarios, according to North Dakota State University ag economist David Saxowsky, are:
low-cost, large-scale commodity production;
medium- to small-scale commodity production combined with non-farm sources of income; and,
production and marketing of specialized products.
You can find examples of all three in just about every Midwest farm neighborhood.
And, those aren't bad options, believes Saxowsky. “It's important that farmers focus on the positive side of the changes that agriculture is going through,” he says. “There will be excellent opportunities for farmers who are willing to recognize consumer demands and are willing to team up with other segments of the industry to meet them.
“We've got to quit thinking in terms of corn and soybeans and start thinking in terms of food and fiber,” says Faivre. “When you get into long-term multiple crop rotations you achieve efficiencies that are difficult to achieve in a two-crop system. Further, when you spread production risk geographically and begin to see new technology that's integrated, rather than developed as independent components, you start to add billions of dollars of value to agriculture.”
“We've got to quit thinking in terms of corn and soybeans and start thinking in terms of food and fiber,” says Steve Faivre.
Thinking like that will drive some farmers to radically change how they farm. “Producers may not have adequate capital and time to develop a size of operation to take full advantage of the maximum economies of scale for each enterprise,” says Saxowsky. “One of the simplest methods farmers can use to gain efficiency is to share machinery ownership, labor and other farm equipment. Any equipment that has a peak seasonal use and is needed by other producers at a different time of year could be managed with such a strategy.
“Another strategy is for producers to specialize. That is, select one enterprise and become knowledgeable and efficient in producing and marketing that commodity,” he says. “That could ultimately lead to horizontal strategic alliances where a group of farmers rotate land with each other, thereby managing production risk and capturing the economies of specializing.”
Taking that strategy one step further, farmer alliances could invest in each other's businesses, rather than just their own, says Saxowsky. “A well-diversified investment could include operations in North Dakota, Iowa, Texas, California, Columbia and South Africa.”
And, it could include huge numbers of acres. Some industry sages predict that just like there is a BP/Amoco of energy today, there will be a BP/Amoco of agriculture in the future.
Think it can't happen? Purdue University's Mike Boehlje points out that Smithfield Farms already controls 12% of the hog production and processing capacity in the U.S. What's to stop the same thing from happening in food and fiber production?
Not much, believes Gary Bredensteiner, Nebraska Farm Business Association director. His clients' farm records are all the evidence he needs that there will be a lot of acres changing hands in ag. “We're about one generation away,” he says. “When older farmers start to retire, their children aren't going to care nearly as much about who farms their land. They'll be looking for who offers the most profit. There's really very little to stop a large ag corporation from gaining control of large numbers of acres.”
For years, farmers have remained competitive by being low-cost producers, Faivre says. “But it's difficult for traditional family farms to grow enough corn and soybeans per acre to compete with industrialized operations that apply business efficiency strategies to farming,” he says. “You're going to see the economics of production replaced with the economics of business processes.”
So, it's a stunning realization that farmers and the rest of the industry have to ask: Do crop farmers still add value to agriculture?
The short answer is, yes. Obviously the industrialization process hasn't reached the same level in grain production that it has in the hog industry. And perhaps it never will. As Faivre points out, it's far more difficult to rebuild a land-based industry.
Perhaps the better question is, what value do farmers add to agriculture today, and how long will those opportunities exist?
“Farmers have always added value to agriculture and they always will. The farmer remains a very important link in the food chain,” says University of Illinois professor of agricultural and consumer economics, Steve Sonka. “The question is, what is the cost? We only need the independent family farmers if they can provide the management functions of crop production cheaper than someone else.”
Remember, commodity crops aren't going away. And, there will continue to be opportunities to add value to that industry, according to Purdue's Boehlje. “The ability to become more efficient within your business is still a dynamic force,” he says. “As a commodity producer, you can't expect to get paid any price premiums, but you can create value by trying to figure out how to do it better.
“Farmers need to adapt the corporate process called Continuous Process Improvement (CPI.) You need to spend part of each day figuring out a way to improve the quality of each process you use to produce a crop,” Boehlje says. “That may be scheduling, it may be developing Standard Operating Procedures, or new technology, or something as basic as how to get an extra 30 minutes of use out of your combine each day.”
If you're considering value-added crops, Sonka cautions that you need to understand the difference between value added and value earned. “Just growing a value-added crop doesn't mean you should expect a premium,” he says. “If a crop doesn't require you to do anything different than you normally would, you shouldn't expect a price premium. You earn the premium by adding value to the process.”
When farmers switch from commodity crops to differentiated, or value-added crops, you need a different set of skills, according to Boehlje. “With a commodity crop, farmers traditionally added value to their crop by lowering costs through adapting new technology to increase production and efficiency,” he says. “With value-added crops, the competition is to differentiate your product from your competitors. That may be through product attributes, such as leaner pork, or it may be through the processes you use to produce the product, such as organic production.”
It's also important to understand the difference between value added and value captured, Boehlje points out. “It's actually easier to add value than it is to capture, or be paid for, that value,” he says. “Your ability to negotiate has everything to do with capturing the extra value you've created in a crop. It's a skill farmers aren't required to have with commodity crops.”
“Your ability to negotiate has everything to do with capturing the extra value you've created in a crop,” says Mike Boehlje.
Regardless of what crops you decide to grow in the next five years, it's the ag industry, not farmers, that likely will dictate the changes we see. “Farmers still have a critical role. But, their influence in directing the future of farming isn't as strong as it used to be,” says Faivre. “Farmers are already seeing the industry shift emphasis from products and services focused on producers to products and services focused on crop production.”
“The forces that are causing the changes in agriculture probably can't be stopped. The trend toward industrialization will occur at different speeds in different parts of the country,” says NDSU's Saxowsky. “Those changes will cause uncertainty. But, new and profitable opportunities will be available for farmers and communities willing to look at their future in new ways.”