Allen Lash’s American drawl is slow. His voice is smooth, his words calculated. But his message carries a sting. “By 2020 we won’t recognize crop farming,” Lash tells me. “By 2030, it’ll be all over. Most of the land will be owned by a handful of producers.”
Lash knows his words provoke sharp reactions. He knows that many farmers will scoff, or say he must be sitting in some ivory tower. They’ll say he doesn’t understand real farming, and that he’s just a publicity seeker, the story of the day for some gullible ag reporter.
Read Also
Riding the tariff rollercoaster
Farmers are accustomed to roller-coaster years. But the current geopolitical windstorm is something else entirely. On his cattle operation near…
And yes, Lash may be wrong. But first, give him a chance to make his points. His argument is harder to refute than you might think. Besides, he’s no fool, and in his position as founder, president and CEO of AgriSolutions, an accounting and business education company based in Illinois, he gets to see the books and talk strategy with the generation of farmers that is driving change in the U.S.
Lash thinks most farmers know there’s a trend toward larger farms. In most regions, it would be impossible to deny it. What he doubts is that today’s farmers realize how quickly that trend is picking up steam.
Farm consolidation is accelerating and we’re only at the end of Phase 1, Lash says. “A half per cent per year of the country’s arable land is being turned over to a handful of crop farmers,” says Lash.
It may not sound like a big number, but keep reading. Only three-tenths of one per cent of U.S. farms are grossing over $5 million a year. That’s three in 1,000, but Lash says those super-size farms will soon produce almost all of the U.S.’s food and fibre.
In 2007, farms with over $1 million in annual sales accounted for 59 per cent of U.S. agricultural production. Five years earlier they produced 47 per cent. Turning the numbers around, their share of U.S. ag production grew 25 per cent in those five years.
If the trend holds and they post another 25 per cent gain by 2012, that means these $1-million- plus farms will account for 74 per cent of U.S. ag production by the end of next year.
The numbers quickly get astronomic. The upper grossing part of American farms — the top 5,500 farmers — already produced some $83 billion in 2007. That’s $15 million apiece, and Lash says that the trends that have led to their growth will continue and expand, including a combo pack of demographics, technology and economics.
For a dose of reality, start adding up what some of your neighbours and cousins are generating this year. Consider some of the massive vertically integrated livestock feeding operations. Think how much grain is flowing through some of those on-farm grain drying and storage systems, and think about the scale of some of the operations that have diversified into specialty crops or dipped into higher value-added margins.
Then think how rapidly so many of those operations are expanding.
Farmers on both sides of the border are producing more and selling into some amazing peak markets. In 2006, only seven per cent of all Canadian farms had annual revenues over $500,000 and those farms accounted for more than half of our country’s total farm revenues. By 2009, 12.9 per cent of farms were earning more than $500,000 and these farms had operating gross revenues of about $1.56 million.
This growth may not be news exactly, but the magnitude and speed of the transition is startling, and Lash says it is accelerating.
Interestingly, the total number of farmers has increased in the U.S., bucking the forecasts of declining numbers. However, that doesn’t change the story that the Goliath farms are dominating the value of production. The smaller farms are producing niche products, or they’re focused on marketing or have off-farm income.
Lash categorizes 95 per cent of commercial crop farmers as “part-timers,” meaning they gross less than $500,000 a year. And although there will still be many, many part-time crop farmers, says Lash, the largest farmers will be the ones best able to expand during a time when a great deal of land will exchange hands… which means now. In 2007, more than 30 per cent of the U.S. farmland was owned by people over 75 years old.
Looking at numbers only, Lash concludes that medium-size farms simply don’t have enough cash flow to expand or make improvements at the same rate as the larger farms.
“Costs are no longer the key driver,” Lash says. “The group grossing $500,000 to $1 million will not be in agriculture very long.”
Will crop farming follow what happened to the American hog industry? In 1988, there were 320,000 pork producers. Then by 2006, that number had shrunk to only 56,000 pork producers, with the smallest 48,000 of them producing less than a combined one per cent of the pigs. That same year, 191 hog operations produced 64 per cent of all the pigs in the whole country.
The hog consolidation got kicked into high gear by a fundamental change in the hog supply chain, with processors owning sows, says University of Manitoba economist Derek Brewin.
The fundamentals driving the expansion of crop farms, however, are very different, says Brewin. “Crop farm size increases have simply been driven by size of equipment with labour as the limiting factor,” he says.
One of Brewin’s graduate students is studying the most efficient farm size for cropping in Western Canada. The farms with the lowest costs and highest production per acre in his research have been family farms operating pods of production based on equipment and labour capacities. With our limited seeding and harvest windows, one combine, one seeder and one farmer can manage to seed and harvest about 3,000 to 5,000 acres, says Brewin.
Even at 5,000 acres, a farm would have to consistently gross an average of $1,000 an acre to be considered part of Lash’s super-size group.
Instead these pods of efficient production are being replicated, jumping to 6,000 or 10,000 acres and doubling up equipment, says Dick Schoney, agricultural economics professor from the University of Saskatchewan.
A 2009 USDA report, The transformation of U.S. Livestock Agriculture, showed that with hogs and dairy, costs fall sharply as enterprise size increases, up to some threshold level. Once scale economies are exhausted, there doesn’t appear to be an optimal size. Farms with 2,000 dairy cows have average costs similar to farms with 1,000 cows, as do farms with 12,000 or 5,000 finishing hogs.
Margins vary, depending on many factors, not just costs, says Alfons Weersink, ag economist at the University of Guelph. Debt servicing, technology choice, labour costs and management skills, volume and marketing can affect a big or small farm’s bottom line.
Also marketing risk is now more important than ever. “A farm without a risk management strategy is vulnerable whether big or small,” says Weersink.CG
———
The top 5,500 farms in the U.S. already produce $83 billion a year, and they’re still growing
———
Managing The Middle
To get super-sized, you’ve got to hire managers, not just employees
Allen Lash doesn’t mince words. “You can’t use today’s management to get to tomorrow’s future,” he says. In his experience, the real cap on farm size is human resources, including management capability.
Small businesses generally fall into three human resources categories. Either there is an owner who is also the operator, there is an owner with employees, or there is an owner overseeing middle managers who in turn oversee employees. The traditional farm business model where one person is the owner and operator is limited by the amount of time and ability of that one person. More recently farmers have been hiring labourers and bringing in more family members. But based on a business concept called span of control, the number of staff that one person can manage is maxed out at 10.
Expansion beyond 10 employees requires middle management. Depending on the complexity of the work and other on-the-ground logistics, the number can be even lower. Assuming one staff member can handle 1,000 acres, a crop farm business model with no middle management reaches its maximum at 10,000 to 12,000 acres.
That’s a serious challenge for today’s farmers who want to super-size so they’ll be players in tomorrow’s agriculture, says Lash, CEO of AgriSolutions. “It’s rare for farmers to be able to manage middle management. To get bigger, they have to develop those skills.”
Farmers do get a break, says the University of Manitoba’s Derek Brewin. The family farm model has endured even in rich countries mostly because of its supply of cheap, skilled, seasonal, committed labour. “This is a special labour force who generally prefer to work for themselves,” Brewin says.
Since families are residual claimants to profit, they’re more likely to work hard and don’t require costly supervision. Family farms can also adjust labour supply to the season and then are able to reallocate their people to other tasks on and off the farm.
Still, the seasonality of agriculture and the challenges of supervising employees who may be working many miles from the farmstead are obstacles when the farm does have to broaden beyond family labour.
There’s also troubling news for farmers who believe they can outcompete the super-size farms because their family labour makes them more efficient. Familial knowledge of local soil and climate, often accumulated over generations, has become less important with GPS technology and is less significant when producing lower-value crops on lighter soils, Brewin says. “Based on our research, efficiency is equipment and sector based.”
———
TECHNOLOGY
Self-steer isn’t the end. It’s only the beginning
Technology has been a great leveller of skills for large farms. It is easily transferred between farm units, or anywhere in the world. Also, larger farms employing more people are able to take advantage of new technology 24 hours a day, seven days a week by working shifts, so with the same investment there can be quicker payoffs.
The next wave of technology may make an even greater competitive impact. “Driverless equipment is going to be a big nail in the coffin,” says Allen Lash of AgriSolutions. He also predicts laser sorting technology right on augers will improve quality control, segregation and tracking.
Nor is the computer revolution over, with even better communication technology and even faster information processing, says the University of Guelph’s Alfons Weersink. “One individual is able to handle significantly more production units.”
———
Credit Crunch
Unfair or not, big farms get more cash
The biggest limit to farm growth can be access to capital, especially with larger operating lines.
“To access bigger amounts of credit, you have to play by capital rules,” says Allen Lash, CEO of AgriSolutions. Those rules include what Canadian creditors have demanded for years, such as regularly reviewed and audited statements.
If the farms are aggressive, they can face even tighter conditions. Growing lesser-known crops or ones requiring tighter seeding windows or longer growing seasons can be perceived as riskier, even though such crops have greater potential for higher gross revenues.
Historically farms owned at least 15 to 20 per cent of their land and were able to use it as collateral. That model collapses, however, when you need to grow as fast as today’s farms.
“Ag lending has been shorting on heritage,” says Lash. “Farmers can own land or they can grow, but you can’t do both. There’s just not enough working capital.”
Ontario has Canada’s largest average farm debt, and Alfons Weersink at the University of Guelph is concerned about cost-averaged loans that are based on increasing land and quota values and that are supported with small down payments. “The expansions should hopefully be focused on profitability,” Weersink says. “If farmers and banks are relying on equity to justify credit expansion, we are setting ourselves up for another farm financial crisis like the mid-1980s.”
Farmers are also looking for non-traditional sources of credit. Some farms have the ability to borrow internally, such as Hutterite colonies. Other farmers are shopping for loans in other countries.
Simultaneously, large international investment funds are suddenly hungry for farmland. Big names like John Hancock, TIF Kraft, Altima, have some big money set aside to purchase big chunks of land.
“Agriculture land is now viewed as an acceptable asset class like bonds, stocks,” says Lash. “But those people will only accept professional management, high technology, and strong financial control systems.”
The funds currently investing in agriculture have a 10-year commitment and won’t liquidate small blocks, says Lash. Instead they’ll want to sell large chunks to another fund group, or processing or retail companies or bigger family-farm corporations.
The big get bigger, again.
