Will Investors Consider A Strong Ag Concern For Their Capital?

Capital not only won’t consider agriculture, as now structured, in the future, it will “flee” the industry, he said.

acCooper and Zell, in remarks to the agribusiness leaders and interviews with Feedstuffs, said agriculture can’t succeed as an industry in which thousands of producers make independent, individual decisions about what they can produce based on their productive resources rather than on what they can add value to and sell. The industry’s structure must become “dramatically and profoundly” different, they said.

Cooper and Zell spoke to the agribusiness leaders at the 10th annual conference of the International Food & Agribusiness Management Assn. (IAMA), which includes management from private, public and cooperative agriculture businesses, economists from the academic and private sectors and policy-makers.

Cooper: Fewer producers must add more value to production

Cooper said the new economy decoupled commodity prices from inflation as the U.S. economy — with a core inflation of 2.5% — has deflated, and businesses are forced to hold the line on price increases. Accordingly, she said agriculture has lost one of the industry’s main means of raising prices, i.e., inflation.

Furthermore, agriculture commodities have always been cyclical but, for 200 years, have decreased more on the down cycle than they have increased on the up side, she said. This has become even more extreme in today’s deflated economy and with today’s productivity and technology in which production has increased so much faster than demand that demand is muted next to output.

Indeed, agriculture’s share of the U.S. gross domestic product (GDP) has decreased from 13% in 1920 to less than 2% today, she said, a trend that’s occurring in every developed country in the world. “Only the least-developed economies have a large part of their GDP devoted to food,” she said.

Farm income has not kept pace with the rest of the U.S. economy because government subsidies have encouraged farmers and livestock producers to continue to produce, and technology has permitted them to produce too much, Cooper said. Now, the economy is moving to even greater deflationary pressure in which business-to-business and business-to-consumer commerce is accelerating, she said, and e-commerce will bring even more increased productivity and reduced costs into transactions, aggravating agriculture’s plight.

acpE-commerce will drive efficiencies and lower prices by eliminating from transactions all business segments that cannot add value to production, she said, including middle-man segments and producers themselves. “Prices are going to continue falling in sector after sector,” and business segments must add value to make products and services worth more to accommodate or recover from lower prices, she said.

However, Cooper emphasized that, for agriculture, it’s not just adding value but decreasing and restructuring the production base so farming and production decisions are made by fewer participants, with resources and scale to capture economies and, then, increase value.

“It’s politically incorrect to say this,” Cooper told Feedstuffs, because farming and food production are held so sacredly in the U.S. and worldwide. “Farmers are critical to human well-being,” she said.

However, the reality of the situation is productivity is increasing, and will continue to increase, so fast that fewer and fewer producers are and will be needed to produce the world’s food requirements, she said. To not consolidate and rationalize production, she said, would be to keep agriculture outside the new economy and poor.

Zell: Fewer producers must compete for more capital

Zell drove the same tractor. Agriculture has always been an industry of too many producers, he said, and because of this, it has always been an iudustry that captures its profits and ROI at cyclical peaks and hands returns back at cyclical lows.

Peaks are based on asset liquidation, and exit of producers and downturns start as producers rebuild assets, he said, but given today’s astounding growth in productivity, peaks are ending sooner and downturns are lasting longer. This is affecting investment in the industry, he said.

Historically, investment in agriculture has been timed for the upturns to capture ROI at the tops and then be pulled out on the downturns, Zell said. Agriculture, therefore, has never “had to compete” for capital, for investment, he said.

In the 21st century economy, however, capital demands higher ROI at less risk, an investment scenario agriculture cannot provide. Moreover, agriculture has relied on and sought artificial price supports and political fixes for all its problems, he said, and capital finds that kind of “management” too risky.

“Capital has choices,” Zell said, especially in the new economy’s communications and other technology sectors, where capital is managed better and provides higher and steadier ROI. “It’s likely that there will be a major reduction in capital flow to agriculture,” he said. “There will be a flight of capital from agriculture.”

Agriculture will have “to compete for capital,” he said, “but the current industry (production) is too speculative. It needs to be more accountable (to capital) and less politicized, and it needs superior management” to get that way.

For that to happen, he said, there needs to be “rapid” consolidation and rationalization to respond to excess supplies, low prices, a need for more value, political disruption, risks and cycles. “There are too many producers” making too many production decisions in agriculture today, he said.

Zell explained to Feedstuffs that, without a capital flow into the industry, producers who can’t finance their farms and ranches through cash flow will have to exit production or find alternative means to farm and/or produce livestock. He said this process will rationalize decision-making into larger operations that can compete for capital through production strategies that balance demand and supplies and produce value-added products with higher and more steady returns, which will attract investment back into the industry.

“Consolidation, if done well, will turn this industry into one that can get capital and participate in the new economy,” he said.

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