Growth will be a necessity — not a luxury — if commercial farmers and ranchers want to remain competitive.
That's the message Ed McMillan, an agribusiness consultant and mergers and acquisitions specialist, gave the Association of Agricultural Production Executives last winter. He encouraged them to consider three management-strategy options:
Lead. Develop a future direction that's right for your business — increase productivity and output, increase value-added of current products, expand the size of the current operation or leverage skills and assets into a new operation.
Follow. Merge or align with another business — find someone who knows where to head and get on board.
Get out of the way. Find a buyer and decide where to best invest your skills and capital.
This article focuses primarily on the “follow” or “merger/alignment” option because, although common in the non-farm sector, it's only recently become more prevalent at the farm level.
If any merger is to be successful, the first question is: Will the new entity be greater than the sum of its original parts in terms of competitiveness and performance? This may result from economies of scale, management specialization, complementary talents or resources, or access to new input and output markets.
One caveat — just getting bigger will not necessarily produce economies of scale. Scale economies usually result from shifting to a new cost or revenue curve, or from moving to a lower point on the industry's long-run cost curve.
Two comments I frequently hear are that too many farmers and ranchers run their businesses more as producers than as business managers, and that they're resistant to change. From my experience, most farmers don't see either statement being directly applicable to them personally.
Most believe they are managing their farm as a business. The question should really be: Are they using the best business management practices and do they possess the necessary management skills and attributes to compete with the best in the business.
Almost every farmer believes he has made significant changes in his business?
The real issue is: Are they moving forward as fast as their leading edge competitors — the top 10%?
For example, consider two people driving the same direction down the interstate. Both are clearly changing. However, one is traveling 55 mph and the other 70 mph. Based on five, eight-hour days a week, at the end of a year the one going 70 mph will be 31,200 miles ahead.
That's a pretty big advantage. But what if the 70 mph operator decided to ramp things up to do business 24/7? If the 55-mph driver stayed on his current pace he would now be falling behind by 498,800 miles per year. Assuming the highway circumvents the globe, he would be lapped about 20 times each year.
Is the example extreme? Yes. Is it unrealistic? No. Large dairy operations typically milk in three round-the-clock shifts.
One row crop operator I know now farms in 15 states. That's so he can diversify production and market risks in addition to utilizing his labor, management and equipment nine months a year rather than the normal single-site planting and harvesting periods.
A Florida specialty crop operator I recently met plants a new crop every three days and harvests 364 days a year. He doesn't work on Christmas Day.
The second question may actually be harder to answer, and that is an honest and objective assessment of you and your business, as well as your prospective business partner.
Essentially this involves doing a comprehensive analysis of each firm's strengths, weaknesses, opportunities and threats — both internal and external.
This means not just considering the historical and current situation, but also what risks and changes are on the horizon for the industry. This then needs to be followed with a similar evaluation of what the answers would be for the merged entity. Synergy, compatibility, complementary and new opportunities are all key factors to look for.
Some poorly conceived mergers could actually compound both firms' problems. It's critical to know what you need out of a merger, what you would gain and what you would be willing to give up.
Part of the rationale behind any successful merger needs to be the ability to compensate for weaknesses and to capitalize on strengths. Some of the possible reasons not previously mentioned might include management succession, the ability to grow without taking on additional debt, the elimination of duplication, the ability to adapt new technology and the ability to more fully utilize existing resources.
While mergers can offer a great deal of economic potential, they also present their own set of risks. This is particularly true on the relationship side of the business.
A merger is a business marriage. Just like any other marriage, things don't always work out even when the business rationale appears to make sense. Usually the failures occur because they involve people with different backgrounds, personalities, egos, values, personal and business goals and management/work styles.
These are all things that need to be recognized, discussed and never underestimated in terms of their impact on the venture's potential. Due diligence shouldn't be limited to just doing the homework on the financial and legal matters.
Pita Alexander, New Zealand's best known and most respected farm business consultant, says, “Never forget that with partners or a joint venture of any kind, it is invariably harder to get out of a business arrangement than it was to first get into it. Don't get personally and financially involved with any business unless the benefits are real, sustainable, bankable and enjoyable. Think about what your exit strategy would be before you enter the business. You will often find that the exit strategy is much more important than the entry strategy and seldom is enough thought given to it.”
Obviously, the merger or acquisition approach isn't and won't be a viable option for many farmers. In some cases, they wouldn't bring anything to the table that another business wanted or needed other than their assets.
Likewise, many farmers who are used to running their own business wouldn't be happy working for someone else. This is particularly true if the management and operating styles of the businesses are significantly different from their own.
Mergers or acquisitions take a lot of time, effort and commitment if they're done right and for the right reasons. A high level of trust and communication is essential, both parties need to be willing to lay all of their cards on the table and there has to be something in the arrangement for all parties involved.
Whatever the nature of the arrangement, there is one thing I believe is essential for any multiple owner business: A written buy-sell agreement signed by all parties involved, including spouses.
If you do decide to pursue a merger, I urge you to use advisers who know their stuff and have experience working with successful mergers. Tax accountants and attorneys are important, but they often aren't enough.
A good mergers and acquisitions specialist that can help facilitate and implement the deal can pay huge dividends and eliminate a lot of the problems that frequently develop.
The structure of agriculture is going to continue to change and many aren't going to like what occurs. But I sincerely believe there are ways to survive and succeed. However, almost all options involve a greater level of interdependence.
As Jack Welsh so insightfully says, “In business, the only truly sustainable competitive advantage is the ability to learn and adapt faster than your competition.”
Danny Klinefelter is a professor and extension specialist at Texas A&M University. He also serves as director of The Executive Program for Agricultural Producers. He may be reached by telephone at 979-845-7171 or by e-mail at dklinefe@ag.tamu.edu.