US row crop farmers must transform: Rabobank

The bank suggests vertical integration, contract farming and investments in on-farm technology to increase attractiveness to investors.

Pressured row crop profit margins over the next five years will force US farmers to change to ensure long-term resilience, according to Rabobank.

In a report released last week, the Dutch bank recommended row crop farmers in the country consider contract production agreements, vertical or horizontal integration and investment in on-farm technologies to enhance the investment-worthiness of their operations.

Specific suggestions included purchasing neighboring farms or grain storage facilities, converting a portion of under-performing land to organic production and following their permanent crop peers in establishing long-term contracts to supply food processors or consumer packaged goods companies.

“While there is always time to plant, now is the time to evolve,” the report’s authors wrote.

Jeff Conrad, president and founder of separate-account focused AgIS Capital, told Agri Investor Rabobank’s suggestions could essentially apply to any industry and that the path taken by an individual farm will always depend on access to, and facility with, capital.

Conrad  agreed with Rabobank’s projection that though row crops appear to be nearing a low point on prices, the next five years are likely to see low growth, profit margins and returns on invested capital in the sector. While AgIS’s strategy is opportunistic and the firm has only purchased permanent crop properties since its founding in 2013, Conrad said it had bid on row crop farms and continues to monitor the market for distressed opportunities.

Idiosyncratic factors in largely family-run operations will determine whic of the suggestions provided by Rabobank will work on a particular farm, according to Conrad. He stressed the role of generational differences, and said that the younger farmers increasingly coming into decision-making roles after having been to agriculture or business school often pay much closer attention to financial considerations than their predecessors.

“You are seeing a much more shrewd group of young farmers coming through,” he said. “They understand that they are producing a commodity and focus on how to capture more value. Often, they are looking at vertical integration. Some of them want to go so far as to create a brand and try to get it onto store shelves.”

Rabobank observed that row crop farmers operating land they own have seen higher profits than those farming rented land. The bank described a farmland sale as an option with low relative attractiveness for farmers, but a high possibility of execution success.

Conrad explained that the farmland sale process can often extend over as long as five years and sometimes involves adapting to changes within a family’s own plans of who will or will not remain part of the operation. While the cultural stigma attached to farming leased land has faded over recent decades, according to Conrad, the potential for an unexpectedly quick turnaround often leaves farmers still reluctant to sell, despite the mixed outlook for row crops.

“If you are in some of these competitive markets, even today, you don’t want to give up the land because once you give it up, getting it back will be difficult,” Conrad said. “Farmers definitely think that way.”