Klinefelter: By the Numbers

By Danny Klinefelter
DTN Farm Business Adviser

Aside from several collaborative farming efforts, using mergers and acquisition to grow a business has generally been considered a corporate America topic. However, I think there are several things developing in the production agriculture sector which makes it something that more farmers need to think about now.

The first is the decline in farm income, which may be long-running. The second is the softening in land values. These will affect several things: repayment capacity, declines in market value net worth, increased leverage, reduced liquidity and tighter credit due to higher risk.

There is a basic principle of economics that I have often quoted: "The function of a competitive market is to drive the economic return to the average producer to breakeven, through supply and demand responses, in both input and output markets. In equilibrium, the top end are profitable and still able to grow, the average are just hanging in there, and the bottom end are losing money and exiting the industry. Business success and survival depend on continuous improvement at a pace necessary to stay in the front half of the pack."

In order for the middle group and the bottom group to remain in farming without liquidation, one option may be to merge with a successful entity. It would mean giving up control, but it would allow the business to survive and preserve equity, and allow the operator to remain employed in agriculture. This not only applies to principal operators, but to their partners, children working in the business and key employees.

The successful operation would benefit from greater economies of scale, but also gain access to experienced employees that are becoming increasingly hard to find in modern agriculture. It would also allow them to grow without necessarily increasing leverage, but at the same time take on and work with minority owners. One critical area to be addressed is the need for a buy-sell agreement between the owner(s) of the operation being assumed and the majority owners. At a minimum, this would need to address stock valuation, transfer rights and voting rights.

For some on both sides, a merger or acquisition wouldn't work because of cultural fit, management style and switching from being the one who "calls the shots" to being an employee with delegated responsibilities. For others, it would allow them to do what they love best in farming without the burden of taking on the executive business management duties that are increasingly being required of agricultural businesses. Those duties include financial management, managerial accounting, risk management and human resource management, just to name a few.

Now is the time to get prepared for growth before the ag economy worsens and some type of action is forced on your farm. It is always better to have a strategy and alternatives well thought out, rather than being reactive under stress.

EDITOR'S NOTE: Danny Klinefelter is an agricultural finance professor and economist with Texas AgriLIFE Extension and Texas A&M University. He also is the founder of the mid-career Texas A&M management course for executive farmers called TEPAP. Grains Pro subscribers can access all of his columns online using the News Search feature under News.

(MZT/AG)

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