You Don’t Buy the Stock, You Buy the Business
I spend too much time on social media, but to be fair, without it, I wouldn’t come up with gems like this.
On a podcast the other day, they were interviewing a young Warren Buffett. He made the comment that when he was younger, he bought stocks based on the market (technical analysis). As he grew older, he realized that that way of thinking was not conducive to the wealth he was attempting to create. It was at this point that he started buying businesses. Around $147B later, here we are.
So, in agriculture, what makes a farm an attractive business unit?
People
In today’s environment, farms sell based on asset value. I am in the camp that as margins tighten and the structures of farms become significantly more complex, this will change. The value within most businesses is based on their people. The board of governors, the C-suite, the management, and the baseline workers. In agriculture, we don’t even look at these people as value or investment; they are merely an expense. Going forward, things are going to change.
The labour shortages of today are already starting to affect agriculture. A significant portion of the industry still believes the local paper and the part-time miner or oil worker are the best employees. For those operations that have created human resource plans and hired based on attitudes, behaviours, and specific skillsets, they are seeing dividends considerably ahead of their competitors. I am often told that if the farm has tight margins, hiring people is not possible. In many instances, that is because the primary operator and owner is not doing the job of running a business; they are in the seat. The statistics and data show that spending time working “on” the business and not “in” it has compounding income effects. The sooner you realize the value of your time (an actual hour’s X wage equation), the sooner you identify that you need to hire someone for the seat OR to run your business (that one is much harder to swallow for most).
Process
The one area of agriculture that I have seen change the most in my time as a consultant is around process. This might be something as simple as meetings (who would have thought that communication was required to run a multi-million-dollar enterprise?), roles and responsibilities, accountability, and, first and foremost, operations. The moment we started keeping benchmarks on hours per acre and farm labour efficiency, we started seeing trends that were clear as day. The farms that have internal processes get significantly higher efficiency from labour (whether family or third party). Who would have thought, what you measure you manage?
Additional processes around agreements have become significant as well. The old verbal handshake on a land rent is not commonplace anymore (and nor should it be). I have seen the farms we work with pushing for longer-term agreements and “negotiating” terms like true business entrepreneurs. Things like monthly payments, renegotiating clauses before the end date, first and last rights of refusal, gross margin and share of risk agreements, and other mechanisms that resemble those used by other industries for decades. The landlords are becoming business partners, not just demonized people who are continually looking to hurt your profitability.
The shareholder agreements, wills, and estates are finally becoming commonplace amongst the progressive operations. The fact that there is an agreement that can mitigate family disputes rather than just splitting up the farm is not revolutionary; it is just not used enough. I have seen these types of agreements save families and, in turn, also save the business and its ability to create profitability. These types of processes are significant to the future viability of operations.
Vision and Strategy
I am quite honestly tired of hearing the term “price taker”. If this were true, then every farm I work with would have similar gross revenue because the price is fixed and neighbours have similar land and soil classes. For those who have not looked at any benchmarks, this could not be farther from the truth. The top businesses (farms) in the industry market considerably better prices, whether basis or futures, than their competition.
The fact that farms can choose different commodities to grow, use multiple vendors and elevators, and are not fixed to their management styles makes the industry less about “price taking”. The vision and strategy of farms have become commonplace now that margins are tightening, and we are starting to see those that can excel. The top farms do not just sit and take the current environment; they adjust strategies and change visions so that they can stay ahead. The farm beside you is not successful because of luck; they just know how to play the game.
I may never live long enough to see a publicly traded primary producer operation. I do, however, see the shift to buying and selling farms with “goodwill”. The value of these operations is not just in their asset base, but it is tied to the people they employ, the leadership group they have, and the processes and strategy that they follow. If you want to see the largest gap in agriculture, it is not just based on wealth and equity; it is based on management and vision.
If you stop looking over the fence, it would free up a lot of time to improve your own sandbox.
