John Mattingly: Socratic Rancher 5-27-13
October 16, 2013
We all understand that it's difficult for a young person starting out today to get into farming or ranching. The reason seems obvious enough: the capital required is overwhelming.
If we drill down into this problem, it actually has two parts. The first is capital structure, and the second is lack of market share relative to capital required.
■ Capital structure. Most businesses in the U.S. are structured in such a way that the operator does not own the entire means of production. That is, the large capital components of the business are owned by shareholders as shares of stock. This enables the operator to control the large capital items without having to own them in total.
With capital assets, there are three functions: Ownership, possession and control. It is necessary to have two of these to run a business that requires large capital assets. Ownership usually comes with control, subject to relevant laws and standards such as zoning. Possession, as in a renter in possession, also comes with control, depending on the terms of the lease.
In the case of ownership, farmers try to own the farmland, the machinery, and then fund the variable expenses of operating. This is like the senator who once famously said, "A billion dollars here, a billion dollars there, and pretty soon you're talking about serious money."
One can imagine a farmer saying, "A couple million bucks here, another million or so there, and then a few hundred thousand on top, and you have a serious barrier to a young person getting into farming.
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In the case of a renter, the farmer still has to pay the landlord a reasonable return on investment, which, even in today's low interest rate world, can be a handsome sum. In fact, the financial metrics of ownership with reasonable financing are attractive today relative to rent. But this assumes the young farmer has access to low interest loans, either though government programs, or owner financing.
■ Market share. Most businesses that require a lot of capital seek to get substantial market share for their investment. But the farmer, even established farmers who inherited their farms or won the lottery, have no measurable market share in most farm commodities. The biggest corn farmer in the county, or the largest hay grower in the valley, or even the biggest cash crop corporation in the state has almost no market share in what they grow.
For example, the annual corn crop is ten billion bushels. Billion. A big corn farmer might grow a couple of million bushels a year, which is .000002 percent of the corn market. And that's considering only the annual production from the U.S., not including worldwide production or carryover. So even though the big corn farmer grows a lot of corn, a few million bushels exerts no appreciable influence on the market.
Most businesses that make a large capital investment want at least 25 percent market share. Basically, the farmer is in the unenviable position of needing to spend a lot of money for almost no influence on the market into which his or her production must go.
This is a serious problem for young people, especially given that most of the farmers in the U.S today are getting old. The last ag census estimated that 60 percent of U.S. farmers are over the age of 55. This means that in the next 20 years, we need to find a lot of young farmers to fill the tractor cabs of a generation of farmers leaving the field. ❖