March 31, 2013

Gregory Duerksen
President, Kincannon & Reed

CROP FARMING’S MANAGEMENT CONUNDRUM

As we work with our crop sector investor clients around the world, we hear a common lament: there is a mismatch between the old management and labor needs of crop farming versus the current and future leadership and talent needs. Or they simply can’t find the leadership talent they need in the location they want.

Today we think about the farmer as CEO. In contrast, historically we have had owner/operators in a limited geography occasionally employing low-skill general labor. The very nature of commodity crop farms and commodity crop farming are changing dramatically, so the talent we seek today has some characteristics quite different than a generation, or even a decade ago. My father — who still helps out his neighbors at planting and harvest time — in his lifetime has transitioned from horse-drawn implements to mechanization to intelligent systems. More fundamentally, he has transitioned from doing it all himself to assembling or being part of teams, and knowledge intensity and operational complexity are growing exponentially.

A structural conundrum for farms today is that they are big investments from a financial standpoint, but small companies from a management perspective. In the United States, the economic size farm for commodity crop production is approaching 10,000 acres. The current rule of thumb for economic scale for commodity crop farms with no animals is 1 hour of labor per acre per year. So if you have a 10,000 acre farm it’s a $100 million investment ($10,000 per acre) with $10 million sales ($5 corn x 200 bushels per acre = $1000 / acre) and only 4 full-time equivalent workers per year. But the problem of course is that you need 4000 hours of labor in 4 weeks in the spring, 4000 hours in 4 weeks in the fall, and 2000 hours spread around the other 10 months.

Obviously, skilled equipment operators are a problem during the spring and fall. We don’t have a talent shortage, though, but rather a price issue. The bigger problem is the fact of big financial investment but small company from a management standpoint. This problem is compounded by the societal trend of the best educated and highest potential talent wanting to live in major metropolitan areas for reasons of spouse or partner career and bigger scale and scope of family education and daily activity options. To compound the problem, executive and broader labor mobility is plummeting globally. For example, in 2012 only 2.4% of the US population relocated, compared to 6% in 1990. It’s worse in other countries and regions.

To optimize their return on investment, agriculture sector investors must be ready to address these leadership challenges head-on with foresight, creativity, and flexibility. For example, remote sensing technologies will enable executive and operations managers to monitor crops and field activities from afar without daily personal inspection. In fact, we are already seeing the emergence of a new agricultural village; in past centuries, farming villages were small and the farmers trudged daily or via animal to their lands, while today they will drive or fly from their city location as needed when remote management is insufficient. Also, successful strategies may be gleaned from other industries with operations in remote places, such as mining or oil and gas, where we often see operations split between two workforces that travel from a central location and trade multi-day blocks of time on site.

Greg Duerksen was a member of the speaking faculty at Global AgInvesting 2014 in New York, April 28-May 1.

The opinions expressed in this editorial are the author's own and do not reflect the view of Global AgInvesting.