The corporate world brings to agriculture its own set of challenges! Done correctly it has the potential to be very rewarding and profitable. In this article RCS senior consultant Matt Barton explores what he sees as the 7 key pitfalls, complexities, myths, burdens, risks and challenges to maximising long term profitability in the corporate world. If you’re not in this space, it’s worth reading on to see what you can take away for your own situation.
1. Executive management shortfalls
Senior management of many corporate ag entities rarely, if ever have any operational experience in agriculture. They are confronted with an industry that is fundamentally different to all other industries in the broader economy. Agriculture is the only industry where there is little or no control over both production and price.
Agriculture is operating in a truly global environment that is commodity based. Price is highly elastic and commodity products can be easily interchanged, not only between commodity suppliers but also between commodity groups. So one form of protein is easily interchanged with other forms of protein if the price becomes too high, relative to the other forms of protein (Beef for Lamb, Chicken, Pork etc).
Production in dry land broad acre agriculture is largely governed by prevailing climatic conditions. Generally once production tries to outmanoeuvre climatic conditions, business metrics quickly deteriorate.
Undue management time, effort and resources can be wasted in trying to control production and price of commodities. This indicates a poor understanding of the key drivers of profit.
2. Operational management shortfalls
The common career path for agricultural operational managers is to move up the management hierarchy within one or more agricultural operations. This career path has proven over time to be an excellent method of training for agricultural operational methods and procedures.
Unfortunately this path has ignored the business training that is fundamental to a manager of a profitable agricultural business. This lack of understanding of profitability and key profit drivers, commonly leads to a long-term cycle of poor business performance.
An important misconception at operational (and executive) management levels, is that production equals profit. It is important to understand that there is no correlation between profit and production.
A telling symptom of this breakdown is the blaming of poor business performance on influences outside of the managers control. This will typically be demonstrated in blaming poor prices and/or unfavourable climatic conditions for poor business performance.
3. Business complexity trap
The major economic headwind facing most private farming businesses is scale. The economic area needed to justify a full time labour unit can double every 15 years or so.
One strategy commonly used by private operators is to counter scale with complex and flexible business systems. This can be effective in many private businesses because of the private operator’s skill, drive, flexibility, unpaid labour and passion.
Corporate agricultural businesses can and do adopt much of this complexity in the effort to mimic “best industry practice”. They generally lack the key success factors being skill, drive, flexibility and passion. They also need to pay full cost of labour and then generate dividends!
Corporate businesses falling into this complexity trap have totally ignored the one comparative advantage they have over many private operators, scale. They have instead adopted business models that are notoriously difficult to manage and have a much higher risk profile (price, production and redundancy). Importantly they have designed an inherently unprofitable business.
4. Myth traps
Unfortunately agricultural media tend to concentrate on industry disasters, leading popular perception of the industry towards a bias of negative misconceptions. Lack of industry experience amongst executive management can lead to their acceptance of common agricultural myths and misconceptions.
These may include:
- Droughts cannot be avoided
- Controlled landscapes always reflect best management
- You must work hard on the land
- Can’t make money out of agriculture
- Weather and price control profitability
Acceptance of these myths or paradigms hide fundamental flaws in management (both executive and operational) and poor business models.
5. Administrative burdens
Agriculture is a highly competitive industry that competes on a global scale. This is reflected by comparatively low margins that are accepted by much of the industry. Although agriculture is capital intensive it cannot support high overhead levels that are typical of many other industries.
Management and administration layers cannot be supported. Head office and corporate trappings quickly become a profitability drain. Problems cannot and should not be fixed by throwing money and labour at the problem.
Labour and plant and equipment must be at an appropriate level that optimises profit. And there is a real danger of the “boys with toys” syndrome at farm level.
6. Management risk is the key
A typical agricultural risk analysis will identify many sources of risk. These would include seasonal risk, price risk, production risk and commodity risk. Extraordinary lengths can be made to mitigate each individual risk. Good management and management support structures will significantly mitigate and/or eliminate all of these risks. Conversely bad management will amplify all these risks.
The most important risk mitigation is management and management support. Interestingly this is the most overlooked part of the whole equation. Agricultural managers are the most poorly paid of all industry sectors, and management support is negligible.
Operational managers are typically located in remote environments with little or no professional and peer support. Appropriate external management mentoring and support can fill this void providing value well beyond their cost.
7. Disconnect between ownership and operation
As ownership of agricultural land moves from owner-operators to corporations/investors, an important nexus has been broken. It was in the owner-operator’s best interests to maintain the landscapes under their management for future viability. As absentee owners proliferate, land degeneration risks rise exponentially.
Operation managers under pressure from executive management, could easily make short-term decisions that will benefit the bottom line but have a much more costly longer-term impact. This has wider societal implications.
Absentee owners should include and maintain strong corporate cultures around land stewardship and revisit the vision(s) and & goal(s) continuously.
RCS Corporate Advisory
Matthew Barton is a senior member of the RCS Corporate Advisory service now specialising in helping corporate agribusinesses maximise long term profitability.