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 by R.B. Halaby June 2003 Business just seems to be getting bigger and bigger. Wal-Mart has annual sales larger than the GDP of 36 countries. Mergers in the agrochemical industry have created seven major companies where 11 had been. The value of annual mergers exceeds trillions of dollars. It all seems like bigger is the only way to go. But for every newly merged monolithic company, there are thousands of new opportunities created. It is a trend I call the "re-entrepreneuring" of agriculture, and it is reshaping the way businesses are built. For a start, many of the new generation see a whole world opening up as larger enterprises consolidate business and change the economics of selling into some markets. The cost structure of large multinational enterprises demands a focus on markets that can support them. Single products must have sales well into the eight-digit region to be sufficiently profitable, or even sufficiently large enough to warrant attention. As a result, some large companies are likely to make products available to smaller groups. Several businesses are successfully picking up crop protection products for specialty markets, such as orchards or nurseries. Large crop protection companies are happy to license chemistry to smaller companies and garner extra sales or royalties on markets they couldn't service properly. Similarly, some export markets are opening up again. Consolidation has helped large companies focus on large markets, such as China or the European Union, but the efforts to service less enormous markets such as Thailand or Uzbekistan may not be as sustainable. Large agricultural companies will often walk away from smaller markets to focus on bigger sales. Thus, what is only a drop in the income bucket for a large company may be the bucket for a smaller entity. Especially in the agriculture sector, where there are regular economic cycles that depress commodity prices, the trough of the cycle thins margins out and can be tough on publicly traded companies where fixed costs can run high. This is already evident, as we have seen many companies aimed at vertical integration divest themselves of certain market segments. There is tremendous pressure to find efficiencies and core competencies in businesses - both big and small. In search of those solutions, I have noticed that a new generation of companies is popping up. Enterprises such as Channel Bio Corp. and Maizex are showing how to get serious about building a specialized company. It is really all about knowing who you are and what it means to focus your talents on a particular niche. Don and Aileen Funk of Channel Bio Corp. have grown a successful seed corn business. In an industry where companies such as Pioneer Hi-Bred International command tremendous scientific infrastructure and huge market share, it is sometimes hard to imagine a role for the "little guy." However, the Funks have specialized. They bring strengths in marketing to their region of the Corn Belt. They contract out their production so they can stay focused on sales. The strength of their business is quite simply avoiding being too many things to too many people. By the same token, Dave Baute of Maizex has identified corn seed production as his niche. He has built a business that not only serves other entrepreneurial companies in the agriculture sector but also several large multinationals. Baute has an ingenious way of working with machinery and equipment and has created some unique in-field solutions to sorting corn. He and his wife, Brenda, also do some marketing, and their innovation is paying off. Specifically, the company has enjoyed a 15 to 20 percent increase in annual growth for the past four or five years. It is when you see success stories like those that you believe the re-entrepreneuring of agriculture is well underway. Little companies are being run by people with great courage, people who see a niche and focus on it. This trend debunks many of the myths about "industrial" agriculture taking over. As several large meat companies indicate that they are exiting pork production, we are reminded that farming is a traditionally entrepreneurial experience. For the most part, families who have a passion for their land, their production and their livelihoods have run farms in this country. Large enterprises certainly have a role, but that passion for production, and all the details it entails, is hard to replace. I'm also seeing some industry veterans re-establish enterprises following changes in the industry. A good example is ABT, a forage company that bought up dozens of smaller companies operating in the same market. ABT rose and fell with the stock market a few years ago, and since its demise, many of the former owners of these forage businesses have reconceived enterprises in the sector. Their experience and understanding of running the proverbial tight ship is helping to restore the forage business to profitability. This, of course, leads to observations about efficiency, because, in business, there are really two ways to achieve it. One is to build an enterprise that has a critical mass that allows it to operate globally in many sectors, or share administrative costs across one portion of the market, or build synergies through linking research and development to marketing. Another way to create efficiency is to operate a small organization that is lean, ensuring administration does not become a large portion of the cost of operations. As the head of one small company once told me, he used to worry if toilet paper costs got too high. That's not always the best use of time, but it speaks to the capacity of entrepreneurs to watch all aspects of their business. When entrepreneurs are at their best, though, they are watching changes in the market. In addition to opportunities large companies leave in product segments or export markets, entrepreneurs are also great at identifying new niches and serving them well. Large businesses such as Cargill Specialty Oils bring connections into the board rooms of the world's largest food processors and can develop the unique oils they need for everything from potato chips to raisins. Their ability to serve these markets well is great. At the same time, smaller enterprises can also be very successful at identifying a need and serving it. Whether it is soybeans specially bred and grown for soymilk or organic herbs for restaurants, a whole new generation of business people are meeting these needs. And the truly great thing is that there is seemingly exponential growth in the number of new niche markets to be served. There are not only niches to fill but also more of them. So, I believe one of the most unsung trends of the past few years in agriculture has been the re-entrepreneuring of the sector. There is certainly room for enterprises of all sizes - big and small, integrated and specialized. Businessmen and women across the industry are building wonderful new opportunities for themselves, their employees and the other businesses they service. Too much focus has been put on the mergers and so-called corporate agriculture. The next time you hear about another large merger in the agri-food industry, consider that it will create efficiencies for bulk markets and in its wake leave hundreds or even thousands of opportunities for a whole new wave of entrepreneurs. R.B. Halaby is chairman of AgriCapital Corporation, a New York-based investment bank for agribusiness. For more information, visit www.agricapital.com. Tweet |
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