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Smaller Grain Elevators Merge to Avoid ‘the Biggies’
Matt Krabbenhoff said he started noticing a disturbing trend some years ago – smaller co-ops such as Kragnes Farmers Elevator in Kragnes, Minnesota, where he’s worked for almost a decade, were starting to get acquired by multinationals such as CHS Inc. or Archer Daniel Midland (ADM).
In a bid to save the co-op from being snapped up by a larger firm, and perhaps to save their jobs, Krabbenhoff said he and elevator manager Dan Noreen proposed something to colleagues at nearby elevators that he thought just might work: a merger of equals.
Rothsay Farmers Co-op, based in nearby Rothsay, Minnesota, was a natural partner as the two companies, along with Fergus and ADM, were already quarter partners in a shuttle train. While Fergus and ADM weren’t interested in partnering, stakeholders in Kragnes and Rothsay decided earlier this year that they could do more combined than apart.
“We were trying to figure out how to get the best margins without hurting each other,” Krabbenhoff told Successful Farming. “Rothsay has a very good agronomy program, and Kragnes is a good elevator deck and can handle more bushels, so we decided we’d partner and that this was the best time to do it.”
The companies closed their merger in mid-September, just in time for the harvest, forming a new company called Valley Ag Partners.
Consolidation has been rampant in the agriculture space in recent years. Deals have been made between some of the biggest companies in the industry including Dow and DuPont, Monsanto and Bayer, and ChemChina and Syngenta.
Smaller companies, including elevators such as Kragnes and Rothsay, aren’t immune to consolidation and in fact are likely targets for larger companies looking to expand their market share. It’s become more and more difficult for small firms to compete with ethanol plants and large conglomerates that dot the landscape where only small elevators once stood.
Sydney Place, the owner and head consultant at SPS Consulting in Sioux Falls, South Dakota, said consolidation among elevators has been going on for years, but in the past 10 years it escalated as farmers went through some good times. They were able to purchase larger equipment, more farmland, and more on-farm storage, meaning they had fewer needs from an elevator.
“The co-op that had serviced most of those farmers who were operating 500- to 1,000-acre farm were now trying to keep up with 1,000- to 4,000-acre farmers,” said Place, who helped broker the deal between Kragnes and Rothsay. “It costs a lot of money to invest in a business in a way to keep up with producers. To stay relevant, they needed to create investment opportunities. They asked ‘how do we share these needs’ and started saying ‘let’s consolidate our investments and build one giant facility that can cover a 20-mile radius.”
To survive, she said, elevators evolved.
Jon Scheve, the head of grain trading at Superior Feed Ingredients, said he’s also seen plenty of acquisitions and consolidation in the industry. When he was growing up near Beatrice, Nebraska, the local co-op owned three elevators. Today that same company owns 30 or 40 facilities. That gives them the ability to compete with larger companies that are snapping up the nearby mom-and-pop shops.
Still, it’s a grind, he said.
Elevators will give member producers a dividend after a set period of time, promising them returns, for example, three decades down the road. That seemed to sit well with older farmers, but younger growers today aren’t as willing to wait to see if those returns ever come to fruition, Scheve said.
Instead, most are looking for the best price whether that comes from their local elevator, a multinational 20 miles away, or an ethanol plan just down the road, he said.
“Younger farmers don’t want to wait for 30 years to get this dividend when they can trade direct and get most of that dividend now,” Scheve said. “With the advent of an ethanol plant every 30 miles, you don’t have to go very far.”
Noreen, now the manager of Valley Ag Partners, the new name of the combined entity that at one time was Kragnes and Rothsay, said he understands that producers need to get top-dollar for their crops, especially when times are tough. All he can do, he said, is hope he’s offering a competitive price.
“Minnesota co-ops in our region haven’t been as profitable as they were when Grandpa was farming, so they haven’t paid regular dividends,” he said. “Younger producers have learned that they can’t count on those dividends, but they know if they can get the best price today, they should take that best price today. Deferred equity doesn’t mean much to them anymore.”
Offering multiple services rather than just buying grain is another draw for co-ops that offer marketing, fertilizer, seed, and other services and products, he said. Again, though, producers have a lot of options when it comes to purchasing inputs, so it’s not a given a grower down the road will buy from Valley Ag.
In fact, Noreen said he doesn’t believe in the one-stop shop anymore. As with anything, people are going to go where they get the best price, and Valley Ag, despite its best efforts, doesn’t always accomplish that goal, a fact the manager understands and embraces.
“We say here’s our fertilizer and here’s our price, we have seed and here’s our price,” he said. “Individuals are going to pick and choose what piece of the pie they’re going to get from us, and we’re OK with that because we don’t expect a guy to one-stop shop because input costs are so high.
“We try to find some additional or alternative services for them. Whether it’s advances on grain contracts or delayed pricing programs, if you can’t compete on cash price, we always try to find other mechanisms that add value. If I were them, I’m going to be a shopper, also, and find the personality and service entity I feel good about and work with them.”
Place, the consultant, said she sees more consolidation coming down the pike as multinationals get bigger and producers become more savvy in terms of grain marketing and adding storage on their farms. Small elevators are going to have to do something not only to keep up with the CHSs and ADMs of the world, but the ever-growing producer whose farms are getting larger.
Co-ops that have less than about $150 million in sales likely will be bought by larger companies if they don’t merge with equal partners, and some of those might be overlooked because they have too much debit or simply aren’t profitable enough, she said.
In that situation, it’s likely the elevator will eventually go out of business. Or, if they’re lucky, a larger company will buy its assets and shut it down instead of attempting to make it profitable. Either way, the employees would lose.
“Some are in a state where a Cargill or ADM or CHS wouldn’t even want to merge them in,” Place said. “If they don’t have the assets or bring value, a lot of larger companies are going to skip over the co-op. If they’re small but still want a seat at the table and to protect the equity of their patrons, they need to take advantage of the merger opportunity while they still have value. Otherwise, their assets will be lost, and they’ll cease to exist.”