Will Ag Banks Prosper in Age of Vertical Integration?

By Cocheo, Steve | ABA Banking Journal, November 1999 | Go to article overview

Will Ag Banks Prosper in Age of Vertical Integration?


Cocheo, Steve, ABA Banking Journal


Concentration in agribusiness and possible ripple effects have some ag bankers concerned about their long-term future

Bigness" has been a nasty and worrisome word in American agriculture since about as long ago as when the first steel-bladed plow began furrowing the prairies of the Midwest. There has always been some "big" party or group that the little guys have fretted over, fought, or hated.

Likewise there has long been concern about concentration of power in the ag business. The testimony, accusations, and objections that came out earlier this year when Cargill, Inc., proposed taking over Continental Grain (completed in July, after divestitures were made) and later when the pork industry's Smithfield made moves to acquire rival Murphy Family Farms were only the latest acts in a long-running play. There are also mergers that have taken place in support businesses--such as between Case and New Holland in farm equipment, and others in the inputs area, such as mergers or joint ventures between seed companies--and even among cooperative systems, such as the pending combination of Farmland Industries and Cenex Harvest States.

And, then, there is the longstanding consolidation of America's farms themselves. This trend is often referred to as "ag industrialization."

So much concern about ag-world consolidation has been expressed that Minnesota's Sen. Paul Well-stone, a Democrat, introduced legislation calling for a moratorium on agribusiness mergers for a year.

And then there's "vertical integration," a relatively new term used to describe the formation of agribusinesses that control every step of a particular commodity, virtually from sprouting, hatching, or birthing to dinner plate. This occurs when a company at one level of the supply chain expands or acquires firms that handle their commodity at earlier and/or later stages. While the term is relatively new, the concept is not. In describing the long and convoluted history of Cargill, for instance, MacMillan: The Story of America's Grain Family (W. Duncan MacMillan, Afton Historical Society Press), makes it clear that the company long wanted to be more than an operator of grain elevators and warehouses. The book recounts how at one early point in the firm's evolution as much attention was being devoted to starting and operating company grain farms as to storing and selling other people's grain. Today, of course, its activities range from trading of all sorts of commodities, including grain, to producing seed, fe ed, and fertilizer to brokering futures to making steel and much, much more.

So none of this is quite new; yet the speed at which the face and size of agriculture is changing is.

"The consolidation is receiving widespread attention, but many observers overlook how it will redraw the economic landscape in rural America, posing formidable new challenges for many rural communities," states Mark Drabenstott, vice-president and director of the Center for the Study of Rural America at the Federal Reserve Bank of Kansas City. His article, "Consolidation in U.S. Agriculture: The New Rural Landscape and Public Policy," appeared in the 1999 first quarter edition of the bank's Economic Review.

"It is moving fast," says Jeff Plagge, president and CEO, $135 million-assets First National Bank, Waverly, Iowa. "It's absolutely dazzling how quick it is moving. And for a community agricultural bank that has a very concentrated portfolio, it is very frightening, because such banks can start losing alternatives."

Consolidation ... and its fruits

For all the chords of memory that these issues strike, the situation in agriculture today seems very close to home for banks. After all, ag's situation isn't so different from the situation in banking, as nearly every farm banker contacted for this article pointed out. Both industries are coming to resemble barbells; as in the banking business, where the midsized institution is gradually disappearing, the midsized farm is also fading. …

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