Steve Berger

Grain and Hog Producer
Wellman, Iowa

Ken Zuckerberg

Former Senior Research Analyst,
Rabobank, New York, N.Y

Ken Zuckerberg: A speaker at an event I went to recently made the point that things aren’t changing; they’ve changed. Look at the iPhone and all the services and features and enhancements that you get on that phone, and think about where we were 15 years ago. It wasn’t even in existence. So we spend so much of our time now with a product that we never knew we needed, but once we have it, once it was created, now we can’t live without it.

Steve Berger: It’s the same way with the farm technology. Coming out of college I had no idea about global positioning. … So what will happen in the next 10 years? It’s just, it happens much faster.

Zuckerberg: Steve, I agree. And I think it’s interesting because we are all interesting creatures, with various skills and various passions and different views, and biases unfortunately. But one thing that’s common is, when something works, you sort of “don’t change.” … That transcends a lot of businesses. However, as a student of the financial markets, it’s amazing when you think about how businesses become a victim of their own success. They get excellent at what they do, they have products and services that are widely adopted, and then oftentimes when they get too big, they become complacent, and they forgot what it was like to be a small, scrappy competitor that was trying to break into a market. That’s sort of the circle of life.

Berger: So what do you see with a typical Midwest family farm going forward. How will it be successful in the next 5 or 10 years? … How do you see it looking from the outside?

Zuckerberg: A partner of mine and I had just published a research piece called “A Time to Evolve.” And I was thinking about the cycle of life: A time to plant, a time to evolve. And as we looked critically at the quantitative models that (Rabobank) has, we had determined that the way the current farm economy is structured, that the average Midwest crop farmer — being much like yourself, a soybean and corn farmer — there’s good and bad news. The good news is that commodity prices seem to have bottomed, or at least we’ve probably seen the worst we will see. The bad news is that there’s a 75% probability that corn prices will probably top out at $4.20 over the next 5 years… And as we look at trade probabilities of where trading is going to be and how the U.S. will expand or contract in its trade prowess, this model takes into account lots of different variables, and where we come to is the high probability of low growth and low returns going forward.

So if the average Midwest corn farmer is looking at a 4-5% operating margin on average over the next 5 years, what is one to do? So the way we see it is, we see four different strategies that professional growers can pursue. The first would be, horizontal integration, and that’s a fancy way of saying mergers —

Berger: Get bigger.

Zuckerberg: Get bigger, have greater scale, lower your operating costs per acre, maximize profit.

Berger: Leaner and meaner.

Zuckerberg: Steve, in any commodity business, doesn’t matter which, we all know that the only way to win is through ...

Berger: You need to be above average.

Zuckerberg: The key to excellence in a commodity business is be the low-cost operator and maximize returns. So I think that comes into play here.

A second option is vertical integration. And as I’ve been studying corn farming, I’ve often thought, well, this was a terrific move to expand on-farm storage. It provides optionality, in terms of when you market and merchandise grain. But if you’re very good at the business of farming, why don’t people think about owning the elevator? Why can’t you vertically integrate to actually be more in control of your destiny by acquiring and owning those kind of assets?

And by the way, there are so many interesting tools now that can bring market information to the farmer’s disposal in real time. So if you have a better ability to market your grain, then you avoid — what an outside observer, myself, has seen — paying retail for inputs and selling your grain wholesale.

Another option is, and looking at some other industries, contract farming might be an interesting alternative. That is, contract with a specific, intermediary or potentially a branded company… When I think about value creation in the public markets, when you have a company that has greater predictability of recurring income, that company tends to have a higher valuation, because there’s less risk. Same thing with a farm.

Berger: Well, do you look at us as always having a commodity production in corn and soybeans, or are we going to be adding more value out of niche markets to these crops? And we haven’t said much about animals either.

Zuckerberg: Yeah, so I want to come back to that. I think, Steve, you’re unique in that, because what I hear you saying is having an integrated, more of a mixed-use farm, where, again, what’s the definition of innovation, right? Innovation can start with making as few mistakes as possible, or capitalizing on low-hanging fruit. So when I think about people talking about precision fertilizer application, the benefits of not having to buy fertilizer, or at least the same amount by having animal manure on your operation, that’s a bottom-line enhancer immediately. And the ability to produce grain to feed the hogs, as you mentioned, you’re already vertically integrated and you’ve diversified.

But I want to provide one more data point. The fourth strategy we’ve recommended to crop farmers is one that we call “adopt and adapt,” and that’s all about new technologies that deliver positive return on investment, that lower risk, that add value, that takes away either the risk, time or anxiety of production.

Berger: There’s a lot of that in the country, and I’m seeing the younger people have never seen that. You know, a lot of the young kids coming out of college have only seen the last 10, 12 years, and it’s been all good. And so there is a lot of adopting going on, and those four areas that you summarized are very important.

Zuckerberg: I also think about innovation and agriculture as being underappreciated by those outside of the spectrum. Ag has been innovating since mankind began planting, right? Every generation has continued to learn, adopt, adapt and apply interesting technologies. So, in some of the research I published earlier in the year, I talked about the four waves of innovation being mechanization. And I’m going back just, 300-400 years, rather than 10,000 years. But we had the seed drill, we had the combine harvester. Think about how different life is with a gas-powered tractor as opposed to a horse-drawn tractor.

Additional Coverage

June 2018 Issue Contents