Business Growth for Grain Originators: Weighing Risk vs. Reward
by Dusty Clevenger
Grain origination companies must weigh many factors when considering the future of their businesses. Capital expenditures are an ongoing necessity just to maintain business at a steady level, while investments in expansion, technology and people are essential to actually grow the business.
For many operators, however, whether to take on additional risk to capture market opportunities is no small decision, and it evokes a number of questions.
“Will these investments improve margins enough to pay for themselves?”
“If a competitor with deep pockets moves into my area, will I be able to compete?”
“Do I really want to take on risk at this point in my life, or do I transition the business to someone who is in a better position to continue the legacy my operation has today?”
A 50 bu/acre increase in corn yields over 30 years has created opportunities for grain originators.
The Capital Question
For grain originators with strategically located operations, there is growth to be had. Decades of rising crop yields and increasing demand for those crops from processors have placed grain origination companies in an enviable position from a market perspective.
However, without adequate access to capital, growth becomes an increasingly risky endeavor. A situation is created in which a company “grows out of its balance sheet.”
For example, consider an operation that has grown sales volumes over time to the point where it must upgrade its infrastructure. However, doing so would significantly elevate its risk, because when it directs some of its capital resources toward expansion, it puts itself in a tight situation where working capital is concerned. Should grain prices spike, it may find itself in a situation where it can’t cover the cost of grain purchases at the higher levels.
Additionally, this same operation may need to make choices regarding skilled staff. With an upgraded facility comes more complexity in the operation and the need for senior finance, marketing, HR and logistics staff. A company won’t be able to take full advantage of facility upgrades if it doesn’t also have the capital for the best people.
Alternatives for Remaining Viable
Grain origination facilities operate where they do because of location. Access to barge, rail and/or highway is a crucial factor, along with proximity to crop production. Sufficient capital along with the right location is a virtually guaranteed winning combination in today’s marketplace. Conversely, a less than-ideal location can be overcome with adequate equity capital.
Rather than taking on additional debt, equity financing can provide the dollars needed to capture market opportunities without affecting daily operating capital needs.
So what are the alternatives for grain companies to remain viable today? A few choices to consider include:
Continue to go it alone, and do nothing or increase risk while upgrading facilities to meet today’s need. By doing nothing, the operation’s business may stagnate and margins will continue to erode. Even with better facilities, however, the operation remains at the mercy of favorable production yields in its geography, and a couple poor years in a row could spell disaster.
Merge with a nearby competitor in an attempt to deal with equity challenges. This has been the solution of choice for many cooperatives, and local co-ops have become increasingly regional in nature through repeated mergers over time.
Be acquired by a company with access to global markets. A company with an established grain network has a number of benefits over local or regional operations, so it is often a better alternative as a long-term solution when compared with a merger.
Be acquired by a financial company that is backed by private equity. This option can address capital concerns in the short term. However, the company is likely to be sold again to the highest bidder, typically within three to five years. This is the only way the private equity outfit will meet its investors’ needs. It requires cash-on-cash returns based on an increased sale price in a short time frame.
Partner with a holding company backed by patient, long-term investors that leaves local management in place and succeeds by empowering them to grow locally while gaining access to a global grain network. In this case, a holding company acquires the local operation but the local identity is preserved and enhanced. With access to capital, the operation can make the investments necessary to grow and compete while not jeopardizing its daily operations.
An example of this option is Big River Rice and Grain, which was formed in 2013 when Agspring, a holding company, acquired Tubbs Rice Dryers, Raley Brothers and Bayou Grain and Chemical. The owners of these agribusinesses chose the new name.
With long legacies of understanding local growers and their needs, these three companies were an important part of their communities, and the owners desired a solution for the future that would keep their legacies intact. Three years after the acquisition, numerous improvements have been made that make the new entity a formidable competitor in the region.
Find Out More
It is possible to move a grain origination business forward in a way that maintains the local identity of the company. Read the full story of how Agspring formed Big River Rice and Grain at www.Agspring.com/conversation, and consider your options for how your customers could be best served for years to come.