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ATTENTION READERS:
THE AGRIBUSINESS EXAMINER recently marked a special milestone with its 500th issue. To those readers who have made contributions in the past few months and regular contributions over the years I am deeply indebted to you and am most grateful for your continuing support. Continual begging is not my style, but short of it I am here appealing for greater readership support in continuing for another 500 issues.
Checks should be made out to A.V. Krebs, P.O. Box 2201, Everett, Washington 98213-0201
OVERVIEW:
* THE FARMER’S NIGHTMARE ???
New York Times Editorial
* FARM BILL TOSSES DIRT ON SMALL OPERATIONS
By Richard R. Oswald
* FARM BILL MAY EASE RULES FOR MEAT PROCESSORS
By Philip Brasher
* FARM BILL: SAVING GRACE
By Seattle Post-Intelligencer Editorial Board
* REFORM IS IN THE EYE OF THE BEHOLDER
By Daryll E. Ray
* USDA CRACKING DOWN ON “ORGANIC” FACTORY FARMS
Cornucopia Press Release
* AGP BUYOUT PROPOSED
By Jerry Perkins
* WHY DEERE IS WEEDING OUT DEALERS EVEN AS FARMS BOOM
By Ilan Brat and Timothy Aeppel
THE FARMER’S NIGHTMARE ???
New York Times Editorial
August 10, 2007
Only a few years ago, ethanol was just a line in a farm-state politician’s stump speech — something that went down well with the locals but didn’t mean much to anyone else. Now, of course, ethanol is widely touted – and, within reason, rightly so — as an important part of America’s search for energy independence and greener fuels. One day, we may be using cellulosic ethanol, the kind derived from grasses. For now, the ethanol boom is all about corn. And the real question is whether that will finally kill American farming as we know it.
Farmers in the corn belt have watched the coming of the ethanol boom with an ill-concealed excitement. They’ve invested in small-town processing plants, and they’ve happily seen the price of corn fluctuate steadily upward. But land prices have also moved steadily upward. Land set aside for conservation is being put back into production. And a bidding war has broken out over acreage, a war that farmers are sure to lose to speculative investors.
In short, the ethanol boom is accelerating the inequity in the rural landscape. The high price of corn — and the prospect of continued huge demand — doesn’t benefit everyone equally. It gives bigger, richer farmers and outside investors the ability to outcompete their smaller neighbors. It cuts young farmers hoping to get a start out of the equation entirely. It reduces diversity in crops and in farm size.
For the past 75 years, America’s system of farm subsidies has unfortunately driven farming toward such concentration, and there’s no sign that the next farm bill will change that. The difference this time is that American farming is poised on the brink of true industrialization, creating a landscape driven by energy production and what is now called “biorefining.” What we may be witnessing is the beginning of the tragic moment in which the ownership of America’s farmland passes from the farmer to the industrial giants of energy and agricultural production.
FARM BILL TOSSES DIRT ON SMALL OPERATIONS
By Richard R. Oswald
Sacramento Bee
August 11, 2007
LANGDON, Missouri — With passage of the farm bill, the House of Representatives forfeited the opportunity to do something this country hasn’t tried since the New Deal of the 1930s: It could have taken steps to rejuvenate rural America.
In the year I was born, 1950, there were 13 houses along our road in the far northwest corner of Missouri. All of them were farm homes. Today, nine houses are left, and I am the only farmer or farm owner living here. What’s happened along my road is also true across vast areas of the Midwest, where farm consolidation over the past three decades — big farms gobbling up small ones — has taken its toll, not just on farmers but on the rural communities that once relied on farmers for trade and taxes.
Consolidation and loss of rural population have been direct consequences of the past several farm bills. By increasing subsidies, Congress made it profitable for the most aggressive operators to accumulate more land and scoop up a large share of the farm bill’s allotments. While the stated purpose of farm bills has always been to maintain the family farm, in reality the Congress has brought about the family farm’s decline.
The House might have fashioned a 2007 New Deal for Rural America. It would have started with real subsidy limits, making mega-farms less profitable. That step should have been easy.
There is so much demand now for grains — as both fuel and food — that, finally, we have strong, demand-driven markets. Now is the perfect time to move grain farms away from direct payments while insuring crop yields and revenue. It’s been said that farmers live as paupers and die as millionaires. While many farmers look rich on paper, few have million-dollar earnings. In fact, most farms earn only about a five percent return on investment. In low production years of drought or flood, farmers can lose money.
In reality, farmers are wage earners who invest in their own employment. When our profits decline due to poor markets or bad weather, not only our investments but our wages too are at risk. The misguided crop subsidy program that the House maintained protects large farms doesn’t go far enough to support small farmers. It excludes livestock producers, many of whom are suffering through an epic drought.
What producers really need is a safety net that is not paid out as a “bigger is better” stipend — the incentive that has folded family farms into sprawling agribusiness. What farmers want is the comforting knowledge that when bad luck, bad weather or bad markets come (and they always do), there will be a mechanism, an insurance policy, there to soften the blow.
The House could have offered real assistance to local producers willing to grow food in sustainable and humane ways. Legislators could have protected livestock raisers from contracts with multinational meat packers who force farmers to absorb most business costs and all the risks. Instead, the House bypassed the most vulnerable farmers and, in the meekest of reforms, limited subsidies for a tiny group of the richest farm businesses, or, as is too often the case, millionaires with farm interests.
Huge payouts to large farms will never help rural communities because large farms contribute little to local economies. Big farms buy the mammoth machines needed to work vast acreages — a fully equipped grain combine can run over a quarter of a million dollars — far away from the local community. They sell goods wherever the market offers advantages.
Big farms mine agriculture only to spend the profits elsewhere. They have no loyalty, no ties, and no allegiance to towns of 500 or 1,500 people, such as mine. An emphasis on economic development would have helped rural communities grow jobs, as well as crops. And lower limits on direct payments to the largest farms could have freed capital for rural rejuvenation.
The recent farm bill is notable mostly for what it didn’t do. It did not end the unfair advantage granted to large farms over small. It did not rescue livestock producers from a downward spiral of corporate control and drought. It did not silence the lobbyists of multinational grain buyers. It did not offer meaningful limits on farm payments. It did not answer the call from rural communities for real economic development. It did not establish reliable disaster assistance for all domestic growers of food.
In July 2007, as rural Americans watched and waited, the House had the opportunity to create an epic farm bill of New Deal proportions. The Senate takes up its debate on the farm bill soon. We are still waiting.
FARM BILL MAY EASE RULES FOR MEAT PROCESSORS
By Philip Brasher
Des Moines Register
August 14, 2007
When Greg and Jolene Heikens decided to expand their Iowa meat-processing business, they found they had to switch from having state to federal inspectors. Meat and poultry processors can’t legally ship their products out of the state unless federal inspectors regulate their plants, and that discourages supermarket chains from selling state-inspected products, said Jolene Heikens. Those products often come from small processors that cater to family-run farms and ranches.
“We ended up going federal because we felt we had no choice,” she said. But becoming federally inspected is too expensive and time consuming, processors say.
That would no longer be necessary under a provision farm-state Democrats inserted in the House-passed farm bill. The legislation would allow state-inspected meat processors to start selling their products outside the state. Twenty-seven states, including Iowa, have their own inspection programs. “State-inspected facilities are every bit as safe as the federally-inspected facilities,” said Iowa Agriculture Secretary Bill Northey.
Consumer activists aren’t so sure, and they say that allowing interstate shipment of state-inspected products could encourage plants to drop out of the federal system operated by the U.S. Agriculture Department. Consumer groups say it’s also not clear how a state inspection agency would enforce a recall of products that have been sold in other states.
The legislation “would lower food safety standards and increase the risk of food poisoning in the U.S.,” the Consumer Federation of America and other consumer groups said in a letter to members of Congress. The letter also was signed by trade unions that represent meat-processing workers and USDA inspectors.
New Mexico disbanded its inspection system this year after the USDA challenged the adequacy of its regulation.
The USDA also found problems in several other states — including Mississippi, Missouri, Wisconsin and Minnesota — during a review of state programs, according to the department’s Inspector General Phyllis Fong. USDA officials checked 11 state-inspected plants in Mississippi and reported a number of sanitation problems, including soot-like matter on hog carcasses, Fong said. Eventually, the USDA certified all of the state programs, except for New Mexico’s, as being “equal to” the federal inspection program.
Still, the inspector general’s report “painted a picture of a lot of state systems that weren’t up to speed,” said Chris Waldrop of the Consumer Federation of America.
Small mom-and-pop processors such as Triple T Specialty Meats, which the Heikens started in Wellsburg in 1996, say that state officials often are more responsive to their needs than the USDA. Now that Triple T has federal inspection, its sausage, jerky and other products are sold in at least ten states and through the Hy-Vee grocery store chain, they said.
The Senate Agriculture Committee will not start work on its version of the farm bill until September. The committee’s chairman, Sen. Tom Harkin, Dem.-Iowa, hasn’t decided whether to support interstate sales of state-inspected meat, said spokeswoman Kate Cyrul.
State inspection officials are going to seek changes in the House legislation. The legislation would require state programs to have standards identical to the USDA’s. Under current rules, the state programs must be equivalent to the USDA’s, but they don’t have to be identical. State officials say requiring identical rules is too strict.
Organizations that represent federally-inspected processors have agreed not to fight the interstate shipment provisions only if state inspection programs are required to have the same rules as the USDA. “If someone wants to ship across state lines, we just feel like everybody should be playing by the same set of rules,” said Mark Dopp of the American Meat Institute.
FARM BILL: SAVING GRACE
By Seattle Post-Intelligencer Editorial Board
August 12, 2007
The U.S. Senate must redeem Congress’ sorry record on the farm bill. After a horrible, Nancy Pelosi-led fold by the House of Representatives on reform, the Senate stakes are high for consumers, public health and Washington’s diverse farm economy.
The urgency of a healthier food system has never been clearer to local public health officials, activists and citizens. Witness the crowds at farmers markets, schools’ efforts to promote healthier foods and the restaurants’ local food offerings. And, on the dark side, the obesity and diabetes crises.
As King County’s Acting Food Policy Council recently said, the farm bill will have “significant impacts on the health of our local communities.” The council recommended, among other things, more emphasis on land and soil conservation, improvements in the food stamp program, and more funding for low-income families and seniors to buy fresh produce at farmers markets.
The House bill attempted to expand and initiate many good efforts along such lines. But the Democratic leadership, with ample and unhealthy support from farm-area representatives in both parties, ran away from fundamental reform. The House scandalously failed to make any serious inroads into the huge, wasteful, and unhealthy subsidies for the relatively limited numbers of farmers growing corn, soybeans and a few other commodity crops. The wildly distorted subsidy program spends most of its money in just seven states and supports producers who are rich or getting rich on the ethanol boom or, in many cases, are dead.
Political pressures could also block Senate actions on reforms proposed by health experts, environmentalists and, to a healthy degree, the Bush administration. Unless they hear a great deal from constituents, Democratic Sens. Patty Murray and Maria Cantwell may hesitate on reforms that would benefit the whole state (including numerous growers of fruits and vegetables), just to appease Eastern Washington wheat growers on subsidies.
One of the key reform groups, Environmental Defense, is calling for a new farm-income safety net system that would better meet international trade rules and provide funds when farmers really need help. Environmental Defense also advocates more support for voluntary conservation programs and programs that encourage fruit and vegetable production. Without such changes, the Senate and the House should expect President Bush to make good on his veto threats, for everyone’s health.
REFORM IS IN THE EYE OF THE BEHOLDER
By Daryll E. Ray
Director of University of Tennesse’s Agricultural Policy Analysis Center (APAC)
August 10, 2007
Those expecting major reform in the shape of farm bill legislation are now turning their attention to the Senate. While the House legislation included an adjusted gross income cap, country-of-origin (COOL), extra money for fruit and vegetable growers, an alternate revenue-based program for counter-cyclical payments, and some expansion of conservation programs, it fell short of the dismantling of the direct payment and marketing loan program that some were angling for.
That leaves the Senate as the last hope of those who are looking for significant changes in commodity policy. The target continues to be the direct payment, marketing loan, and counter-cyclical payment programs which deliver the bulk of the government payment dollars to farm producers. One central question is: How and why did commodity policy drift into such a heavy reliance on payments?
Several elements contributed to this payment trend in the 1980s that affected all major crops such as the target-price based deficiency payment program. Other changes during this time affected a few crops early-on, but later were applied to all program crops.
The marketing loan program, including Loan Deficiency Payments and Marketing Loan Gains, (LDP/MLGs), also was initiated in the mid-1980s as a means of making US cotton and rice prices more competitive in the world market. The theory at the time was that U.S. loan rates had been too high-above world prices-pricing U.S. commodities out of the world market and forcing the U.S. to become the residual supplier.
The LDP/MLG was established to allow the commodity to be sold at a price below the loan rate-the world price-with the U.S. government making up the difference. Over the years this program was extended to other program crops and was made fully functional for all crops in the 1996 Farm Bill.
It was the establishment of this program and the elimination of the effectiveness of the non-recourse loan rate that allowed U.S. farm production to be sold into the world market-as well as the U.S. domestic market-at fire sale prices. These fire sale prices were well below the cost of production, opening up the U.S. to charges of dumping.
Unrecognized with this policy change was the reality that the U.S. is the oligopoly price leader in most major crops. Under these conditions competitors who want to move their product, price it just under that of the oligopoly price leader and float their product out of their ports. Price-followers can successfully engage in this marketing strategy to clear their markets. If the price of corn is $2.80, the price followers sell their corn for $2.60 a bushel. Likewise, if the price of corn is $1.85 a bushel, the price followers have no choice but to sell their corn for $1.65 a bushel if they want to clear their markets and make room for next year’s production.
Three things became apparent. One was the explicit or implicit assumption of U.S. policy makers that $1.65 corn would force others in the world to reduce production, allowing the price to increase. They didn’t. Like farmers in the U.S., they planted in hopes that others would either make the acreage adjustment or experience a crop failure. When neither happened, crop prices remained in a sub-$2.00 trough for four years.
A second unrealized assumption was that low prices would dramatically increase export demand, bringing additional consumers into the market and sop up any excess production. With the excess production out of the market, prices would rise and farmers would be back in a profitable production situation. While exports and total demand may have increased some in response to the low prices, the adjustment was not nearly enough to return crop markets to profitability as U.S. farmers came to depend on LDP/MLGs not only to provide some net farm income, but also to help them cover some of their production expenses.
The third was a reminder that a lowering-the-price strategy benefits price-followers but not the price-leader. The price-leader is unable to get under his own price. When the price leader reduces the price everyone goes down in tandem retaining the same relative price position. When you play limbo with yourself, you lose every time. And that is what happened to the U.S.’s use of LDP/MLGs.
The direct payments, in the form of decoupled AMTA payments, were established in the 1996 Farm Bill as means of weaning farmers off farm programs in a new economic environment that some said made farm programs unnecessary and counter-productive. The idea was to reduce the AMTA payments over a series of years until they reached zero. That never happened. The AMTA payments were decoupled from crop allocation decisions-farmers no longer had to worry about base acres-but they were not decoupled from farm profitability.
They provided an advance payment that allowed farmers to pay their rent without having to sell corn or take out an operating loan at the local bank. The AMTA/direct payments allowed some farmers to offer higher rental rates to landlords in hopes of increasing the size of their operation. At the aggregate level, the AMTA/direct payments also allow U.S. producers to sell their crop into world markets at prices below the cost of production, because they include these payments as part of their gross income.
By 1998, even AMTA and LDP/MLG payments were not enough to keep the U.S. crop sector afloat as prices plunged to sub-$2.00 price levels. And, compared to pre-1996 legislation, the list of available policy options to address the situation was indeed short. There was no Farmers-Owned-Reserve to take excess supplies off the market nor was there a set-aside program to reduce excess supplies in succeeding years. Congress responded by legislating emergency payments each of four successive years. This led to an early replacement of the 1996 legislation with the 2002 Farm Bill. The new bill included a counter-cyclical payment program much like the deficiency payment program that was cancelled in 1996 – a program that, in effect, institutionalized the emergency payments.
Present payment programs do nothing to reduce production when prices fall so farmers continue to use all their acreage and other resources to produce one crop or another full-out, no matter what. That works fine when demand is exploding but can require a lot of taxpayer backfill when total crop production outstrips demand. Backfilling with money has been the choice of late to deal with agriculture’s undeniable inability to self-correct on its own in a reasonable time frame. As mentioned, policy tools that could be used to adjust market supplies when demand falters are no longer legislatively authorized.
In general, farmers do not voluntarily idle productive cropland and food consumers do not increase total food consumption much with a general drop in food prices. Those are, of course, the two primary market-based ways to activate self-correction when prices plummet.
While backfilling with taxpayer money – rather then gauging output to meet demander needs at prices that cover production costs – is out-of-step with how other sectors operate, the nature of aggregate crop supply and demand suggests care should be taken as consideration is given to commodity policy possibilities.
It is the Senate’s turn to suggest the direction for commodity and other agriculturally-related policies. Reform means different things to different people. It will be interesting to see what it collectively means to the 100 members of the Senate.
DARYLL E. RAY is the Director of UT’s Agricultural Policy Analysis Center (APAC). dray@utk.edu; http://www.agpolicy.org. His column is written with the research and assistance of Harwood D. Schaffer, Research Associate with APAC.
USDA CRACKING DOWN ON “ORGANIC” FACTORY FARMS
Cornucopia Press Release
August 14, 2007
CORNUCOPIA, Wisconsin — The Cornucopia Institute has learned that the USDA appears about to revoke the organic certification of the nation’s largest industrial dairy operator, Aurora Organic Dairy, with corporate headquarters in Boulder, Colorado.
Aurora operates several giant factory dairies milking thousands of cows each in semi-arid areas of Colorado and Texas. The company has been the subject of a series of formal legal complaints filed with the USDA by The Cornucopia Institute. The complaints from the Wisconsin-based farm policy group filed in 2005 and 2006, called for a USDA investigation into allegations of numerous organic livestock management improprieties on Aurora’s facilities.
“After personally inspecting some of Aurora’s dairies in Texas and Colorado, we found 98% of their cattle in feedlots instead of grazing on pasture as the law requires,” stated Mark Kastel, Cornucopia’s senior farm policy analyst. Cornucopia also found that Aurora was procuring cattle from a non-certified organic source in apparent violation of the law. “Our sources tell us that the USDA’s investigators found many other violations when conducting their probe of Aurora.”
But Kastel warned that the USDA is under intense pressure to scuttle the Aurora decertification order. “We understand that powerful political influence is being brought to bear on the USDA in an effort to delay or water down the penalties against Aurora,” noted Kastel.
As part of their investigation of Aurora, compliance officers at the USDA took sworn testimony from Cornucopia staff, visited Aurora’s facilities and interviewed their organic certifier, the State of Colorado. The Institute found out about the impending enforcement action, and the potential for its delay, from officials in Colorado, a political appointee at the USDA and a highly placed industry executive.
The organic industry is carefully watching what the USDA does with the Aurora matter because of its size and impact on the marketplace. Aurora doesn’t directly market milk under its own name, but it is the country’s largest private-label producer of organic milk. Aurora packages store-brand organic dairy products for Wal-Mart, Costco, Target, Safeway, Trader Joe’s, Wild Oats, and other grocery chains. “The organic regulations are scale neutral,” added Kastel. “In terms of enforcement it shouldn’t matter if we are talking about a powerful corporate player, with thousands of cows, or a smaller family operation, bad actors in this industry need to be removed from the marketplace.”
Because of the delay in USDA enforcement against Aurora Dairy, The Cornucopia Institute today filed a Freedom of Information request (FOIA) with the USDA to secure documents that could uncover possible influence peddling and favoritism at the Department. “We hope that the USDA will issue tough sanctions, if warranted,” Kastel said. “And we want the agency to know that the organic community is very closely monitoring this case.”
Earlier this spring the 10,000-cow Vander Eyk factory dairy in Pixley, California lost its organic certification after an investigation revealed numerous violations of federal organic rules. The industrial-scale operation had been publicly spotlighted by The Cornucopia Institute for organic management irregularities. The Vander Eyk dairy had been selling its milk to Stremicks (Heritage-Foods) and Dean Foods (Horizon).
Based on documents recently received by Cornucopia through an earlier FOIA request, the Vander Eck dairy lost their ability to market organic milk not only because they lacked pasture for their cattle but also because they violated requirements for careful record-keeping to assure that all cows milked were eligible for organic certification and all the feed they consumed was actually organically grown.
“It now appears that our concerns about the giant industrial dairy cutting corners by confining cattle in a ‘factory-farm’ setting was just the tip of the iceberg,” said Will Fantle, Cornucopia’s research director. “The foundation of the organic certification process is the maintenance of a comprehensive farm audit trail which can be reviewed by independent certification inspectors and the USDA. The fact that Vander Eyk could not produce the documents requested by his certifier, and that he did not appeal the enforcement action, is just damning.”
The controversy about the growing number of factory-farms producing organic milk has come to a head this year as the number of farmers transitioning to organic dairy production has dramatically increased causing a surplus of organic milk for the first time. That surplus, largely attributed to the mega-farms, is now driving down prices to family farmers around the country endangering their livelihoods. It’s also become a tragedy for some family farmers around the country who have gone through the arduous and expensive three-year transition to organic management but now have nowhere to ship their milk.
“With at least 15 of these giant dairies operating, mostly in the arid west, they have succeeded in jeopardizing the livelihood of the 1500 or so ethical dairy farm families who are doing this right,” said Merrill Clark, an organic livestock producer from Cassopolis, Michigan and former member of the USDA’s expert advisory panel, the National Organic Standards Board.
“The good news for consumers is that in our survey of organic dairy brands (posted on www.cornucopia.org) a full 90% of namebrand products received very high ratings in our scorecard that critiqued the environmental and animal husbandry practices used in sourcing the organic milk for the dairy products,” the Cornucopia’s Kastel said. “With a small amount of research, consumers who care about maintaining the integrity of organics can easily find organic dairy products they can believe in.”
Aurora is owned by some of the same conventional factory-farm operators that founded the Horizon Organic brand and then later sold it to Dean Foods. Aurora’s largest equity stake is controlled by CharlesBank of Boston, which invests capital for the Harvard endowment fund.
Rumors have also been swirling in the investment community that Aurora’s owners are seeking to sell the company or to take it public.
AGP BUYOUT PROPOSED
By Jerry Perkins
Des Moines Register Farm Editor
August 14, 2007
Ag Processors Alliance LLC, an Omaha-based company, has delivered a letter of intent to acquire Ag Processing Inc., an Omaha-based cooperative currently owned by 203 local and regional cooperatives and individual co-op members in Iowa and other Midwestern states.
The proposed acquisition, which was valued at up to $850 million by the companies, would provide AGP cooperative members with the liquidity that the current co-op structure does not provide except at very low prices relative to the book value of AGP, according to an announcement released Tuesday.
The letter of intent was delivered to AGP’s directors and management on Tuesday.
Ag Processors Alliance LLC was formed specifically for the acquisition of AGP.
Ag and Food Associates of Omaha, an investment banking firm, is managing the project on behalf of an investment group with an interest and expertise in agricultural operations, the announcement said.
“It is incredibly difficult, if not impossible, to receive outside investment in a cooperative structure,” said Mark Lakers, president of AFA, in a statement released by the company.
This acquisition will change the cooperative structure of the company and allow the infusion of new liquidity for the local and regional cooperatives and other members that currently own AGP, Lakers said.
“Liquidity is something that many current AGP owners have asked for over the years, and we are pleased to have put together this proposal to try and make it happen,” he said.
Mike Walter, a member of the board of directors of APA, said the acquisition, if completed, will bring an improved business focus, particularly for domestic operations.
“We hope AGP’s board of directors recognizes the value that our proposed transaction would provide to its members and will quickly begin negotiations with APA to reach an agreement,” said Walter, a former ConAgra executive who leads a risk management consulting firm based in Omaha.
Lakers said in the statement released by the companies that he expects that all current AGP management will stay with the new owners.
“Agriculture has changed dramatically over the past two years, and many local cooperatives have been unable to take advantage of these changes,” Lakers said. “The proposed transaction would give these cooperatives liquidity in their investment in AGP and the ability to seek opportunities that capitalize on this new paradigm and support the growth in agriculture and in rural communities.”
APA intends to hold a series of informational meetings for AGP shareholders to learn more about the letter of intent and to ask questions.
WHY DEERE IS WEEDING OUT DEALERS EVEN AS FARMS BOOM
By Ilan Brat and Timothy Aeppel
August 14, 2007
MOLINE, Illinois — For more than a century, Deere & Co. has relied on dealers to sell its iconic John Deere tractors and other farm equipment. Deere dealers like to brag that they “bleed green,” the company’s trademark color.
But even as the farm boom helps Deere harvest record profits, dozens of North American dealerships are getting sent out to pasture, including some that have passed through families for generations. Chief Executive Robert Lane says times have changed. In an age when tractors use satellites to track the location of every seed, he says, dealers must match the sophistication and size of agribusiness customers. “For years we talked about Deere as a family,” says Mr. Lane, a former banker. “The fact is, we are not a family. What we are is a high-performance team….If someone is not pulling their weight, you’re not on the high-performance team anymore.”
Deere’s overhaul is one answer to a challenge faced by many large businesses that distribute their products through independent retailers. These retailers are supposed to know the local turf and market the product more effectively than a big corporation could. But if the retailers are too small-scale, their inefficiencies could outweigh the advantages.
To some Deere dealers, the transition feels like a betrayal. Raymond Warren spent 34 years working his way up from salesman to owner of a dealership in Wakefield, Virginia. In late 2002, Mr. Warren says he began receiving letters, emails and visits from Deere officials almost monthly urging him either to bulk up by acquiring another dealer or cash out. (Deere declined to comment on individual cases.) He finally sold to another dealer in 2005. Deere has “no feeling of remorse whatsoever or compassion for the dealer who has made them what they are today,” says Mr. Warren.
One of his former customers, Paul Rogers Jr., agrees. When Mr. Rogers wanted to start his cotton harvest early last September, his Deere dealer was out of spindle grease for his cotton picker. “I got mad and told them what they could do with their spindle grease when they had it in,” says the farmer. “When you own multiple stores, you don’t give the same service as when you rely on a single store for your livelihood.”
The 57-year-old Mr. Lane, who took the driver’s seat at Deere seven years ago, fears small dealers don’t have the wherewithal to hire enough skilled staff or track parts inventories. Also, Deere is trying to wean itself from years of overproduction at its factories, and it needs dealers who can manage inventory well. By contract, dealers have to meet Deere’s performance targets or face losing their right to sell Deere products. If someone wants to transfer his dealership to a child or anyone else, Deere must approve.
With the help of a strong U.S. farm economy, Deere has done well under Mr. Lane. Despite a recent dip, the company’s stock price is nearly double the level of two years ago. It has doubled its dividend in the past three years.
Deere expects net income of $1.55 billion in the year ending October 31. That’s slightly above the previous year, excluding its discontinued health-care business, and well above $643 million four years ago. Sales are expected to top $20 billion this year, compared with $13.3 billion four years ago. (The sales figure doesn’t include revenue from financial operations.)
Kip Tom, president of Tom Farms LLC in Leesburg, Indiana, says he is pleased with Deere’s changes. Mr. Tom owns or rents 12,000 acres growing corn, soybean and tomatoes. All of his 17 tractors are Deere machines, and he says he counts on the dealer to keep them running. A dealer has to have “a good set of business skills when you’re managing a customer like us,” he says. Deere’s consolidation drive is “just basically sorting out the stronger ones.”
In general, a big company has ample motive to consolidate its distributors. It needs fewer managers to oversee distribution and spends less time chasing bad debts from marginal operators. Also, giving dealers bigger territories reduces the chance that they’ll engage in price wars. That’s especially important today when customers, whether car buyers or farmers, can compare prices on the Internet, says Adam J. Fein, a consultant in Philadelphia.
Deere had 2,984 dealer locations in the U.S. and Canada as of last year, down 12% from the 3,400 it counted in 1996. Deere says the number of owners has shrunk at an even faster pace, as more owners take control of multiple locations, although it declines to give owner numbers.
Few manufacturers are more deeply rooted in the American soul than Deere, founded in 1837 by a blacksmith who devised a new type of plow that revolutionized Midwest farming. Over the decades, dealers sprouted throughout the country, reaching more than 10,000 in the 1920s. The number began to decline in the 1930s and 1940s as mechanized farm equipment spread and service became a bigger part of the business. The traveling salesmen of an earlier era faded out in favor of dealers who could fix what they sold. Today, big dealership groups may ring up more than $100 million in annual sales, and even small dealers bring in $5 million to $8 million.
Mr. Lane inherited a company accustomed to big profit swings based on how the agricultural economy was faring. Like Detroit’s Big Three car makers, Deere tended to pump out more product than its customers wanted, forcing dealers to discount to clear surplus inventory in weak times.
Mr. Lane tells a story of taking his then-10-year-old son to a Chevrolet dealership in Davenport, Iowa, 20 years ago. Shopping for a Suburban, Mr. Lane noted the dealership had eight of that model on the lot. He told his son he would reject eight offers by the salesman before agreeing to a deal. Sure enough, the salesman kept lowering his price. “He’s got a lot to sell here, so he’s really hungry,” Mr. Lane recalls telling the boy.
That was the kind of situation Mr. Lane wanted Deere to avoid. He told his executives to find ways to boost profitability. One step was to streamline manufacturing plants so they could respond more quickly to changes in demand.
As the executives looked for inefficiencies, they also began to focus on dealers who were having trouble meeting profit and customer-loyalty targets. At a series of meetings in Louisville, Kentucky, in the summer of 2002, Deere’s brass told dealers they should plan on a future in which they would either be a buyer or a seller. Tim Tyndall, who at the time owned a Deere store in Salisbury, Maryland., recalls attending a farm-equipment auction that fall. Several dealers half-jokingly went around the circle asking who would be shark and who would be bait. “Everybody said, ‘Well, I’m a shark,’ ” he says.
Mr. Tyndall ended up becoming neither. He later merged his store with a dozen or so others to form a conglomerate.
Deere has also tried to force some dealers to sell Deere products exclusively, which can be tough on smaller dealers. A dealer association has threatened to take its concerns to state attorneys general over the exclusivity issue. Separately, at least two dealers have sued the company over its drive to force them to expand or sell out.
Deere’s main competitors, Agco Corp. of Duluth, Georgia, and CNH Global NV, which is majority-owned by Fiat Group SpA of Italy, are also pursuing dealer consolidation, but industry observers say Deere’s push has been more aggressive.
Technology is a key reason size matters, says Deere. On some of today’s tractors, farmers needn’t even touch the steering wheel: The machines turn themselves, to ensure that no patch of soil is covered twice. Their computers can be programmed to track soil temperature and control fertilizer spraying.
Owen Palm, who co-owns five stores in western Nebraska, thinks the main advantage of getting bigger is that he can afford to hire more skilled managers and technicians. “If you have a single store or even a couple of stores, you don’t have the volume to justify hiring the type of people you really need,” he says. Mr. Palm has bought equipment and assets from three dealerships over the past nine years, as their owners retired and Deere refused to let someone else take over. Mr. Palm says his bigger stores offer better service than the shuttered dealers, although some customers complain they now have to travel as much as an hour to reach their nearest dealer.
Drew Eggers farms about 700 acres of mint, winter wheat and corn in southwestern Idaho. Last October, during winter wheat planting season, the mechanical arm that raises and lowers his planter broke. His dealer didn’t have the part, but a sister store 50 miles away owned by the same operator did. Mr. Eggers says he received the part the next morning and quickly had his machine back in service.
Consolidation hasn’t always lowered costs, as Mr. Tyndall in Maryland found out when he joined with other dealers to create Atlantic Tractor LLC. Employee-benefit costs went up as Atlantic unified its benefits package under the more-generous terms some dealers had offered. To underscore the benefits of the merger, it offered customers next-day delivery of out-of-stock parts. That required overnight trucking runs costing $500,000 a year, says Mr. Tyndall.
Atlantic’s total return on sales — a measure of profitability closely watched at Deere — was less than one percent last year. That compares with about four percent at each of the half-dozen individual dealers before the merger, says Gregg Rebar, Atlantic’s chief operations officer. He believes Atlantic will eventually get back to that level.
Farm equipment accounts for about half of Deere’s total sales, but the company also has a significant business selling machines such as $200 weed trimmers and $1,500 riding lawn mowers to consumers and commercial landscapers. Some dealers carry multiple Deere franchises and sell both to farmers and consumers. Here too Deere has sought to consolidate its dealers. Seeing its customers migrating to home-improvement stores such as Home Depot or Lowe’s, Deere has added those retailers to its lineup — which left it with too many lawn-and-garden outlets dotted across the U.S.
Many dealers who have lost their Deere outlets are bitter. Jerry Marx, 72, spent most of his life working in Deere dealerships. He and his wife, Judy, had hoped to pass their store in Princeton, Indiana, to their children. But Mr. Marx says a Deere official told them in August 2002 that other dealers in the region were growing larger and would eventually drive them out of business. Deere wouldn’t allow the Marxes’ children to take over the dealership.
The Marxes gave up their Deere dealership in January 2003, and the store has struggled trying to sell other brands of tractors and lawn mowers. “The whole thing is just like a nightmare,” Mr. Marx says. Mr. Lane allows that not all dealers are happy with the consolidation. “It really isn’t about us liking or not liking” dealers, he says. “We explain what’s going to happen, and they can make choices. Some may say, ‘Well, that’s not what grandfather had in mind but that’s what I’m going to do.’ ”