Iconcluded the previous article (Small farmers will Disappear) with a demoralizing “delayed death sentence” for farmers who find themselves stuck on a small farm. And many of the comments received were to ask how many square meters or hectares were considered “small” and therefore sentenced to death.
This is the first mistake. The size does not refer to the arable land, at least not completely. The arable area is one of the means of production but not the only one, and it is qualified by access to other means of production: labour, capital, technology. And of course, all measured in “money” (Euros in our case).
Therefore, the size of the farm is measured in Euros using the balance sheet and income statement. I know that a small farmer has never made a balance sheet or income statement but that does not mean they don’t exist or don’t matter; indeed, the bank gives you a “simulation of both” when you ask for a loan.
But to put it in simple terms that everyone can understand, if you have a family farm (where your own labour is not valued as salary) that doesn’t produce enough to make ends meet (not to mention loan repayments), that is a small farm. Given this situation it is necessary to find a way to break the vicious circle of lack of margin, lack of investment and lack of competitiveness.
In my LinkedIn there was a comment questioning public aid to young and/or small farmers if these, according to my article, were doomed. Obviously there are many grants or aid that can be questioned if they only serve to defer a “certain death”, but in many cases they may also be the last resort for the restructuring of a sector.
In this regard and for cold feasibility analysis, it doesn’t matter where the resources come from (governmental, loans, capitalist investors). The important thing is how to increase the size.
So, if we do not intend to relocate production (go to another area/country to grow) we can increase the size (without buying more land) by incorporating technology that allows us to produce more and better crops (productivity) and enables us to plant other crops with higher earning potential (and usually more margin).
And the good news is that many farmers increase the size and competitiveness of their farms, while the results of smaller farmers deteriorate at an increasing rate, leading to their gradual abandonment of the sector.
Therefore, recapitulating the above, although the classification of what a small, medium and large farmer is varies according to the product and agricultural technology applied, this would be a first approximation:
- A small farm is one in which the deterioration of margins calls into question the economic viability of the farm. And faced with the progressive deterioration of these margins, more and more farmers fall into this category. And this involves crossing a point of no return; after which, the farmer will not have his own resources (because his business doesn’t generate them) or external resources (because the bank does not give him any credit) to reverse the situation. The banks, due to the small size of the operation, make the “right” diagnosis and will not provide any more credit for campaign or investment needs.
- Medium-sized farms are those working on efficiency thresholds with economies of scale. They usually quickly adopt new technologies (they have moderate to average investment capacity) which in turn allow them to gradually increase the size of the farm.
- Large farms are those located on production thresholds with diseconomies of scale, but which try to benefit from some production factor such as access to capital (large investment capacity) or by relocating production in areas with low labour costs. Normally these large farms are vertically situated “downstream” of the domain of other links in the value chain (such as packaging and marketing at source) to generate economies of scale in these links and thus combat the diseconomies generated in the agricultural part .
Medium-sized farmers are the new miracle.
And this is the real Spanish Mittelstan (see what the German industry Mittelstan is) of intensive agriculture; the new great miracle of intensive agriculture.
Very professional farmers with long-term orientation, narrow focus on products and product categories aimed at specific market segments, total quality, attention to detail, innovative benefits, etc., normally prioritizing highly diversified exports to fill the niche in each of the available markets (and thus build economies of scale).
Large booming investments.
Moreover, in the heat, or rather cold (the returns of all types of businesses have fallen a lot) of international financial markets, there is now talk of an investment bubble in agricultural commodities and part of this has reached our intensive farming and also fruit growing (in the past two years major investments have been made in new “large farms”).
But in this case, these large agricultural investors value the returns in comparison with other investments (opportunity costs) and the value of the land (now, to invest, and later to sell when the annual profit falls below the achievable returns based on the price of the land).
For this reason, they will choose a strategy in which short-term profits are given great importance, as there is a need for higher profits to justify the investment and also because, normally, these investments are highly leveraged (made with credit); and they are even being made by listed corporations which therefore need high profits to reward shareholders.
As a result of this, large farms will focus on a highly concentrated export to build economies with logistical efficiency and operational simplicity (economies of scale to combat the diseconomies generated in the agricultural part of the business). Therefore, they choose highly standardized products with few references and whose handling (packaging) is as simple as possible without undermining the intrinsic quality of the product.
In the end, my positive thesis (if not, I would have left this business by now) is based on the fact that a progressive and dramatic adjustment is occurring in our sector, which is resulting in a conversion with an extraordinary competitive basis mainly relying on the Miracle of Medium-sized Farmers of (our Mittelstan).