Agroholdings have long term potential: Interview with Alfons Balmann
15 April 2018 - Agroholdings have recently become a subject of controversial discussions and debates. In order to understand why and how the large-scale farms develop around the world, what similarities and differences exist between them in different countries and whether or not this phenomenon is of long-lasting nature we decided to conduct an interview with Alfons Balmann, Director of the Department of Structural Development of Farms and Rural Areas at the Leibniz Institute of Agricultural Development in Transition Economies (IAMO) and Professor of Agricultural Economics at the Germany-based Martin-Luther-University Halle-Wittenberg.
What do you think are the main factors that drive the development of large-scale farming today?
The major drivers of the development of large-scale farming include the following: low interest rates on international financial markets; institutional deficits within countries; infrastructural deficits; digitization; as well as advantages of horizontal and vertical integration along the supply chain. All these factors, to a greater or lesser extent, drive the increase of investments into large-scale agriculture. Very large farms became able to access foreign capital markets, for example, by issuing equity shares for free float at international stock exchanges. This is particularly relevant if domestic financial markets are unstable. One of the examples for this development is the case of Argentina, where the cost of raising capital in global markets may be significantly below domestic interest rates. Furthermore, the advantages of horizontal or vertical integration along the supply chain seem to compensate the uncertainties in the case of weak local institutions which make it difficult to enforce contractual agreements. Tightly integrated supply chains benefit from large-scale farming due to their ability to optimize transactions, production, marketing expenses and risks. For example, in Russia, large livestock operations integrate livestock production with grain and oilseed production, which can be interpreted as an effort to secure the feed supplies. Moreover, the advances in digital technologies as well as recent innovations in crop breeding, tillage, and information technology make it easier for the management to supervise large-scale operations.
Do you see any differences/similarities between large-scale farms across the world?
Yes. There are some. Depending on which country or which continent we are looking at, the large-scale farms may differ in many aspects. For example, size, specialization of farms, mentalities and the degree of non-agricultural engagement. Moreover, the available local infrastructures differ a lot between Eastern Europe and South America. Along these aspects, there are both differences and similarities between large-scale farms across the world. If we look at European Union farms, we discover that, according to the official classification of Eurostat, very large farms are those farms which operate more than 1 thousand hectares. But if we take a look at Brazilian, Ukrainian, or Russian farms, there can be farms of 500 or 600 thousand hectares in size. Another aspect is the specialization of farms. In Latin America, there are farms which exclusively specialize in sugarcane and ethanol production whereas in the countries of the former Soviet Union we observe a lot of mixed farms (livestock and crops) although the tendency is toward crop production as a major specialization.
What are the main characteristics of large-scale farms in your country (size, specialization, business model, vertical/horizontal integration, etc.)?
In Germany, we see that a lot of large-scale farms are specialized in cash crops. Though most farms in East Germany cannot be called large, approximately half of the land is farmed by farms with 1 thousand hectares and more. In West Germany, the farm sizes are much smaller than in East Germany. The reason for this differentiation is the fact that East German agriculture was collectivized after World War II. The pattern of farming in West Germany was and is dominated by family farms.
Are there any problems associated with the development of large-scale farming in your country?
Most large farms in the eastern part of Germany are successors of former collective farms which are now mostly organized as limited liabilities or cooperatives. Some are however also family-based and owned by heirs of formerly expropriated families which returned. Partly, also farmers from West Germany or The Netherlands moved to East Germany and established or acquired farms or livestock operations. In recent years, a couple of large farms were acquired by emerging family-owned holding structures or successful successors of former collective farms. Even though – with few exceptions –there is no clear evidence that large farms are responsible for social or environmental problems, the emergence of holding structures is seen very critically in the public. The few cases for which problems were evident suffered strongly from non-compliance with animal welfare laws or with investment regulations.
What are the main problems large-scale farms themselves face in your country?
The main problems are related to low societal acceptance of large holdings and modern agriculture. German farmers are currently anyway under strong societal pressures with regard to issues such as animal welfare, environmental protection, etc. The societal perception of very large farming is therefore often negative. Despite of lacking evidence, very large farms are often seen as profit-driven and irresponsible companies which produce agricultural products but do not care about pollution, natural resources management or rural areas. It is quite clear that large farms are economic units which operate according to the principles of market economy. Naturally, they face the pressure to reduce costs which is related to the desire to achieve profits. On the other hand, particularly very large farms in East Germany operate with quite high employment intensities because they engage in livestock production.
Do you think that large-scale farms are more efficient/productive/successful than medium or small scale farms? Why?
In general, I do not see a specific comparative advantage of very large farms in relation to other large farms which are able to exploit existing technologies. Medium farms in Western Europe may benefit from their robustness to cope with a crisis – at least if they own most of their land. Small farms have usually a different motivation; they may aim to use existing production capacities or may focus on very labor intensive products. On the other hand, large and very large farms may benefit from specific institutional deficits, infrastructural deficits, and implications of digitalization. The key factor for economic success of larger farms is the management and their ability to learn from experiences.
Do you think that the societal benefits of large-scale farming outperform the problems they (potentially) bring to the society?
In the end, it depends on the farm's economic success (jobs, land lease payments, etc.), the farm's management as well as on on- and off-farm corporate social responsibility (CSR). The role large-scale farms play for the society differs in different countries. Particularly in former socialist countries, there is still a belief that, due to their size, large-scale farms are obliged to serve to the society and to carry out specific responsibilities. In part, this may be still true. Many former collective farms have still local owners. Russian and Ukrainian agroholdings often continue in providing similar social services for rural population as former kolkhozes and sovkhozes did during their time. This is partly driven by their own interest to attract motivated and well trained employees to work on their facilities in the rural areas.
Do you think that agroholdings/large corporate farms are just a temporary phenomenon or do they have a long-term perspective? How do you think large-scale farming will develop in the future?
Structural processes are path dependent. Agroholdings may learn to manage their weaknesses and to reduce their vulnerability. So yes, I think that this phenomenon has the potential to be long lasting.
What do you think are the most interesting research topics with regard to large-scale farming?
A lot of research is necessary to understand the challenges as well as the perspectives of large-scale farming. Many exciting research topics are related to management and include issues such as internal control and auditing of agroholdings; strategic management; financing; human resource management; and last but not least – CSR-related issues, i.e. it is important to address social benefits/damages/risks and awareness.
As mentioned above, there are some problems with monitoring of the managers within a company (internal monitoring/internal control). Recent evidence suggests that opportunist managers may falsify or suppress the accounting numbers to hide a negative performance of the company. Internal monitoring within a corporate entity has to be accomplished by a board of directors and the internal audit committee to ensure the effectiveness of internal control. This requires research.
Another research gap exists in the strategic management literature. Agroholdings are very complex forms of organization of agricultural production and, therefore, it is important to get in-depth insights into their organizational architecture, to understand whether or not they are successful and how to improve their efficiency, profitability and economic growth.
Moreover, the issue of financing seems to be one of the relevant topics for future research on agroholdings. The analyses of the interrelationships between financial strategies, access to capital and economic performance are important.
Last but not least, the topic of large-scale farming is often associated with the issue of land grabbing, which may shed negative light on the large-scale farming overall. However, large farming enterprises mainly grow via the acquisition of already existing large farms. Unfortunately, this hasn’t got a lot of scientific attention either. Moreover, due to their size and the role they play in providing food security, large-scale farms have a high degree of responsibility for the use of natural resources and maintaining the certain level of environmental sustainability. The issue of corporate social responsibility and societal acceptance of large-scale farms seems to be one of the important topics on the research agenda.