Large companies more capable of adopting new technologies – Alex Lissitsa
30 April 2018 - The general director of IMC, one of the largest agroholdings in Ukraine, Alex Lissitsa has long been known in the Ukrainian agri-food business as a professional lobbyist. Five years ago he left lobbying for big agricultural business, but he keeps an eye on what is generally happening in the industry. Lissitsa, who will give a keynote speech at the upcoming IAMO Forum in June 2018, talks about the main aspects of today’s large scale farming in an interview to LaScalA.
Alex, what do you think are the main factors that drive the development of large scale farming today?
If we were to think about the factors that drive the development of large scale farming on the global scale, while not focusing on a particular country, technology would certainly be one of them. Technological advances have been driving up the average productivity of agricultural production in the recent years and the productivity is set to keep rising in the future. Agricultural producers nowadays have to catch up quickly in order not to lose their competitiveness. And large companies, so-called agroholdings, are generally more capable of adopting and implementing new technologies into their production and management methods. Global consumption trends are also a factor that drives the development of agroholdings. Consumption preferences across the globe are dynamic and rapidly changing. A company that doesn’t pay attention to these trends may end up losing one of its markets (it is especially dangerous if a company focuses on one particular market). Here, again, large scale agricultural producers appear to be more flexible up to date and thus to be less exposed to the risks. The environmental and safety standards, which are getting stricter every year, are also something that big companies are better at dealing with, as the certification process might be very expensive and difficult.
Do you see any differences/similarities between large scale farms across the world?
There are differences between large scale agribusinesses across the world. Agroholdings in particular regions, say in post-communist countries or countries in Latin America, do share some special features, substantiated through the peculiarities of their specific regions. For example, in some countries, agroholdings tend to rely more on sophisticated contract systems to work with their suppliers rather than on direct integration with the suppliers, and thus may resemble somewhat more of a huge cooperative than of a corporation, actually. Latin America and particularly Argentina might be considered a good example of that. Another difference would be the level of political involvement of agroholdings and how these companies are actually limited by various political interests in their countries. Let me bring in a good example of how even in one particular region of the world agroholdings may diverge on their development paths. Agroholdings in Ukraine are businesses in the classical meaning of the word and they compete with each other on the market for their customers, whereas agroholdings in other post-communist countries often and at first hand compete with each other for a political “shelter” that will support them in competition for market shares.
What are further remarkable characteristics of large scale farms in your country?
In Ukraine, we consider companies that operate more than 10 000 ha of agricultural land to be in the category of large scale farming. The common name for such companies is agroholdings. As of today, there are roughly 100 agroholdings in Ukraine. The majority of them specialize in cash crop production. The prevailing business model is horizontal and vertical integration. In terms of space and location, agroholdings consist of quasi-autonomous production clusters. Also, Ukrainian agroholdings are primarily export-oriented.
Do you observe any problems the development of large scale farming causes in Ukraine?
I don’t see any problems that could be considered as those caused particularly by the development of large scale farming in Ukraine. It is probably because agroholdings are not really the disruptors as there simply wasn’t much to disrupt in Ukraine. Ukrainian agriculture was in a really bad shape before agroholdings emerged. And though the share of small farmers in the total number of agricultural producers declined, Ukrainian small farmers cannot be compared with traditional family farms of Western Europe as the latter are most often inefficient producers.
Looking from a different perspective, what are the main problems that large scale farms are confronted with in your country?
In my opinion, there are two types of challenges large scale agricultural producers face in Ukraine. First is the external challenge that includes “classical” problems such as poor infrastructure, high corruption, imperfect institutions and non-transparent legal environment, as well as a generally low level of competency among bureaucrats. Second is the internal challenge that encompasses dimensions such as human resource management (e.g. deficit of qualified workforce) and logistics. Though the latter results from the abovementioned problem of bad infrastructure.
Do you think that large scale farms are more successful than medium or small scale farms?
I think so, yes. They are on average more successful because they are more efficient and more productive. And the main prerequisite for that is simple economics, really. First of all, the effect of economies of scale drives down average costs per unit of output; secondly, agroholdings’ vertically (and horizontally) integrated structure provides much more cost- and time-efficient logistics; agroholdings also have highly professional management (as opposed to small farms, where a farmer is also a manager at the same time), which results in adequate corporate strategy and long-term orientation. Another advantage, which is especially relevant for the developing economies, is that big agroholdings have much better opportunities to access finance, for example, they often go for an IPO or use some other financial instruments. Thus, they tend to be much more technologically intensive, simply because they can afford that. This leads to an above average efficiency (which often means less waste, too) and higher productivity or, in other words, above average yields.
Do you think that the societal benefits of large scale farming outperform the problems they (potentially) bring to society?
Well, the benefits and potential problems vary from company to company. So, it is difficult to give an unambiguous answer to that question. The influence of agroholdings on society, or rather the end results of that influence, depend strongly on the environment they operate in. If we take Ukraine as an example, the benefits agroholdings have been bringing to the local communities across the country are obvious. A difficult economic situation which has ensued after the collapse of the Soviet Union, and was further accompanied by a continuous political turbulence, led to a growing urbanization and rapid decline in rural areas. Today agroholdings not only bring jobs to villages and rural communities but also implement CSR policies, offer various educational and training opportunities, as well as organize entertaining and cultural events. They effectively reanimate the villages they come to. On the other hand, it is quite understandable that in Western European countries where the scene of agricultural production has been long dominated by family farms, people might be cautious about large agricultural corporations.
Do you think that agroholdings may for some reason be only a temporary phenomenon? What future do you think they have?
How can we name large scale farms “a temporary phenomenon” given that they have been evolving for the past 15 years? I would say that agroholdings do have a long-term perspective. Even without taking obvious strengths, such as scale effects, into account, agroholdings appear to be better equipped to cope with possible external economic shocks or crises, especially due to their enormous sizes and better financing opportunities. In the post-communist countries of Eastern Europe and Central Asia, as well as in some Latin American countries, large farms are more capable than smaller agricultural producers of interacting with bureaucratic authorities or resisting corrupt officials.
Under such circumstances, what should small farms expect from the future?
The future of small farms depends primarily on whether or not they will be capable of catching up with large agri-businesses in terms of productivity. Some small farms may be very efficient in managing their resources or in going “organic” and, thus, they may respond well to current consumer demands and expectations. But without scale effects and cost minimization strategies, they appear to be disadvantageous compared to large producers. As we all know, agriculture has been actively adopting various innovative technologies, primarily from the IT industry. These technologies may help small farms to boost their productivity given that they are capable of investing in these new technologies. In addition, ongoing urbanization will play an important role in the development of small farms. Many countries face the huge problem of the lack of successors of small family farms. However, I think the current trend toward consolidation of agricultural enterprises will persist in the near future and, as a result, the number of small farms will decline.
For you as a businessman, what would be the most interesting research topics in the sphere of large scale farming?
As this phenomenon is still relatively new while the Western research has recently been dominated by the belief that agroholdings are not able to survive even in the short run, there are surely many interesting research areas. For example, from the perspective of business administration, it would be interesting to know to what extent the modern corporate management and corporate finance practices and tools can be applied to the large farm management, especially in the view of agricultural peculiarities, such as seasonality or specific risks (e.g. weather and climate). Beside different management issues, it would be also interesting to look on the issue of innovation adoption with respect to e.g. various IT solutions for agriculture. The question of farm size is always interesting, namely, at what size scale effects don’t matter anymore and the integrated structure becomes too costly in terms of management.
The IAMO Forum 2018 “Large-Scale Agriculture – For Profit and Society?” will be held on June 27-29, 2018 in Halle, Germany. For more information please visit https://forum2018.iamo.de/about-the-conference/