What is an agroholding?
31 December 2017 - The rapid development of large farming structures in transition and emerging market economies not only challenges the traditional views on production organization, but also confuses the research community with respect to the very definition of an object of inquiry.
Since the research on large corporate farming is being conducted within different contexts (countries, production sectors, research interests and disciplines), the meanings behind the terms used often differ. These same contexts impel the researchers to search for the alternative definitions that would more appropriately capture the essence of the analyzed phenomenon. Therefore, the current article does not pretend to deliver any universal terms in this regard. Instead, through an overview of existing approaches toward the definition of agroholdings, it sheds light on how diverse these organization modes of large-scale agricultural production are.
Large-scale farms differ in many respects, depending on a country of operation, specialization, size, and organizational forms. The biggest farms in the world are found in China and Australia. In China, the emergence of large-scale production operations was possible mainly due to farmland concentration achieved via the transfer of farmland management rights from rural households to farmland shareholder cooperatives. Coupled with economic growth and the need to increase the food security ratio for growing population, these factors enabled the appearance of farms reaching over 10 million hectares. Some of the world’s largest farms reside in Australia. This scale is a result of country specific conditions including low average rural population densities, stable institutional setting for large-scale investment as well as the country’s climatic and environmental systems. The development of agricultural production technologies and the need for economies of scale were the key driving forces for the rise of large-scale farming in Brazil, where large farms are organized as publicly-traded corporations, privately-held corporations and family-owned hybrids, known as family groups. In contrast, in Argentina, large-scale farming is predominantly governed through contracts instead of vertical and horizontal integration and is most often organized as a trust fund (fideicomiso) or investor-oriented corporate farm. As a result of these developments, a number of transnational large-scale farms operating up to 1 million hectares came into existence in Brazil and Argentina. In Russia, Ukraine and Kazakhstan, some transnational large-scale farms operate even more than 1 million hectares of arable land each. Obviously, the farm structures in former planned economies which overtook the former state-owned sovkhozes and kolkhozes differ from those of Latin America or Australia. In particular regarding specialization, there are farms which exclusively specialize in sugarcane and ethanol production in Latin America whereas one may observe a lot of mixed farms (livestock and crops) in the countries of the former Soviet Union.
Large-scale farming entities in the context of former Soviet countries are often referred to as agroholdings. An agroholding is a type of a consolidated set of parent and controlled subsidiary agricultural companies operating at least 10 thousand hectares. Reaching dozens and even hundreds of thousands of hectares of land in size, agroholdings are often part of larger vertically and horizontally integrated business groups. Particularly in Russia, Ukraine, and Kazakhstan, where extensive integration of agriculture with related inbound and outbound industries takes place, “agroholding” is a widely used term that designates such organizational structures. A primary agriculture business of agroholdings is structured such that it includes a mother company which manages hundreds and thousands of corporate farms. The latter are often separate legal entities registered in the form of limited liability companies, joint stock companies, and even family farms. Within an agroholding, these corporate farms are most often grouped into several clusters based on farm locations, logistics or historical developments. Since the term agroholding implies a company created to control another company, i.e. a farm, by owning its voting stock, this term may often be misleading, as not all agroholdings have the structure or organizational features of a holding. Therefore, a number of authors refrain from using the term agroholding for definition of the large farming entities in Russia, Ukraine, and Kazakhstan. Instead, given their affiliation with larger business groups, agroholdings are often referred to as new agricultural operators.
Access to outside capital is one of the key factors in the development of all large-scale farms worldwide. Less complicated access to capital as compared to small-scale farms allowed large farming businesses to take advantage of booming agricultural prices and follow the strategy of fast growth in land and assets. The origin of capital may be foreign or local, stock market or private equity, etc. Accordingly, some authors define and classify large-scale farms by the type of their corporate governance, e.g. “investor-led” vs. “oligarch-led” agroholdings.“Oligarch-led” agroholdings tend to have only a minority of shares traded on a stock exchange, while the bulk of the ownership remains in the hands of the founder of the company. In case of an “investor-led” company, all or most shares are traded on a stock exchange. An agroholding often presents a group of entities bound not only by the asset, contractual and corporate governance interdependence, but also by means of accelerating production through vertical or horizontal integration into a supply chain. Therefore, agroholdings are often referred to as integrated structures. In particular, they adopt various types of integration: vertical, horizontal, conglomerate, as well as hybrid, consisting of all of the above forms. The differences exist in the scale of integrated structures such as size of operated land, labor, capital, and number of involved agri-food enterprises as well as in the degree of legal or economic dependence and/or interdependence. Horizontal integration implies control at the same level of the value chain in similar or different industries.In case of a vertical integration, a company takes complete control over one or more stages of a supply chain. Types of vertical integration strategies include backward integration, forward integration and balanced integration (mix of backward and forward integration strategies). As a result, agroholdings differ according to their integration strategies as well.
In summary, agroholdings are usually understood as commercially oriented groups of a number of legally independent farms and firms coordinated by a central parent company that makes strategic decisions on the development of a group and its members. Such groups may be owned by institutional or private investors and may be vertically or horizontally integrated. They may differ in the type and number of integrated stages of the food chain, the degree of legal and economic independence of affiliated companies, the origin of capital, and, finally, the stock exchange activity.