Saturday, October 1, 2016

The Proximity Premium

Top Producer 2006

Looking at the list of influences shaping the grain farming industry it is hard to find a common thread: rising costs, increasing yields, cheaper technology, labor shortages, expensive [large] machinery, diminishing crop choices, “flatter” grain origination (fewer steps between grower and user), investor ownership of increasingly costly land, and transparent competition. Individual producers, nonetheless, are discovering one workable strategy to handle these disparate challenges.
That strategy is proximity – farming close. While the evidence of this game plan is anecdotal, as all early indicators are, it is widespread and resonates with our instinctive impulses.
The proximity premise is “duh!” obvious – farming close yields a profit boost. (I told you it was a no-brainer). But what has not been precisely measured is how much of a boost, especially compared to far-flung operations. When operating profits were wider, there was less point in the careful allocation of costs to document this seemingly slim difference, but the Brave New World of extremely low margins has exposed some vulnerabilities in widespread farming.
Most of us can identify the factors, but few of us anticipated the value of the synergy between them:
Higher on-station time: A 6-row combine sitting at the end of the field is as productive as a 12-row machine sitting at the end of the field. The same principle applies to a combine in transit. Or a planter. Proximity makes intensive operation of undersized equipment possible, especially with autosteer and enhanced machine lifetimes. (Hint: compare your engine/separator hour-ratio with your buddies) Running with fewer people works too. The proximity premium is real money, not just convenience.
Cash rent adjustments: Often large operators could lease ground simply because management skills such as the politics of different rents for different landowners stymied local operators. Survivors have learned. One result I have seen recently and Mike Walsten in Landowner Newsletter has noted is nearby operators are often setting the rental market.
Elbow room: Putting a 24-row planter in 42 acre field is an exercise in end-rows and unfolding. Large mobile operators are eyeing smaller or isolated fields more critically after a few years of data. Tack that 42 A. onto the next-door neighbor and it looks like part of a 200 acre high- efficiency tract. That proximity premium may have an actual value of $15- 20/A in my experience. As locals switch to cash rent, pull out fencelines, and experience some big-field benefits, they are more prepared to bid for the field next door.
Home-town heroes (a.k.a. the devils you know): Sufficient examples have accumulated with out-of-the-community operators that some landowners at least are reconsidering priorities. While the rents still must be

competitive, we many have learned the sad way it makes church potluck
dinners more amiable when you rent locally.
  • Harvest pressure: As local elevators close, farmers are building bins just
    to keep the harvest going. While the “romance of the road” seemed like a glamorous profit center when the semi craze began 15 years ago, we’ve discovered that you can’t own enough trucks to keep an AFX or 9760 running full blast unless you are hauling locally – preferably about 3⁄4 mile. This means building bins, and we soon discover: 1) Big – really big – bins are better, unless your hauler loves to move the 13” auger twice a day. 2) Paying for one 800-amp entrance is bad enough, but it’s better than 4 sites with 200 amp entrances 3) Centralized storage encourages well- built, for-the-long-run layouts with high efficiencies rather than whatever works for a day. All this implies centralized acres.
  • Now add in a sharply up-trending yield curve thanks to biotech. If getting 200 bu/A. away from a combine is challenge, what about 240? 300? Where ya gonna haul?
  • The best neighbor in the world: yourself. Need to fix the tile, avoid spray overlap, or hate other semis blocking the road? The common answer is to rent/own the land next to you. While we have always known this, we are starting to monetize these headaches and fold them into our bids.
    Proximity has always been an obvious, idealistic situation that took generations to accomplish – a long time for American attention spans. Behold the upside of cash rent. After despising it for years, those who master its management are discovering a tool that can help them speed nearby growth.
Moreover, I believe that such operations are the “seed crystals” from which will grow America’s answer to the cerrados of Brazil and steppes of Ukraine. 

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