Ag leader sees growth in LLCs
By Russ Oechslin Journal correspondent | Posted: Sunday, March 16, 2008
SPENCER, Iowa -- Limited liability corporations are soon going to dominate agriculture as the primary, preferred capitalization structure, CommStock Investments David Kruse told participants in Spencer's recent Ag Outlook.
Farms were owned by individuals when his grandfather bought the first family farm in 1928, Kruse explained in his annual address. Then came what he called a ''unique'' change that ''was very beneficial to agriculture the cooperative.'' The co-op structure ''allowed agriculture to do many things it had not been in the past.'' Today the structure is evolving again, into limited liability corporations, or LLC structures, he added.
Co-ops almost extinct?
Kruse said the structure of farm cooperatives is almost defunct and evolving to LLCs because the one-man, one-vote concept is inequitable, and a farmer must invest in order to do significant business with the co-op. Co-ops, he added, provide only restricted access to capital and are less profit driven.
On the other hand, Kruse says, an LLC provides opportunity for capital acquisition, an enhanced management structure, efficiency of scale, accelerated adoption of technology, and enhanced market clout, while allowing producers "to go higher up into integrated supply chains. Successful traditional producers will mesh into LLCs accepting outside investment,'' he said. And farms will be run by CEOs and CFOs, due to a greater management challenge.
Royal Beef, an LLC Kruse put together with family and neighbors, is a group of a dozen or so, he explained, and is "essentially a partnership with neighbors.
"Instead of having a dozen of us all going out and building smaller operations, by creating a company with this capital structure, we gain all the great efficiency and management benefits from the larger operation on that particular scale,'' where they have more than 1,000 head of cattle.
Kruse says he sees the beef industry re-locating to the Midwest around the ethanol plants, where the distiller's grain offers a five to 10-cent a pound advantage over producers in the southern plains. He also noted that being in a covered barn, even in frigid February weather, should be "whole lot more comfortable" than they would be in typical open lots.
Capital is available
Pointing to the recent news of farmland price increases, Kruse noted that "we’re going to have some capital to invest as we see farmland values rise significantly."
But, he noted, "We are still not back at the peak in terms of inflated dollars," which saw an average price of $5,564 per acre in 1979, followed by a low of $1,481 in 1985, following the farm crisis years of the early eighties.
The major difference between the 1970s prices and today’s values, Kruse pointed out, is the debt structure, that sees agriculture much better off than in the past, with increasing values and a lower debt ratio. Kruse says he expects this to "create a pretty dramatic pool of capital in agriculture that hopefully we will have to give back wisely in one way or another in new businesses or expansion.
Where just a few years ago he saw $3 corn as the highest price to generate a profit for both the producer and Ethanol processor, today Kruse sees that level as $5. "Essentially most Ethanol plants can make money at $5 corn. That gives me a synthetic foot of $5 as an investor in an Ethanol company. If the price of corn is less than that I’m probably going to get some kind of a check or dividend from an Ethanol company. But of course if the price of corn is $5 or higher, I’m going to get that nice check from the corn. And I can’t complain about that either."
Other commodities follow corn
Like corn, soybeans and other commodity prices are following the relationship with higher crude oil prices, too. And, Kruse says, he expects that to continue as light sweet crude approaches $110/bbl. "Five dollar corn and $13 beans are a good thing," he added, noting that $7 corn and $16 beans could hurt the demand base, "and there could be a penalty paid for entering that short-term award if we enter that phase, which we may very well later in the year."
And, where Ethanol industry start-ups were once a good opportunity for investment, "as the industry unfolded and matured, we have all seen that those opportunities have basically dried up. But some new ones have evolved," especially with the depressed stocks of some of the companies.
Kruse cited figures from Iowa State University that show Ethanol companies should have made a profit even paying $5.43/bu. for corn when crude oil was $80/bbl, due to the government’s tax credit. But without the subsidy, Ethanol production would be profitable only at the $3.90 level with oil at $80/bbl. Crude oil prices have steadily increased to over $100/bbl over the last month.
Kruse termed the ethanol subsidy "very, very important to everyone in this room who is marketing corn, as well as those who are not involved in the ethanol industry. Supporting this bio-fuel economy is our primary risk today, he noted.
Kruse explained that he sees the future of bio-fuel in blender pumps like the ones in use in South Dakota that allow the consumer to determine the level of ethanol used with petroleum-based gasoline.
Speaking the same venue later in the day, POET Energy's Doug Berven called for a 30 percent ethanol fuel standard (replacing today's 10 percent standard) along with blender pumps to make the most efficient use of motor fuels in today’s automobile engines.
In tests co-sponsored by the U.S. Department of Energy, ethanol was found to have "a higher value than previously realized, as three of four cars tested traveled farther on a mid-level blend of Ethanol than on unleaded gasoline, alone." The variance in the different blends is very easy to see," Berven explained.
In addition to better mileage, he said the results also showed "better value for ethanol than BTU content would predict."
Farms were owned by individuals when his grandfather bought the first family farm in 1928, Kruse explained in his annual address. Then came what he called a ''unique'' change that ''was very beneficial to agriculture the cooperative.'' The co-op structure ''allowed agriculture to do many things it had not been in the past.'' Today the structure is evolving again, into limited liability corporations, or LLC structures, he added.
Co-ops almost extinct?
Kruse said the structure of farm cooperatives is almost defunct and evolving to LLCs because the one-man, one-vote concept is inequitable, and a farmer must invest in order to do significant business with the co-op. Co-ops, he added, provide only restricted access to capital and are less profit driven.
On the other hand, Kruse says, an LLC provides opportunity for capital acquisition, an enhanced management structure, efficiency of scale, accelerated adoption of technology, and enhanced market clout, while allowing producers "to go higher up into integrated supply chains. Successful traditional producers will mesh into LLCs accepting outside investment,'' he said. And farms will be run by CEOs and CFOs, due to a greater management challenge.
Royal Beef, an LLC Kruse put together with family and neighbors, is a group of a dozen or so, he explained, and is "essentially a partnership with neighbors.
"Instead of having a dozen of us all going out and building smaller operations, by creating a company with this capital structure, we gain all the great efficiency and management benefits from the larger operation on that particular scale,'' where they have more than 1,000 head of cattle.
Kruse says he sees the beef industry re-locating to the Midwest around the ethanol plants, where the distiller's grain offers a five to 10-cent a pound advantage over producers in the southern plains. He also noted that being in a covered barn, even in frigid February weather, should be "whole lot more comfortable" than they would be in typical open lots.
Capital is available
Pointing to the recent news of farmland price increases, Kruse noted that "we’re going to have some capital to invest as we see farmland values rise significantly."
But, he noted, "We are still not back at the peak in terms of inflated dollars," which saw an average price of $5,564 per acre in 1979, followed by a low of $1,481 in 1985, following the farm crisis years of the early eighties.
The major difference between the 1970s prices and today’s values, Kruse pointed out, is the debt structure, that sees agriculture much better off than in the past, with increasing values and a lower debt ratio. Kruse says he expects this to "create a pretty dramatic pool of capital in agriculture that hopefully we will have to give back wisely in one way or another in new businesses or expansion.
Where just a few years ago he saw $3 corn as the highest price to generate a profit for both the producer and Ethanol processor, today Kruse sees that level as $5. "Essentially most Ethanol plants can make money at $5 corn. That gives me a synthetic foot of $5 as an investor in an Ethanol company. If the price of corn is less than that I’m probably going to get some kind of a check or dividend from an Ethanol company. But of course if the price of corn is $5 or higher, I’m going to get that nice check from the corn. And I can’t complain about that either."
Other commodities follow corn
Like corn, soybeans and other commodity prices are following the relationship with higher crude oil prices, too. And, Kruse says, he expects that to continue as light sweet crude approaches $110/bbl. "Five dollar corn and $13 beans are a good thing," he added, noting that $7 corn and $16 beans could hurt the demand base, "and there could be a penalty paid for entering that short-term award if we enter that phase, which we may very well later in the year."
And, where Ethanol industry start-ups were once a good opportunity for investment, "as the industry unfolded and matured, we have all seen that those opportunities have basically dried up. But some new ones have evolved," especially with the depressed stocks of some of the companies.
Kruse cited figures from Iowa State University that show Ethanol companies should have made a profit even paying $5.43/bu. for corn when crude oil was $80/bbl, due to the government’s tax credit. But without the subsidy, Ethanol production would be profitable only at the $3.90 level with oil at $80/bbl. Crude oil prices have steadily increased to over $100/bbl over the last month.
Kruse termed the ethanol subsidy "very, very important to everyone in this room who is marketing corn, as well as those who are not involved in the ethanol industry. Supporting this bio-fuel economy is our primary risk today, he noted.
Kruse explained that he sees the future of bio-fuel in blender pumps like the ones in use in South Dakota that allow the consumer to determine the level of ethanol used with petroleum-based gasoline.
Speaking the same venue later in the day, POET Energy's Doug Berven called for a 30 percent ethanol fuel standard (replacing today's 10 percent standard) along with blender pumps to make the most efficient use of motor fuels in today’s automobile engines.
In tests co-sponsored by the U.S. Department of Energy, ethanol was found to have "a higher value than previously realized, as three of four cars tested traveled farther on a mid-level blend of Ethanol than on unleaded gasoline, alone." The variance in the different blends is very easy to see," Berven explained.
In addition to better mileage, he said the results also showed "better value for ethanol than BTU content would predict."
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