Meet the zombie farm

No, this is not a script for a horror movie. Zombie companies are an existing economic phenomenon. Are there zombie farms? Companies that actually have no right to exist, but are active. How many companies are we talking about and what is the impact on the agricultural sector?

The seed for this opinion was planted during a conversation I had with a colleague. It concerned the potato contract prices in relation to the cost price. I stated that these have been growing apart for years and that the cost price is not fully covered by the contract price. My colleague responded very aptly with the question: "How is it that when I drive through an arable area, I see new storage sheds in many places, new tractors in the country and even new potato harvesters or sprayers that cost half a million."

Thick sandwich
I had to owe him the answer. Indeed, based on the sale of new material, the addition of barns and the purchase of very expensive agricultural land, you can only conclude that the arable farmer earns a very big living. For a little tractor you lose more than a ton. At the same time, the price of agricultural land continues to reach records.

I am currently reading the book 'Keerpunt 1971' by macro-economist and Boerenbusiness-house guest Edin Mujagi. There I became acquainted with the term 'zombie companies'. According to the Organization for Economic Co-operation and Development (OECD), the definition of zombie company is a company that is at least ten years old and has been unable to meet its interest obligations for three years in a row. When I read the term, the question came up: do zombie farms exist? I think that question can only be answered with yes.

The Zombie Farm
The zombie farm is (I think) the answer to the question asked earlier: why do I see (at first sight) successful companies while at the same time I am told that crop prices are (far) below cost. Answer: That's a zombie farm. A new tractor, sprayer or harvester is leased at very attractive interest rates thanks to our 'debt company'. The new storage shed was built because the value under the company is being considered: the soil. The reason why so much can be invested by the sector.

Even in regions with traditionally low agricultural land prices, prices have exploded. In 2022, €95.000 per hectare must also be paid for one hectare of drought-sensitive sandy soil. That surprises me even more than polder land that has risen to €170.000.

Crop yield
There is nothing wrong with the fact that the value of the land has increased enormously since the 90s. At the same time it is a difficult thing, because it is stuck in your company. No one has ever become a farmer by selling land. A farmer lives poor and dies rich, I learned when I started working in the sector. That statement is not without reason. It's great that you are building your business on this basis, but it can disguise 'zombie entrepreneurship'. Apparently things are going well – judging by the activities in the yard – but it has nothing to do with the yield of the cultivation or other entrepreneurial activities.

In his book, Mujagić mentions extremely low interest rates as an important tool for zombie companies. You can't ignore that in this sector either. Not only can machines be leased attractively, the interest costs per hectare can also be kept low and land can be purchased at ever-increasing prices. If the interest rate rises only a few tenths of a percent, then the proverbial mess breaks out. Another parallel can be drawn with the overall debt society. Don't pay off a loan, but borrow more. Borrow for land, borrow for buildings, borrow for machines. Sometimes that is purely outward display of power to appear more successful than the neighbor. That also keeps an entire sector working, but the margins are paper thin. A leased tractor is often quickly exchanged for a new one, or a rental construction must offer a solution as soon as the interest and repayment cannot be paid. Everything to put a new copy on the dam. Anyone who still buys a tractor is crazy, you will almost believe.

Young farmers
Why is a zombie farm an undesirable phenomenon? After all, the dealer has a tractor to maintain and the barn builder is not short of work either. In the long run, a zombie farm is crippling the industry. A zombie farm does not invest in its land, innovate in new cultivation methods and do not take product quality to the next level. Nor do they do anything to improve market prices. That takes away opportunities for young entrepreneurs and does not help the sector to reach an overall higher level.

If you look at the challenges that lie ahead in the short (up to three years) and medium term (five to ten years), they are huge for farmers. After an hour of explanation about the new CAP or the 7^e Nitrates Directive action program you have lost track. We haven't even mentioned a thinning package of resources, increasing animal welfare requirements, nitrogen regulations and a challenging sales market. Only as a top entrepreneur with a healthy company can you meet these challenges. You cannot be green when you are red, the VTA (Verenigde Telers Akkerbouw) has been saying for years.

Creative destruction
Let's go back for a moment to Keerpunt 1971. In it, Mujagić talks about creative destruction. A process in which continuous innovation makes the old techniques and methods superfluous (destroys them). This process alone ensures economic growth. In agriculture, this process has already been started before the war, but zombie farms throw sand in the engine. Do as we have always done and do not innovate. The companies that do not innovate stand still and disappear over time. This process is no stranger to the sector either, but it is currently slowing down.

The current corona support measures, but also unprecedented subsidy amounts for new machines, ensure that zombie farmers can survive more easily. If you look at the challenges listed above, it is not the zombie farmer who comes out as the winner. I remain positive about the future, but a future without zombie farms.

Niels van der Boom

Niels van der Boom is a senior market specialist for arable crops at DCA Market Intelligence. He mainly makes analyses and market updates about the potato market. In columns he shares his sharp view on the arable sector and technology.

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