Cooperatives: A generation of consolidation

M&A activity increasing among agricultural cooperatives

The agricultural industry is continually pivoting to adjust to the market trends that drive it. As demand for food and commodities continues to rise, the impact on agricultural cooperatives (“co-op”) throughout the country is leading to consolidation. This, in combination with an incoming generation of new leaders, some with aggressive mindsets, and a continued focus on member value, is setting the stage for increased merger and acquisition (“M&A”) activity.

A growing sector

The co-op business model continues to perform strongly, with the top 100 agricultural co-ops in America generating revenues of more than $149 billion (the top five co-ops generate revenues of $75 billion). As the needs for sustained growth and member value continues to drive business strategy, those looking for complimentary or diversified offerings in adjacent markets will be open to consolidation.   

Increased M&A activity among U.S. co-ops

One of the market factors impacting the U.S. co-op industry, especially within the agriculture sector, is increased consolidation across the entire supply chain. This rise in M&A activity is driven by a variety of related reasons, including:

• Lower commodity prices and macroeconomic conditions (after several years of high-priced agricultural commodities)
• Increased globalization (economies of scale sought to reduce costs)
• Reduced regulatory costs
• Increased capital requirements
• Increased risks and complexities (international sourcing and competition)
• Improved revenue and development of additional product, service and/or geographic revenue streams to sustain or fuel growth
• Development of broad multi-channel distribution networks for greater geographic reach
• Issues with succession planning

Strong appetite from private equity investors

Agricultural co-ops have noticed a visibly increased interest from private equity investors in rural agribusinesses. This is due in part to the launch of the McLarty Capital Partners (MCP) Rural Business Investment Company (RBIC), which is the fifth RBIC the U.S. Department of Agriculture (USDA) has initiated since 2014.

MCP has the potential to inject $100 million into growth-oriented, small businesses across rural America. It’s part of the USDA’s ongoing efforts to attract private sector capital to investment opportunities in rural America to help drive more economic growth in rural communities. Private equity investors see the agriculture sector as a low-interest environment with opportunities to generate greater returns that are not typically associated with private equity investments, thus making it an attractive market to participate in.

The time is now

The consolidation growth option for agriculture cooperatives is worth evaluating. With more than 15 notable transactions happening throughout the industry since late 2016, many are realizing the benefits of joining forces. The competition for complimentary and differentiated offerings will continue to increase.  Agricultural cooperatives will continue to embrace growth opportunities through a generation of consolidation.

For more information about mergers and acquisitions, or to learn how Baker Tilly's specialized food and beverage team can help, contact our team.

Source: Capital IQ as of May 2017