A venture capitalist proposed to purchase 80 acres of agricultural land in Illinois in order to capitalize on the Federal Government’s plans to increase corn-based ethanol as a substitute for gasoline. Not only is he looking for a better quality of life in rural America, he anticipates that the price of corn and the value of farmland will both increase as a result of resulting levels of demand. His business colleagues support the idea and suggest that the investor purchase the land and relocate. However, the investor’s mixed strategy of either purchasing the land to operate a farm or purchase the land in anticipation of rising land values, will not yield the desired profits. He will not enjoy first-mover advantage in this arena and given the number of competitors the suppliers may create a prisoner’s dilemma. There are also other factors effecting the viability of this investment, making it unwise.
The ability to succeed in venture capitalism and yield a profit depends on a certain combination of skills. As discussed in the text, foresight and vision arguably prove beneficial for investors, while luck is arguably the most important factor in determining success (Brickley et al., 2008, p. 275). The investor in the case study was tired of life in New York City, and was looking for another alternative (Brickley et al., 2008, p. 262). After reading about the government’s plans to increase the use of corn-based ethanol, he identified a large parcel of land in Illinois where he could farm corn and capitalize on the growing demand for this commodity (Brickley et al., 2008, p. 262). The investor’s colleagues advised him to go ahead and make the investment, citing a number of different reasons why it would be a good idea (Brickley et al., 2008, p. 262). The purpose of this paper is to examine whether or not his colleagues are correct.
There is no question that the move from New York to Illinois provides the investor with the quality of life that he is looking for. Illinois is certainly less populated than New York and offers a much more peaceful environment than a large city (“High Quality”, n.d.). However, the investor’s colleagues may have erred in whole-heartedly recommending this strategy, and in suggesting that investing in Illinois farmland has little risk. In employing a strategy, the investor is focused on long-term issues to generate revenue (Brickley et al., 2008, p. 276). The price of corn is largely contingent on the weather; it rises, and falls based on the harvest yield each year (Aupperle, & Schnitkey, 2013, p. 17). The same theory applies to net farm income which fluctuates based on higher commodity prices and payouts from crop insurance policies (Aupperle, & Schnitkey, 2013, p. 17). Crops can easily be decimated by drought or poor drainage issues (Aupperle, & Schnitkey, 2013, p. 18-19). Lastly, contrary to what his colleagues advised, there is an abundance of good farmland in Illinois, with farmland covering nearly 80% of the state (“Facts”, 2001). Given this near saturation, the investor would be unwise to rely on a cost advantage over farmers who wait to buy land since they already own it. The estimated value for farmland in Illinois is $12,670 per acre for “excellent” farmland, and $10,500 per acre for “good” farmland (Aupperle, & Schnitkey, 2013, p. 27). With the investor’s proposed purchase price of $10,000 an acre, there is little room for depreciation in value. He would need the property to truly double or triple (as predicted by his colleagues) in order to realize any significant profit at the time of sale.
The investor’s colleagues further opined that buying the farmland would be a wise decision since the investor was smart and would learn the farm business very quickly. The actuality is that agriculture in the United States is a complex industry and a very specialized field (Czech, 2013). In order to be successful, many farms operate using sophisticated technology and equipment that require advanced training to operate (“Facts”, 2001). Incidentally, this is another expensive investment not currently contemplated by the investor’s strategy. Even if his colleagues were correct, there is already an existing surplus of farmers in Illinois making the profession less profitable. Approximately 39 percent of farmers are currently employed in other occupations, and farming is no longer their primary source of income (“Facts”, 2001). This is further evidenced by the continuing decline in the number of farms from a total of 164,000 in 1959, to a total of 76,000 working farms today (“Facts”, 2001). Even with this decline in numbers, there is still a producer surplus during good harvest years, where there is more corn produced that required with the existing demand. It is difficult to predict future demand levels for the investor.
Lastly, another challenge to the investor is the size of his proposed investment. The average size of a farm in Illinois is 368 acres, putting the investor at a significant competitive disadvantage in operating only 80 acres (“Facts”, 2001). While small farms historically produce more than larger ones, the investor would need to operate more efficiently than his competitors to realize comparable profits (“Food First”, 2010). This is yet another challenge increasing the level of risk for the investment.
Given the well-established farming industry in Illinois, combined with undefined future demands for corn, there is not one, single dominant strategy which would yield a larger payout for the investor than any other. Instead, the investor is approaching this opportunity utilizing a mixed strategy, where there are more than one available pure strategies with a variety of possible outcomes (Brickley et al., 2008, p. 238). Although the investor has identified the possibility of in supplying ethanol factories with corn even before the market exploded, he will not enjoy first-mover advantage in this arena as there are already a sufficient number of producers ready and able to fill the demand. He can also reasonably expect that the rush to supply corn may even result in a prisoner’s dilemma, where many suppliers discount their products in order to move the commodity, resulting in a worse state for all suppliers. Given these factors, the investor may decide to move to Illinois to enjoy the rural lifestyle, but he should not move to Illinois expecting to earn money as a farmer.
Aupperle, D., & Schnitkey, G. (2013). 2013 Illinois Farmland Values & Lease Trends. Illinois Society of Professional Farm Managers and Rural Appraisers. Retrieved from http://www.ispfmra.org/wp-content/uploads/2013/03/2013-Illinois-Farmland-Values-Lease-Trends-Full-Presentation.pdf
Brickley, J., Zimmerman, J., & Smith, Jr., C. S. (2008). Managerial economics and organizational architecture (5 Ed.). Boston: McGraw-Hill Irwin.
Czech, A. (2013). Food and farming panel sparks debate, shows complexity of agricultural issues. Minnesota Cornerstone. Retrieved from http://www.minnesotacornerstone.com/?p=1352
Facts about Illinois agriculture. (2001). Illinois Department of Agriculture. Retrieved from http://www.agr.state.il.us/about/agfacts.html
Food first policy brief number four. (2010). The multiple functions and benefits of small farm agriculture in the context of global trade negotiations. Illinois Department of Agriculture. Retrieved from http://www.foodfirst.org/pubs/policybs/pb4.html
High Quality of Life. (n.d.). Illinois Department of Commerce. Retrieved from http://www.illinois.gov/dceo/whyillinois/Pages/QualityOfLife.aspx