The Farm

The Farm

Problem: Possible conflict of interest as the father in law of Erich has bought the Agees farm, which is in co-operation for procurement and operations with the Bad Hausen Farm owned by the Von Peterson family.

Criteria: Cost Saving, Legacy, Future Business Prospects, Cost Allocation.

Alternatives: Keep the co-op, break the co-op, sell the farm.

Analysis:

1. Cost Saving

Overall, the co-op has been very successful in cost savings for Bad Hausen farm. As can be seen in Exhibit 1, a total savings of 8% (56812.50 euros) in costs occur due to the two farms shared procurement and operations. If the Von Peterson family were to decide to split from the Co-op, these sufficient savings due to economies of scale will fail to occur although they will save 20,000 euros as part of their share of Erich’s salary. Since the Von Peterson family will benefit overall, keeping the Co-op is imperative.

1. Legacy

The Von Peterson family has a huge history with the area and the people that inhabit the area the farm is located. Alexandra, the founder of the original farm had rescued Tobias and Micheal (managers of the farm) from potential bankruptcy after the Berlin wall came down. She had a deep connection with the land and the people of that area as she wanted to ensure that they have employment. Even though Frederich himself lived in Munich and was not a part of the day to day operations, his excitement to be involved and giving back to the people was evident when Alexandra re-established her control of the farm. Friedrich’s son, Georg, did his undergraduate studies in agriculture as well as worked on the farm for a year and summer holidays. Due to the reputation of the family as being committed to the development of long-term family roots to the area, they were able to expand and rent more land for farming from the locals. Last but not least, the guiding principle of the Von Peterson family was “To get work for our workers, not to get rid of them”. In order to continue with their great reputation, keeping the co-op is the best option for the Von Peterson family.

1. Future Business Prospects

The economics of agriculture have changed vastly over the past 10 years indicating a shortage in the long run. On the demand side, the growth of China and emerging economies has increased demand as worldwide consumption has grown and since biofuels are now competing with food crops for land, the demand for arable agriculture land has gone up. On the supply side, global warming and natural catastrophes have led to lower crop yields. All this has led to an increase in the price of crops. As can be seen in exhibit 2, this price increase bodes well for the Von Peterson family as they will be able to generate more revenue from the farm provided costs remain somewhat steady. In order to get the maximum profit out of the farm operation, keeping the co-op is the best option for the Von Peterson family as costs are minimized by the co-op.

1. Cost Allocation

Since Erich is responsible for allocating costs, this is the biggest possible conflict of interest for the Von Peterson family. As can be seen from Exhibit 3, the number of hours worked by a worker between the two farms before the co-op and after the co-op, Agees is clearly benefitting more. Even though Agees has 78% more arable land then Bad Hausen, the number of hours worked for them has gone down since the co-op started whereas it’s the opposite for Bad Hausen as the number of hours worked on Bad Hausen has gone up. Also, more highly skilled workers, implying higher wages, are working at the Bad Hausen farm compared to Agees. By taking away cost allocation responsibilities from Erich and giving those to Micheal, the Von Peterson family can ensure that any conflict of interest that might arise from this discrepancy is avoided in the future.