Categories
Water

Prime Future 106: What does a water win look like?

“The crux of the issue for water is getting the right amount of water to the right place at the right time, at a reasonable price. Ish.

So let’s say there are two sides of the water issue:

  1. Ensure water supply
  2. Reduce water demand
My hypothesis is that the first is more of a collaboration problem; the second is more of a technology problem.”

Last week we started a conversation on water as the ultimate unsolved problem in ag.

Today we turn to the intersection of technology & innovation and the reduction of water demand in feed, livestock, and meat/milk production.

Let’s start with the fact that WaterTech is still a relatively small category.

You hear all the time about venture-backed startups in alternative energy working to solve the problem of reduced dependence on petroleum, or reducing carbon & GHG emissions.

But rarely do you see press releases about companies raising venture capital to go solve problems related to water, even in ag.

Why is there such a gap? Is the innovation not there? Are the founders not there? Is the capital not there? Is the market too small?

Water doesn’t even have its own category in the comprehensive annual report on AgTech published by AgFunder, that’s how small the category is relative to other innovation categories within AgTech.

Let’s anchor back to the Meatingplace summary of Tyson’s water usage:

“The meat industry’s largest corn buyer, Tyson, says irrigated corn feed accounts for 91% of its supply chain water consumption, as opposed to 7% for raising animals and 2% for plant operations (31B gallons in FY 2019).”

Let’s reasonably assume these proportions are not just true of Tyson, but are representative of the entire meat value chain. Let’s break it down accordingly.

The bulk of water demand to produce meat is in growing feed.

So it makes sense that if you look within agriculture, most innovation is in irrigation technology specifically with the march towards precision irrigation via sensors to collect data and analytics to turn that data into better insights and ultimately better decisions. The same precision progression every industry is making.

Though I couldn’t find any good stats on water tech investment for ag specific solutions, consider this:

“Water experts analyze 101 funding deals (from 2009-2017) that account for over US$704 million invested by venture and private equity growth capital investors in water start-ups.”

But $704 million over a decade is laughable compared to the $5 billion that went into alternative meat startups in 2019 alone!

Technology is, of course, not the answer to everything. There are massive elements of political and societal will at play here, of bringing people and groups with divergent objectives together to accomplish shared objectives. But in an environment where people aren’t great at coming together to solve problems, more of the burden will shift to technology solutions.

And yet, here’s how Agthentic & Upstream Ag Insights authors framed the adoption challenge in their excellent report on adoption of precision irrigation technology:

“Adoption remains low because there has been too much attention given to the technology, and not enough given to the psychology of farmers. It is not the technology that needs to be better. Instead, far more attention must be given to farmer psychology, and the go-to-market strategies, business models, and water policies that can drive the change and impact we need to see.”

So you have relatively low investments in irrigation tech and relatively low adoption of that technology. The bright spot is the expectation for the precision irrigation tech market to grow at ~12% CAGR.

But the technology that directly reduces demand for water isn’t the only path to reducing water demand.

My hypothesis is that water efficiency gains in raising livestock are largely made indirectly, as a byproduct of live performance gains.

This popped up on LinkedIn recently:

And California dairies are rapidly adopting systematic & process changes to reduce their need for increasingly high-cost water:

The amount of water used to produce each gallon of California milk has decreased more than 88% over the past 50-plus years, primarily due to improved feed crop production, use of byproducts as feed, and water use efficiency.

Much of the water use efficiency bucket is in reusing water from clean water to cool & refrigerate milk, then to wash cows, then to wash barn floors, then to irrigate (with the added benefit of some 💩). This approach is also common in hog operations.

If the water efficiency equation is total pounds of output (meat or milk) divided by total water usage then we can either decrease the denominator or increase the numerator to improve water efficiency.

Let’s say that decreasing the amount of total water used is the direct route while increasing the total output is the indirect route.

My hypothesis is that much of the improvements in water efficiency have been made indirectly through general improvements in livestock performance and feed efficiency as a result of the many levers producers rely on from genetics to health & nutrition to improvements in production systems & practices that lead to increased pounds of meat and milk produced per animal or per pound of feed.

If that’s true, it raises the question, going forward will indirect gains in water efficiency be enough?

Considering the efficiency gains made in recent decades, can enough incremental juice be squeezed from future efficiency gains to make a meaningful dent in the water required to raise livestock?

(those are not rhetorical questions, I’m genuinely asking)

And then there’s processing.

This Meatingplace article is a fascinating outline of water usage in plants from live plants to the kill floor to carcass cooling and beyond. It also describes how much of the low-hanging fruit in packing plants is in improving processes within the plant, updating equipment, and training employees.

Can we boil this down to putting the right systems in place and aligning incentives for individuals within the system?

(Though I recognize that’s a vast oversimplification and managers who’ve made the hard decisions for multi-million CapEx projects to reduce water usage would be the first to say so.)

But how do you get credit for a water win, other than a random ag fact in a social media post?

The challenge with water is that it’s really hard to contextualize reduced water demand in a way that turns it into a commercial win for row crop farmers, livestock producers, or packers.

So the business impact of water-reducing initiatives & innovations has to be felt in reduced production costs.

For example, increasing soil organic matter by 1% can increase soil’s water holding capacity by 3.7%. If 58% of soil organic matter is carbon then doesn’t this sound like a multi-purpose win for carbon sequestration, water efficiency, and reduced cost to irrigate?

Saving water for saving water’s sake isn’t enough of a carrot, and no that doesn’t make anyone a boogeyman – it’s the real world.

If you want behavior change, there has to be a compelling reason for behavior change and that typically comes in the form of a carrot, a stick, or some combo.

And IMO, the most effective carrots and sticks are found in the P&L of the business.

My expectation is that agriculture will see more water innovation in the next decade, because we have to.

Shout out to those of you who recommended water resources! I’m excited to dig into some of the books you suggested.

Also 12/10 recommend listening to this Future of Agriculture podcast episode about the economics of water (straight forward overview of a complex topic), and this Future of Agriculture episode with water innovator Matthew Pryor.

Categories
Water

Prime Future 105: The unsolved problem? Water

I recently spent several days in Washington and when I go to the mountains, I document water like it’s my job, y’all.

I make no apologies for my water obsession though. I live in the desert so it is never lost on me how water is synonymous with life. Water represents potential and opportunity for growth and flourishing…humans, plants, animals.

We all know water is a precious resource. And we know we need reliable access to water to raise livestock and produce meat, from growing feed to watering animals to water usage in processing.

So why aren’t we urgently talking about water solutions for both the short and long term? Today we’re starting a conversation on water by framing up a few key aspects of The Water Issue.

Let caveat this entire discussion: (1) water is a wickedly complex topic, (2) the challenges are often hyper-local and vary whether you’re talking about surface water or ground water among other variables, and (3) the debates are intense.

The magnitude of The Water Issue

Meatingplace did a solid series on meat packers’ efforts to improve water efficiency, and framed the magnitude of the broader water situation this way:

“As is, the average American uses 80 to 100 gallons of water per day, in a nation using an estimated 345 billion gallons every day. That same nation is expected to be home to 200 million more people in the next 70 years, for a total population of nearly 514 million. And they’re moving more and more to the hot and dry South and West, according to new census data published in April. Those regions now account for nearly 63% of the total U.S. population, compared with just under 50% in 1970.

The country saw a nine-fold increase of total withdrawals over the first 80 years of the 20th century, thanks to supply-side adaptations like the construction of reservoirs, canals and pipelines. The rate of construction of such conveyances, however, peaked in the 60s.“

Oof.

The crux of the issue for water is getting the right amount of water to the right place at the right time, at a reasonable price.

Add an -ish to each of the parts of that equation because that’s how nature rolls.

I also like how Meatingplace framed this as a two sided problem:

“The collective conservation effort will continue on two fronts: enhancing water supply and/or reducing water demand. The former entails supply-side efforts from enlarging reservoirs, to linking supplies via new canals, to reusing regenerated wastewater, to desalinating brackish and seawater. The latter demand-side approach enlists new water-saving technologies and laws that limit withdrawals from stressed sources such as at-risk aquifers.”

So let’s say there are two sides of the water issue:

  1. Ensure water supply
  2. Reduce water demand

My hypothesis is that the first is more of a collaboration problem; the second is more of a technology problem.

Let’s start with definitions. What are ways to increase water supply? It’s things like…

  • Building reservoirs or increasing capacity to store water
  • Building canals and pumping systems to move water
  • Building water districts to treat water as a utility like electricity

While on my mountain adventures I read a biography on WD Farr, Cowboy in the Boardroom. WD is best known as one of the first people to reject the dogma of his time that cattle must be finished where the feed is located by bringing the cattle to the feed. He made the bold decision to build a feedyard in eastern Colorado and bring the feed to the cattle. As interesting as his influence on the future of cattle feeding was, it was his work to establish systems of water transportation, storage, and distribution to the semi-arid region of northern Colorado that I found most fascinating.

Why? It was a function of two things:

1. His belief that northern Colorado would attract people and become a populous area in the future.

2. WD grew up in the Great Depression and more importantly, the drought that caused the Dust Bowl of the 1930’s. He knew firsthand how drought could sneak in and destroy farms, communities, even entire regions. So his goal became to secure permanent water availability for the region.

Pretty prescient, eh?

Farr’s biography details the multiple major water projects in the mid 19th century that WD helped broker among stakeholders with competing interests and visions including politicians, environmental groups, large & small municipalities, large & small farmers, and many others who struggled to see eye to eye. No they didn’t have Facebook but yes they had plenty of whacko conspiracy theorists trying to jam up projects. But they made stuff happen anyway.

Reading about the creation of those major water projects is like reading a relic of another time completely. Have any states in the western United States done major water storage/transport projects in the last 20 years? 50 years?

Could a major water project even be agreed upon, let alone permitted, in the polarization of the public square today? It’s hard to imagine, isn’t it?

And yet, with the combination of growing population (aka increased residential water demand) and severe drought in much of the west, the water issue is getting to code red levels of criticality in some geographies.

Take California where Central Valley farmers are grappling with new restrictions on groundwater usage at the same time as surface water availability is more limited than ever.

Or Arizona, now ‘celebrating’ 2+ consecutive decades in a drought, where 36% of water for both agricultural and residential use is from the Colorado River. But as the river gets lower, the largest reservoirs are now at record lows, and new restrictions on water usage are completely changing the game for irrigated acres that are reliant on surface water. (Here’s a good article.)

Even if it started raining tomorrow Noah’s ark style and the Western US were entirely out of a drought, there’s still the fact that the region is drought prone and that more people are residing in these areas than ever before, growing the annual water requirements in addition to water demand for agricultural use. So we should probably do something to prepare for the next severe drought, wouldn’t ya say?

But maybe it seems California and Arizona are two extreme examples and they aren’t representative of all regions in the US let alone the world. I’ll buy that. So let’s zoom out and consider a few broad hard-to-argue assumptions about the future, across most regions and climates:

  1. Population will continue to grow creating increased need for residential water.
  2. Battles between residential water use and agricultural water use will continue to be an issue.
  3. Battles will continue between environmentalists and industry.
  4. #1-3 will mean that water will be increasingly regulated at all levels of government.
Maybe the first innovations we need are an increase in common sense collaboration. But hope isn’t a strategy. So what’s the play here?

The limiting factors for increasing water supply aren't really problems technology can solve (yet), they are people problems…where humans need to organize around a shared vision. Which is really really really hard to do.

(Though interestingly WD did experiment with cloud seeding in the 1950’s as a potential tech solution for increasing rainfall but it was met with a lot of resistance and didn’t prove very fruitful anyway.)

One minor point – in a water constrained environment, can we assume that lawns are a luxury not a necessity? Isn’t it likely that in 50 years we look back at the quaint time when a patch of grass was default standard issue with American homes? I think so.

Back to livestock. Meatingplace referenced this summary of water usage in Tyson operations and in Tyson’s supply chain:

“The meat industry’s largest corn buyer, Tyson, says irrigated corn feed accounts for 91% of its supply chain water consumption, as opposed to 7% for raising animals and 2% for plant operations (31B gallons in FY 2019).”

Those numbers aren’t surprising, but they do tell a story. Next week we’ll dig into the implications and look at the demand side & reducing water needs across feed, livestock, and meat processing.

Technology isn't the answer to everything but in a world where it's politically difficult to solve water from the supply side, the burden gets shifted to the demand side to reduce the need for water for residential and agricultural use.

I expect we will see more water focused innovation in agriculture in the next decade because we have to.

Cathie Wood is a well known tech enthusiast and fund manager, who wrote this tweet referring to the economic problems at the moment. But I think we can put water in the bucket of super-pressing-and-urgently-critical problems. And the principle still applies: innovation solves problems.

What a time to be alive 😉
Categories
Markets Meat

Prime Future 104: Oil based insights from ga$ price$

This April headline caught my eye:

Although it’s a bit dated now since oil prices are back up, the article is still relevant as it answers the question by looking at the structure and complexity of the value chain.

Prime Futurists when someone mentions value chain complexity

“Oil prices have tumbled almost 20% from a multiyear peak in March, but the prices American drivers are paying at the pump are still hovering around record levels.

The difference between the costs of oil and gasoline has attracted attention from politicians, some of whom have accused oil companies of price gouging, as U.S. inflation soars.

Oil prices have in fact been falling more quickly than gasoline prices. Oil was at $100.60 a barrel Tuesday, down about 19% from an almost 14-year peak in early March, while a gallon of regular gas averaged about $4.098 on Tuesday, only about 5.4% lower than the all-time record in March.

But the system that turns oil into gas in the U.S. is big, complex and not controlled by any one company. Thousands of companies drill for oil. Dozens refine that oil into fuel. And tens of thousands of largely independent gasoline stations sell that fuel to customers.”

Of course this is all interesting because holy ga$ price$ 😵‍💫, but mainly because of its parallels to price chaos across protein value chains over the last couple of years with both live animal prices and meat and milk prices.

Maybe there are some oil based insights that are relevant for livestock?

To explore that, let’s start by comparing the structure of oil with a protein value chain – let’s use beef. Full disclosure we are going to hunt for insights by oversimplifying things; you’ve been warned.

The article explains the gasoline value chain like this:

  • ~9,000 companies drilling for oil
  • 129 companies refining the oil
  • ~130,000 (mostly independent) gas stations selling gasoline

Contrast that with the beef value chain:

  • ~900,000 cow-calf producers selling calves
  • ~300,000 stockers selling feeder cattle
  • ~26,000 feedyards finishing cattle
  • ~80% of cattle processed by 4 packers selling meat into export, foodservice & retail channels
  • ~63,000 grocery stores who sell to meat eaters (but a way smaller # of chains, obvs)

Even though the commodity’s characteristics obviously impact value chain structures, it’s not actually that relevant to our ‘so what’ today. But here are a few similarities and differences in oil/live cattle and gasoline/meat:

With that context, now to the good part!

“When gas station owners buy more expensive fuel, they typically wait two to four days to start substantially raising pump prices because they are reluctant to lead the market in price increases. When oil prices decline, gas station owners also tend to follow more slowly, with pump prices floating down “like pigeon feathers,”….”

Implicit in this paragraph is the idea that these independently owned gas stations do not have the ability to systematically manage price risk other than the timing of changing retail prices which is in a wickedly competitive market since there’s a gas station or 10 on every corner. They are exposed to market risk both in how they buy and how they sell.

But if live cattle is oil & meat is gasoline, we run into a narrative violation.

Many would say that live cattle prices are low and meat prices are high because of concentration among the packers. But in the oil & gas scenario, refining is also fairly concentrated yet gas prices remain high because of fragmentation at gas retail. Wait…concentration or fragmentation can cause market funkiness?!

Whether gasoline or feeder cattle, buying or selling a commodity inherently includes price risk. As a seller, the more you identify as a price taker the more price risk you are exposed to. Duh.

But larger organizations tend to have the capability to better manage risk, from the sophistication and know how to create risk management *strategies* to the systems that help execute risk management *tactics*. It tends to be the smaller players that absorb the price uncertainty because they tend to have less resources and capability and so are less likely to manage risk.

(Obviously there are outliers – I see you.)

The ‘so what’ is that regardless of what commodity you are in the business of producing/processing, at the extremes there are 3 options:

  1. Swim in the sea of commodity price risk. Ride the wave of profit in, and the wave of loss out, expecting the waves to be favorable over the long run.
  2. Get really really good at managing price risk from strategies and tactics to systems and discipline.
  3. Channel your inner fairlife milk / Eggland’s Best eggs / Snake River Farms beef to get as far out of commodity markets as you can by positioning yourself in non-commodity markets. Or at least in markets that are less commodity-ish.

None of those are right or wrong. Empires have been built from all 3 options….and empires have been lost from all 3.

None of those 3 are necessarily exclusive – many successful businesses have built the even more impressive capability of knowing when and how to use all 3. Meta.

I have a regular debate with a friend about whether it’s better to be in a low margin high volume business or in a lower volume higher margin business. Of course it comes down to two assumptions:

(1) this is a ‘different strokes for different folks’ kind of question which includes personal preferences and capabilities and resources.

(2) the key to make low margin high volume work is to lower volatility and lessen the impact of cyclicality – however you make that happen. Whether it’s through flexing capacity, a financial hedge, long term supply agreements, some other strategy, or the systematic combination of multiple strategies.

My aha from comparing meat and oil is that lessening the impact of market cyclicality is basically the business of production – wherever you are in the value chain, whatever value chain you are in.

I come back to this topic somewhat frequently for a few reasons:

  1. Because sometimes people who work around agriculture but not in production fail to appreciate what it’s like to operate in a commodity market. Spoiler alert: it’s hard.
  2. I love talking to super successful producers because they inevitably have simultaneous strong conviction and hard won humility about this topic because they have built a systematic approach to managing market risk – whether it’s being fully exposed to the market to capture the upside of the good years by having enough equity to ride out the bad years, or whether it’s creating brands to get out of the commodity category, or laser focusing on having the lowest cost of production.

Who knows what gas prices will do over the next 2 years. But if we’re going to pay out the nose we’re at least gonna try to learn something from it, amirite? Especially if it’s true that oil and cattle have more in common than the Permian Basin. 😉

What aha’s does the oil:cattle and gasoline:meat analogy bring to your mind?

Categories
Uncategorized

Prime Future 103: I don’t wanna feed the world anymore.

My friends. I have resisted writing this for a while but alas, here we are.

I recently saw a tweet that said:

The American farmer wakes up every day, and goes to bed every night thinking “How do I compete and leverage technology to feed 9B people by 2050”.

I’m not picking on that tweet, this sentiment is errrrywhere in ag. Founders love to pitch their startups under this context as proof that their startup will be a multi-billion dollar business. Venture funds raise capital based on this. Agribusiness loves to use this framing to recruit talent and rally the troops. Trade associations love to use it to make their members feel good about themselves.

It’s the nebulous & lofty industry rah rah. Need a cheer to lead? Feed the world is the golden standby. Old Faithful.

But let’s talk about why this mantra is irrelevant and flawed…and why that matters.

Why we started Feeding the World in the first place

In 2009 the Food and Agriculture Organization of the United Nations released it’s report saying:

According to the latest UN projections, world population will rise from 6.8 billion today to 9.1 billion in 2050 – a third more mouths to feed than there are today. (Creating the need to) produce 70 percent more food for an additional 2.3 billion people by 2050.

What else did the report say though? It talked about the complexity of accomplishing this from considerations for production (water & land use & availability) to considerations for lifting more people out of poverty (from investment in rural infrastructure across Africa to increase access to food to the prediction that 70% of people will live in urban areas by 2050 up from 49% today). Not to mention the changes in demand for different types of food as incomes rise, and the role of policies around biofuels and how that will impact commodity prices.

Oof, that’s a lot of complexity and competing dynamics among really really hard problems.

If you think about the scale and complexity and geopolitics and cultural trends involved in the global food industry, it’s almost intellectually insulting that we’ve boiled it all down to ‘feed the world’.

7 flaws with dumbing it all down to Feed the World

  1. The market’s job is to solve for m-o-r-e through price. Markets have 1 job, and this is it. Nobody needs to suggest producing more, the market will do that.
  2. Supply is more than just production. Producing enough food for x billion people is one part of the supply side of the equation. There’s also the question of distribution & getting the right food to the right markets at the right time. And then there’s the question of how to minimize food waste, whether in field/barn, in transit, in grocery store/restaurant, or in the home. But talking about reducing waste isn’t nearly as fun as talking about increasing production so here we are.
  3. Demand is a moving thing. On the other side of the price equation is demand. What do people want? What are they willing to pay for? What do they have access to? Food tastes and preferences change over time and chances are pretty doggone strong that preferences will look differently in 2050 than they do today.
  4. Other things matter besides quantity. Feeding the world is a commodity message. Higher yield. More throughput. Yield at any cost. Feed the world assumes you can high yield your way to profitability which isn’t always the case. But it also misses what’s happening in the real world where yes, the underlying market incentive is always for quantity of production but there’s increasingly market opportunities & incentives for producers who are optimizing for quality, and/or specific attributes.
  5. Feed the world has also been weaponized to defend certain production practices. “If we can’t do xyz or use abc then we can’t feed the world!” But it’s usually not true, is it? Producers figure it out and the market sorts it out. As one cattle feeder recently said ‘my entire career people have been saying this or that is going to put this industry out of business, but it never does.’
  6. The World is neither a market nor a customer. Even the most mega of mega farms aren’t feeding the world; they are supplying some percentage of some raw materials to some specific supply chains for some specific food items for some specific customers. Not to mention that you could milk tens of thousands of cows and yet still only supply an itty bitty fraction of a percent of global demand for dairy products. Feeding the world? Nope. Feeding this customer segment with this thing? Yes.
  7. Birth rates have slowed in many countries which raises the question, is global population still even on track to hit 9 Billion by 2050? I would love to see an updated population forecast. But whether global population hits 8, 9, or 10 billion by 2050 is irrelevant. Why? See #1 above.

Can we agree that feeding the world was a flawed oversimplification? Markets align incentives to meet demand. Technology enables increased production and/or improved efficiency. Policy and regulation either increases or removes barriers to both supply and demand. Geopolitics influence trade and access. Etc etc etc…

Maybe it seems petty to pick on an idea that sounds so noble at face value. But the nobility of feeding the world is an outcome of what happens at a micro and macro level, not a driver.

I’m calling this out because it confuses what we wish were true with what is actually true…and you know Prime Future isn’t about that mess. Particularly when it comes to those who are innovating and solving problems in agriculture, to confuse the context around the problem with the problem itself is to build around faulty assumptions.

In conversations with producers, here are a few examples of things that *actually* keep them up at night:
  • Floods. Drought. Derechos. Late freezes. Early snows.
  • Futures markets. Paying off the bank. Interest rates. Fuel prices.
  • Finding great people to hire. Paying great people to stay.
  • Good animal welfare, keeping bad actors and activist groups out of the farm gate. Keeping equipment running and fences standing and housing conditions just so for livestock.
  • If demand for wheat goes up, what happens to corn supply? If more people eat chicken, what will happen to beef prices? If the price of corn keeps going up, what happens to cattle on feed and feeder cattle prices?

What keeps most producers up at night are the day in day out problems of operating in a wickedly complex environment, from the human to biological to weather to market risk to financials.

Feeding the world? Nowhere in the *vicinity* of the list.

Feeding the world is a fine idea. But practically speaking about the day to day, producers are in business to feed their own families. And practically speaking about the next 30-100 years, people gotta eat. No one needs any more conviction about being in a category that will always change but *literally* never go away. We know it.

In 2009 as a brand new baby sales rep in my first grown up job, I LOVED the sense of mission and purpose in the idea of feeding the world. It sounded grandiose and felt important. “I’m not slinging FDA approved drugs, I’m feeding the world” 💛

But it’s not 2009 anymore. We’re 13 years, 3 presidential administrations, 12 iphone versions, multiple regional wars, many percent inflation, and 1 global pandemic later.

Feed the world was a fantastic industry rally cry from 2009-2014. And then it got misapplied and way overused.

So maybe let’s stop claiming to be about feeding the world and be about the realities of unlocking measurable value for producers and consumers?

Only you can prevent nonsensical industry propaganda. Spread the word.

Categories
AgTech Animal AgTech Venture Capital

Prime Future 102: What if Cargill, Tyson & Pilgrims were venture-backed companies?

Imagine an alternate universe where William Cargill, Sam Walton, John Tyson, Bo Pilgrim, and JR Simplot had access to venture capital in their early days.

  1. Could venture capital have improved the outcomes of their companies?
  2. Let’s assume these companies wouldn’t have ended up any bigger than they did, but could they have shaved 50-100 years off the time from start to empire status?
  3. Would those founders have taken venture capital if it had been available?

Venture capital is a tool for faster growth. But it comes with a time clock – industry standard is a 10 year time horizon for a fund.

But these companies are generational giants. William Cargill started the earliest seed of Cargill in 1865…that’s a minute ago. They grew the old fashioned way – by creating value at the right time for the right market(s). I’d love to have insight into their capital structure during mega growth phases but let’s assume that growth was financed by some debt and mostly revenues since venture capital didn’t even become a thing until the 60’s-70’s and even then was limited to high tech businesses.

Today we explore scenarios where venture capital either wasn’t needed or wasn’t a fit, and how survivor bias might influence our views on both.

Speaking of bootstrapping and overnight successes built over years decades, I recently interviewed Scott Sexton (CEO of Dairy.com which is now EverAg) for the Future of Agriculture podcast. Scott has been on my list of go to smart people ever since I was launching The Poultry Exchange. We downed a lot of coffee talking about strategies and tactics to get to liquidity in digital marketplaces since that was how Dairy.com started years before.

Dairy.com emerged from the ashes of the dot com bust backed by several large US dairy processors. Those dairy processors needed a better way to trade dairy products like cream to keep supply & demand in balance which is tricky when you have a perishable product and multiple components.

Because processors were invested in Dairy.com they drove volume into the trading platform, and because there was volume in the trading platform from suppliers then buyers showed up. This early path to liquidity was critical and it’s a topic for another day, but the lack of liquidity is what kills most marketplaces.

The marketplace was effectively what we’d call today their wedge product. It got them in the room, in the market, in the customer’s office. Then they started expanding, incremental step by incremental step.

They were facilitating the trade but then the customer needed to physically haul dairy products and there was a whole suite of challenges making that a nightmare. So Dairy.com moved into digitize hauling.

And once you’ve traded product and hauled product, someone needs to get paid for that product….which had its own suite of clunky paper based products. So Dairy.com moved in to digitize payments.

They’ve just repeated this process for 20 years, going deeper within the vertical while expanding their footprint wider across the value chain and shifting their identity from ‘marketplace company’ to ‘company that powers supply chains’. The company recently began that shift from ‘go deeper in dairy‘ to ‘go wider across ag’ by moving into other verticals.

Until the relatively recent private equity acquisition, Dairy.com grew in a capital constrained way, with steady growth.

So flip the script on their business. Could a venture backed Dairy.com have had a similar outcome in 1/4 the time? Or had a bigger outcome in the same time frame?

I’m still forming my hypothesis here but I think there’s something interesting, something durable about high ambition companies that grow slowly. I’m not talking about lifestyle businesses (and I don’t use that description pejoratively), I’m talking about companies that have high ambition for high growth but do it without relying on copious amounts of venture capital.

Maybe high ambition companies that grow slowly over time have the most staying power.

Venture capital is flashy. It’s big numbers and hockey stick growth curves (up and to the right, always!) and IPO’s and buzzy exits. Or at least, that’s what you read about.

What you don’t see press releases about are the companies that drowned in too much cash by attempting to grow faster than the foundation of the company could handle, or before their market was ready. The graveyard of these companies is grande.

Venture capital is a financial tool for growth, but it’s not always the right tool for the job.

Given the venture fund model and venture timelines, does VC add risk to the investee? In many situations, yes. Or as one founder put it recently, “VC’s have many bets in their portfolio, I have one and it’s this company. My outcomes are binary.”

Alternatively, does slower growth increase staying power of a company?

Depends on the market. The customer. The product. The company. The competition.

Another scenario: Hickory Nut Gap is a growing regional meat company selling into Whole Foods and other retail and foodservice outlets. This is a high ambition farm to label operation that has grown rapidly but is in a low margin category, where traditional growth capital sources aren’t quite a fit and yet some form of growth capital is needed to fuel the founder’s ambitions for the business.

I wonder about the alternative financing models that are needed but not readily available for these types of businesses, capital that is:

  • more risk tolerant than private equity
  • more patient than venture capital
  • less expensive than equity
  • more flexible than most debt

Is that a thing? Can that be a thing?

In agriculture, capital can’t remove all the bottlenecks to growth because often the bottleneck to growth is the reality of natural rhythms of live plants and animals who exist in complex biological ecosystems and producers operating in increasingly volatile financial environments.

The risk to this whole conversation is looking only at the winners, and failing to recognize Survivorship Bias.

Shane Parrish of The Knowledge Project describes it this way:

“Survivorship bias is a common logical error that distorts our understanding of the world. It happens when we assume that success tells the whole story and when we don’t adequately consider past failures.

There are thousands, even tens of thousands of failures for every big success in the world. But stories of failure are not as sexy as stories of triumph, so they rarely get covered and shared. As we consume one story of success after another, we forget the base rates and overestimate the odds of real success.”

This is incredibly true in the world of venture capital. But by definition it must also be true in the eras in which Cargill, Tyson, Walmart, Simplot, etc were forged.

So what’s the takeaway?

I think the moral of the story is that great businesses get built under every financing structure possible, in any market condition, in any vertical. There’s no absolute better or worse capital source, there’s only better or worse for this business at this time.

Would William & Sam & John & Bo & JR have taken venture capital? Impossible to say obviously (and we can have a whole other debate about whether their business models were venture friendly) but I wonder if the benefits of bootstrapping a high ambition business isn’t its own kind of super power.

What a time to be alive 😉

What company that is a small to midsize business today do you think will be a big business in 20-50 years?

Categories
Business Model Innovation

Prime Future 101: The boring key that unlocks super powers? Distribution 🗝

This Business Breakdown podcast episode about John Deere is worth the listen for anyone who…well, it’s worth it for anyone. Farmer & investor Matt Coutts talks about Deere’s transition to a technology company, from product strategy to commercial strategy.

An interesting product note is that Deere now has more software engineers than other engineers. 👀

On the commercial front, Deere has publicly stated a goal to transition to 10% recurring revenue. (Here’s what Sarah Nolet and Upstream Ag Insight’s Shane Thomas had to say about this.)

But relevant to our discussion today, Coutts highlighted Deere’s advantage not just in product but also in distribution of both farm equipment and technology.

The distribution model in farm equipment is to sell through a dealer network. Dealers take the capital intensive inventory, build the relationship to sell directly to farmers, and also service equipment. Deere has relationships with dealers who have relationships with farmers. Coutts says one Deere advantage is having a larger dealer network than their competitors which means farmers might only be 50 miles from a Deere dealership instead of 150 miles. This especially matters when it comes to needing timely repairs in season.

And specifically from a technology perspective, Deere has more tractors in field than competitors so that base of existing tractors is the target market for technology.

Sounds pretty flywheel’ish, doesn’t it?

Deere obviously built the brand on product quality. But we all know that the best product doesn’t necessarily win. Often it’s the company with the best distribution that wins.

Truth be told, Deere having the advantage in both product and distribution is downright impressive.

My nieces here would say nothing dance parties like a Deere 😉

Today we dig into the whats and hows of distribution & why distribution can be the innovation lever to unlock super powers.

This is a discussion that is central to developing new business models, whether the product is physical, digital, or service-based.

What does distribution mean, really?

Distribution is sometimes reduced to the delivery of the physical product, but there are three relevant functions tied (in varying degrees) to distribution:

  1. Customer acquisition & demand creation.
  2. Physical movement & delivery of a product or service.
  3. Customer relationship to support anything post-sale.

Sometimes when people say distribution they mean all 3 elements. Sometimes they just mean 2, or 1 & 2 only, or 2 & 3 only. Often it’s a catch all term for the go to market plan.

(And sometimes the 3 are tied closely together, sometimes they are independent of one another, depending on the product, market, etc.)

Scale is often considered THE distribution advantage. There are so many examples of this from John Deere, to Standard Oil’s grip on the railroads as the method of elbowing out competitors (legality aside) to be the dominant oil player across the US, to the packers whose diversification across sales channels and geographies allowed them to better weather the overnight slow down of foodservice sales in 2020.

But innovation in distribution can be what disrupts the incumbents, or at least allows upstarts to compete with incumbents. A few examples:

  • Before Sam Walton got a hold of the retail & grocery business, the model was for manufacturers to ship product directly to stores. Sam flipped the model on its head by scaling up the distribution center as the inventory buffer between manufacturers and stores, increasing SKUs while lowering costs.
  • Author Ryan Holiday writes books and newsletters, including a monthly email with book recommendations. I buy at least 1 book every month from his recommendations and not once has he led me astray. So in a contrarian move with horrible luck of timing, Ryan opened a physical book store in March 2020. A physical book store in an Amazon world, that’s crazy! And yet, Ryan has thousands of subscribers on his monthly book recommendation email so instead of linking each book title to Amazon, he links it to his own shop’s website. Immediate distribution reach beyond the 4 walls of his book store in little ol’ Bastrop, Texas. Beautiful.
  • Bill Gates is a billionaire because of his early insight that licensing software was the better business than hardware which was on a path to commoditization. Microsoft was the first software company to reach $1B in revenues because of a licensing agreement with IBM in which every PC sold included Microsoft software. Even now in a cloud based world, the vast majority of Microsoft revenue is from licensing software.
  • Digital only banks like Chime or insurance companies like Hippo. In the very first edition of Prime Future, I wrote this about digital first insurer Lemonade:

Distribution can be the glue to a new business model…

I recently talked with the CEO of Walden Local Meat out of New England, Philip Giampietro. Here are the basics of Walden Local’s business model:

  • Walden Local is an ‘animal share’ with a membership model. Join the club and get a % of an animal(s) on a monthly basis. The key here is balancing the entire carcass across members, both grinds and middle meats.
  • Source livestock directly from local farms (how define local) and local processors. Since local processing capacity is a bottleneck for businesses like this, balancing the timing of market ready livestock with processing availability with demand from customers is critical.
  • The kicker? Walden manages their own logistics. Walden owned vans & trucks pick up meat at the processing plants and deliver meat to members.

Walden’s distribution strategy is core to their business model. Presumably owning the fleet and managing the logistics of delivery is not the cheapest way to do things, not by a long shot. But here’s why they do it:

  • Typical delivery services have 2% damaged deliveries. If you’re trying to replace the trip to the grocery store, the right product has to be delivered at the right time. Controlling logistics, including last mile delivery, allows Walden to have <.2% damaged deliveries. This keeps customers happy which keeps customers out of the meat case at their local grocery store.
  • The delivery fleet doubles as rolling bill boards through target neighborhoods.
  • If you’re selling a product on a local ethos, then having a rando FedEx or UPS truck deliver your product feels a bit disconnected. So having a Walden Local vehicle deliver your order by a Walden Local employee feels on brand.

We can debate the scalability of their model. But for Walden Local, their distribution model impacts how they get new customers, how they get product to customers, and how they support customers.

The Walden example raises the question, what metric(s) are we optimizing via distribution?

  1. Cost
  2. Time/speed
  3. Customer experience (control for quality/precision of customer experience, build customer connection, etc)

This reminds me of the product triangle we’ve all seen. You can pick 2 of the following 3 variables: price, speed, quality. But you can’t have all 3.

I’ve always thought of the application of this triangle in regards to the product/service itself, but what if it also applies to distribution models.

When it comes to rethinking old school assumptions about distribution for new business models, this article by the maestro Marc Andreesen outlines a decision tree. Most of the questions in the decision tree are kinda obvious as a function of your product and target customer/market:

  • Product:
    • Physical product (perishable? Liquid? 4 legged? In a bin? In a bag?) vs services vs software
  • Target customer:
    • Who is our target customer? What’s true about them? How do we reach them? Profitably?

But the non-obvious questions are around business model:

  • What role does distribution play in our business model?
  • How do different distribution options impact the business model’s ability to produce?
  • How does pulling on the distribution lever impact other levers like total addressable market (TAM), lead gen, NPS, operational efficiency, supplier relationships, etc?

Distribution is an interesting lever to innovate around because it is so central to the customer experience and the e-n-t-i-r-e business model.

Distribution is the unsexy, boring lever at the center of a lot of companies & industries that can have huge impact when that lever is applied differently.

Distribution innovation can be the secret key to unlock flywheel superpowers.

One last thing. There’s an interesting phenomenon playing out for companies who’s primary customer acquisition channel is paid digital ads. In the early days of social media, you could build a brand & a business faster/cheaper online by putting ads on Facebook and Google. Now paid online ads are a super competitive channel and the cost per ad / cost per new customer has skyrocketed. Some estimate that startups spend as much as $.40 of every $1 of venture capital on digital advertising. That is going to be an increasingly challenging model of customer acquisition if we are in fact at the beginning of a market downturn where capital – whether debt or equity – is more expensive.

What will the next distribution innovation wave be?

What a time to be alive😉

My caveat to all of this is that distribution is not a topic I’ve spent much time thinking about as an isolated concept.

Categories
Uncategorized

Prime Future 100: For the 100th time 😁

I started this project in the uncertainty & isolation of those early pandemic days. The stock market was in free fall and grocery stores couldn’t restock the meat case fast enough while dairies were dumping milk as the price plummeted when schools shut down. It was the weirdest of times.

I had two objectives in mind when I started Prime Future:

  1. Find more of my people
  2. Learn out loud about interesting stuff in animal protein

1-0-0 editions later, here we are. And in the spirit of learning out loud, here are 9 takeaways from the process of writing the first 100 editions of Prime Future:

(1) I wish I’d been bolder with my hypotheses by being specific.

Each edition is ~1,000 words so that’s ~100,000 written words so far. The only thing I know for sure is that at least 50,000 will be proven in hindsight, probably more. But I wish I’d gotten more specific in my hypotheses, like “D2C will represent 20% of total meat sales by 2027” instead of the generalized versions.

There’s more risk in putting specific hypotheses into the world than general hypotheses because they’re more likely to be more wrong in hindsight. But there's waaaay more learning in documenting the specific assumptions…which is the whole point.

This takeaway has much broader application though. How often do we make investing/financial/business decisions without clearly documenting our assumptions at the time of the decision so we can come back later and evaluate & learn from those assumptions? I’d love to talk with someone who has a good process for this.

(2) I’m increasingly convinced that we better understand the future by understanding how the current state came to be.

And that we have a better chance of actually c-h-a-n-g-i-n-g the future when we understand why things are the way they are including the economic, social, psychological, and other drivers that got us here.

As always, Winston Churchill said it best, “The further backward you look, the further forward you can see.”

(3) The continual pursuit of learning to write more effectively is the visible side of the continual pursuit of learning to think more effectively.

Having a regular writing process is a forcing function for a thinking process. Writing clearly is a reflection of thinking clearly. Improving the one improves the other. This will be #goals forever more, regardless of how long Prime Future is alive.

(4) We're all making it up as we go.

(5) Getting in the game – and staying in the game – is the ultimate hack.

If you’re in the game then you can learn and iterate. I go months where I’m super fired up about topics I’m tackling and can’t wait to hit publish, and then hit walls where for a few weeks I’m just not inspired – I’m forcing myself to keep writing and I dread hitting publish. Then the inspiration returns. 🤷🏻‍♀️

Get in the game, stay in the game.

(6) People are the absolute best.

The definitive best part of Prime Future has been connecting with aggressively innovative thinkers and doers.

I have a list of leaders I would work for, teammates I want to work with, investors I’d want backing my next startup, and organizations I would love as customers.

The list is titled ‘long term games with long term people.'

(7) I write for myself.

I’m always asking myself, who am I writing for? Sometimes it’s CEOs or the high ambition person early in their career. Sometimes it’s startup founders, or the lunatic farmer (my favorite kind).

But I always come back to the idea that I am ultimately just following my own curiosities about the depth & breadth & complexity & scale & hints about the future of the vast global animal protein business. While my hope is that it’s valuable for people who are actioning the future of animal protein, I write for myself.

(8) There are 2 kinds of people who engage on the interwebs, including with an email newsletter:

  1. Those who interact with thought provoking questions, comments, & counterpoints to the big ideas.
  2. Those who comment only to point out grammatical errors or the misplaced decimal.

Be the first kind, my friends. Be the first kind.

(8) I’m bullish on the future of animal protein.

A friend who drew my name in a Secret Santa gift exchange got me a shirt that has the Prime Future logo and “I’m bullish on the future of animal protein”. (Best gift ever, right?!)

Apparently I say/write that sentence a lot. I say/write it a lot because y’all, I mean it. And now its on a shirt so imma stick with it.

(9) What a time to be alive.

Perhaps my highest conviction is about why somewhere along the way I started ending each Prime Future with ‘what a time to be alive’.

A couple of years ago a young cattle producer said he was considering selling his cows because alternative meats were going to put him out of business. I consider that question a reflection of the sheer amount of cynicism and negativity and fear mongering that encapsulates this industry; cynicism that is as much from insiders as it is from outsiders.

I’m over that mess.

We can listen to the pearl clutchers. Orrrrrrr we can spend time with the aggressively forward thinking lunatic farmers, the innovators who are solving actual problems, or the pioneers creating opportunity amongst the challenges. It’s virtually impossible to not be bullish on the future of animal protein when you’re surrounded by these people.

Thanks for being here.

What a time to be alive🙂

Categories
Business Model Innovation Meat

Prime Future 99: Learnings from a rotisserie fueled flywheel

The only things certain in life are death, taxes, and the $4.99 Costco rotisserie chicken.

Inflation in the US hit 8.5% in March 2022, the highest since 1981. Food prices up, gas prices up, energy prices up.

But the Costco rotisserie chicken? $4.99 for evaaaah.

This is similar to the Costco founder’s now infamous conviction around the $1.50 hot dog. When new’ish CEO Craig Jelinek went to former CEO and Costco founder, Jim Sinegal, complaining that the hot dog price needed to increase because the company was losing money on it, the founder replied, “If you raise the <expletive> hot dog, I will kill you. Figure it out.”

To figure it out, aka manage costs, this behemoth retailer built their own hot dog factory to supply the more than 100 million hot dogs sold per year. They also moved upstream into the chicken business, building out an entire poultry complex just to supply their need for  more than 85 million rotisserie chickens per year.

Even amidst the highest inflation in 40 years, Costco still hasn’t raised prices on these two items. That is conviction.

That is conviction about a proven tactic in service of a larger strategy, one part of a system. The tendency of a Costco shopper is to do large infrequent trips so the rotisserie chicken is a bet on getting people in the door more often and when folks are in the door….well, you know how it goes at Costco. That $2-3 loss on the rotisserie chicken is more than made up for when the shopper walks out with a $100+ basket of other items.

This reminds me of the Amazon flywheel, a mega theme of the book ‘Amazon Unbound’. Bezos’ core conviction was that customers want lower prices and more selection, and that those two expectations would not change over time. So the Amazon flywheel goes like this:

  • Offer low prices to get customers.
  • Having customers allows Amazon to bring on more sellers.
  • More sellers provide more selection which brings more customers.
  • More customers brings more revenue which Amazon can invest into systems to lower prices.

And the flywheel spins faster and faster. (Sure Amazon sales dropped 3% this last quarter but let’s assume thats a blip as the pandemic impact winds down.)

Aside: I’ve read multiple books about Amazon the last couple of years because they are one of the most fascinating companies to study. I get it that not everyone loves Amazon, I’m working on finding other companies to use as examples though 😉

Jim Collins developed the flywheel concept in Good to Great:

Picture a huge, heavy flywheel—a massive metal disk mounted horizontally on an axle, about 30 feet in diameter, 2 feet thick, and weighing about 5,000 pounds. Now imagine that your task is to get the flywheel rotating on the axle as fast and long as possible. Pushing with great effort, you get the flywheel to inch forward, moving almost imperceptibly at first. You keep pushing and, after two or three hours of persistent effort, you get the flywheel to complete one entire turn. You keep pushing, and the flywheel begins to move a bit faster, and with continued great effort, you move it around a second rotation. You keep pushing in a consistent direction. Three turns … four … five … six … the flywheel builds up speed … seven … eight … you keep pushing … nine … ten … it builds momentum … eleven … twelve … moving faster with each turn … twenty … thirty … fifty … a hundred.

Then, at some point—breakthrough! The momentum of the thing kicks in in your favor, hurling the flywheel forward, turn after turn … whoosh! … its own heavy weight working for you. You’re pushing no harder than during the first rotation, but the flywheel goes faster and faster. Each turn of the flywheel builds upon work done earlier, compounding your investment of effort. A thousand times faster, then ten thousand, then a hundred thousand. The huge heavy disk flies forward, with almost unstoppable momentum. 

All of this leads me to 3 takeaways:

(1) Enduring principles anchor dynamic systems.

It’s easy to look at these retail B2C businesses as something different than the B2B companies we find in production or processing. But every business is a system. Every business buys stuff to make stuff to sell stuff.

In production agriculture, the output is largely a commodity. But whether the output is commodity or differentiated, the system of how the output is produced matters as much as the output itself. The how determines the what.

Enduring principles about what will not change, like the conviction of both Costco & Amazon founders that consumers prefer lower prices. That’s why business model innovation gets so interesting.

So, what’s not going to change in livestock, meat & dairy?

  • We’re talking about living creatures in complex biological systems. We understand more about the biology than ever before but there’s still a lot we don’t know. And even what is understood can’t always be controlled. There’s genetics, nutrition, health, the role of weather in feed & health & mgmt, etc.
  • Price matters. Which means efficiency matters, which generally means scale matters.
  • Quality matters. The obvious dimension of quality is product quality that impacts the eating experience. What is changing is the definition of quality, not just what the customers buys but how it was produced….and many definitions of quality means many high quality sub-markets.

Love it or hate it, price a-n-d quality are what consumers expect.

(2) Dynamic systems spin flywheels.

An old school example of a flywheel was when JR Simplot started feeding potato waste to cattle. Eventually his company invented frozen french fries which increased demand for potatoes so there were more potatoes grown, and more available potato waste for cattle feed. Not just a flywheel, an upcycling flywheel…<chef’s kiss>

A newer example is beef x dairy. Dairy adopts the use of genomics to identify high potential heifers, uses sexed semen to breed for replacement heifers, uses beef genetics for the rest of the herd. The beef x dairy calves are worth more when they hit the ground, and that value carries through to packer. Meanwhile the herd’s genetics improve faster, so all offspring are higher quality, so the dairy herd performs better and the beef x dairy offspring perform better….let that flywheel rolllll.

Dynamic systems spin flywheels creating outcomes like reduced costs, less waste, higher yield, higher value, lower risk, etc….whatever the system was optimized for, the flywheel will accelerate.

(3) Flywheels keep flying.

Each turn of the flywheel builds upon work done earlier, compounding your investment of effort. A thousand times faster, then ten thousand, then a hundred thousand. The huge heavy disk flies forward, with almost unstoppable momentum. 

What is 1 flywheel in livestock, meat & dairy that you see?

Categories
AgTech Animal AgTech

Prime Future 98: maybe Market Conditions are the real innovation arbiters

That is the headline from a recent Wall Street Journal article that goes on to describe an emerging dynamic in this fertilizer-market-gone-wild moment:

This summary highlights two questions that matter when it comes to adoption of anything in ag – whether new technology, new production practices, new marketing strategies. New anything. Let’s call this The New Thing, for simplicity.

The first hurdle is to ShOw Me tHe PrOoF.

Show me the science, the evidence that this has worked elsewhere in a predictable and repeatable way. Producers need highly convicting reasons to believe this New Thing is highly likely to deliver the same results in my operation as it did in the evidence you bring. When you get one shot a year, there’s little room for error.

Assuming the ShOw Me tHe PrOoF hurdle has been cleared, another relevant question is:

Under what market conditions does adoption of The New Thing make the most sense?

And the complexity lies in the fact that ‘market conditions’ does not simply mean the conditions of a single market. Market conditions refers to the equilibrium of both input costs and commodity prices.

  • Grain farmers make decisions based on input costs like fertilizer and corn prices.
  • Cow-calf producers make decisions based on hay prices and drought conditions and calf prices.
  • Feedyards make decisions based on feed prices and feeder cattle prices and live cattle prices.
  • Farrow to finish hog producers make decisions based on feed prices and hog prices.
  • Poultry integrators make decisions based on feed prices and wholesale chicken (meat) prices.

The point is that the unique combination of market factors at any given time can influence adoption in 2 ways:

  1. Increasing or decreasing ROI of The New Thing.
  2. Increasing or decreasing the risk of trying The New Thing, real or perceived.

I don’t want to hurt anybody’s feelings but….innovators cannot bend markets to their will. Market conditions are not a controllable, even for highly convicted startup founders creating their own Steve Jobs’ style reality distortion field.

But innovators can be prepared for the market conditions that might create incentives for producers to become more open to trying out The New Thing.

And innovators can think through whether adoption will ONLY occur under certain market conditions (yikes if true) OR if certain market conditions simply give producers a reason to give The New Thing a shot, at which point The New Thing can prove itself in order to become The Status Quo Thing.

Here’s a great quote from the WSJ article, by a farmer currently using Pivot Bio products:

The fertilizer & biologicals situation is interesting because if – under the current combo of fertilizer and grain prices – producers who would not have otherwise had a reason to take on the initial risk (real or perceived) of biologics in lieu of fertilizers now have such a reason, and if biologics prove themselves in yield, then this specific set of market conditions could turn out to be an inflection point for biologics adoption.

The best case scenario is when certain market conditions create a compelling reason to try, and then The New Thing delivers a compelling reason to keep doing the thing even when market conditions normalize.

Of course the flip side is that market conditions can create massive headwinds for The New Thing, in which case for innovators and startups it’s all about staying alive long enough to have the chance at flying in alternative market conditions.

So maybe the takeaway is simply to put your head down and build solutions to real problems, be aware of what market conditions might create a tailwind, and ignore the market chaos while being ready to seize the moment when some ideal combo of market conditions happens.

Sometimes innovation adoption is determined by markets in the form of premiums, discounts, or market access. Sometimes by regulations. But maybe, just maybe:

Market Conditions are the real innovation arbiters.

One last caveat from the classic book Crossing the Chasm on the real challenge of moving beyond innovator customers & early adopter customers to mainstream adoption: everything we’ve discussed here is likely only true for the majority of prospective customers. In the fertilizer vs biologics example, the early adopter farmers were already piloting the use of biologics for other reasons before the market conditions created the opportunity for the rest to consider.

So perhaps the more accurate statement is that Market Conditions are the real ag innovation arbiters for the majority of New Thing adopters.

The unending complexity in ag is what makes it fun…what a time to be alive 🙂

Categories
Uncategorized

Prime Future 97: Game recognize game, scale recognize scale.

The first third of the book The Secret Life of Groceries by Benjamin Lorr is on the evolution & early innovations of the US food retail business. This book has crystallized my growing hypothesis that game recognize game, but scale recognize scale. And that has implications for the future of livestock, meat & dairy value chains.

Here’s my hypothesis:

  • First, the rise of national food brands led to the rise of larger grocery stores.
  • Then the rise of larger grocery stores, and larger grocery store chains, led to growth in meat packing plants.
  • Then the growth in meat packing plants led to growth in cattle feeding/farrow to finish.

Of course drawing this direct linkage up the value chain might be wrong for any number of reasons, including potentially confusing correlation with causation and also that a million other dynamics were impacting each of these individuals segments.

But today we look at some of the innovations that sparked the early links in this chain, and the potential implications for the livestock industry.

Lorr describes four early grocery innovations that were game changers:

(1) Pre-cut boxes.

In the 1890s, pre-cut boxes began being manufactured. This allowed boxes to be covered with labels. The inexpensive individual container gave rise to the brand as the growth of cost effective and wide spread labeling led to the expansion of brands from just luxury items to suddenly include branded staples. Democratization of packaging led to democratization of branding. The packaged food fad allowed food to be differentiated by brand, which suddenly gave shoppers the power of choice.

(2) Self service grocery stores.

Brands grew quickly as they marketed the consistency of the product and stoked suspicion of the prior grocery model of a clerk behind a counter measuring unbranded products and helping each customer.

One innovator realized that if brands could speak for themselves, then there was no need for a customer to interact with a clerk in order to select a product. The grocery store could become an assembly machine with the customer acting as the conveyor belt.

This inverted assembly line would reduce labor costs and increase the speed of the shopping experience. Thus the first version of the supermarket was created when Piggly Wiggly was born, and a value proposition built on selection.

(3) The shopping cart.

After the supermarket was a thing, an inventor noticed that customers were limited in how much they could buy based on the amount their arms or a small basket could hold. The shopping cart solved that problem.

(4) Rapid scale of self-service.

A regional manager for Kroger realized that volume could be the driver of the future of grocery, if you could increase store size, selection, and SKU’s to offer more selection to customers and use volume to make it cheaper than anything shoppers had ever seen. “Can you imaging how the public would respond to a store of this kind? We could lead the public out of the high priced houses of bondage into the low prices of the house of the promised land.”

Kroger rejected the idea and the manager left to start the King Cullen, which proved his hypotheses incredibly accurate.

By 1965 every grocery store was a supermarket and the race was on to grow, at both the store level and at the chain level. In the 1930’s a 6k square foot store was a dizzying experience for customers but that grew to 18k feet on average by 1965 and now of course nobody bats an eye at the 200k square foot Costco experience.

When we think of scale as an advantage, we usually think in terms of economies of scale via reduced per unit costs.

But what if one of the key advantages of scale is greater market access?

National brands like Nabisco, Kellogg, Crisco, and Kraft came of age because these national brands could fill the growing shelves of national supermarket chains.

Large brands worked well with large chains. Customers like working with similar sized suppliers, and vice versa.

It reminds me of how McDonald’s suppliers grew at a similar pace to McDonald’s, like OSI.

Big companies like to deal with big companies. There's efficiency in big companies dealing with big companies. There's ease in it. There's reliability. There's predictability.

Maybe it’s as simple as game recognize game; scale recognize scale.

If this is anywhere near accurate, then there are three potential implications for livestock producers:

  1. The fight against the packers is one sliver of a larger consolidation trend through the value chain. Packers consolidated because that was the path to growth, just as retailers (their customers) consolidate in the path to growth.
  2. Is cow-calf the next sector to consolidate in order to more effectively work with large feedyards? Feedyards can only work directly with cow-calf producers above a certain size, who can send full truck loads of calves. Doesn’t that imply that we’ll continue to see growth of large cow-calf operators?
  3. The increase in homogeneity at scale creates an opportunity for counter positioning…

Perhaps the most interesting thing about this story is how amidst that 1950-1970’s environment of mad dash to scale, the founder of Trader Joe’s zigged when everyone else was zagging at neck breaking speed.

Lorr tells a story about Joe’s local egg broker, who approached Joe with a deal on X-Large AA eggs because he couldn’t get rid of them. None of the other retailers wanted them, preferring instead Large A eggs. Why? Supply of X-Large AA eggs is limited since they were mainly laid by older hens. And big retail chains like Safeway wouldn’t go near them since Safeway’s value proposition was in always having product in stock. Safeway had no interest in advertising X-Large AA eggs and then selling out due to low supply, which would leaving customers unhappy.

This notion of a ‘discontinuous product’ that was actually better quality and priced lower gave Joe the idea that maybe there were more discontinuous products out there. That insight set Joe on the path to “commoditizing individuality” by “providing products that allowed customers to reflect an identity that rests in opposition to the homogenous mainstream.”

The rise of homogeneity in food simultaneously created a lack of uniqueness in food.

Trader Joe’s filled that gap. This is my new favorite example of counter-positioning, from the 7 powers by Hamilton Helmer who defines counter positioning as when “a newcomer adopts a new superior business model which the incumbent does not mimic due to anticipated damage to their existing business.”

Safeway didn’t care what Trader Joe’s did around egg merchandizing, because there was no way they would attempt to replicate it – it was completely at odds with the big chain’s business model. And that’s why it worked.

I’m increasingly convinced that in order to understand the future of something, we have to understand the evolution of the past – how we got here and why. The powers of economies of scale and counter-positioning played out in early grocery retail, and are playing out today in animal protein. The one creates room in the market for the other.

Questions for you:
  1. Do you agree or disagree with the hypothesis?
  2. Have you seen this dynamic play out in other areas of animal protein or broader agriculture?
  3. I want to learn about food retail in other parts of the world, any good books/podcasts/articles?

Aside: it’s wild to think about how much the post-WW2 war change for Americans from spending 30% of income on food to 10% had on other developments of the century. We on the agriculture side claim much of the credit for the relative cheapening of food, but I’d love to see some data on the role of the above grocery innovations and distribution.