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Prime Future 58: Cattle collision: where the digital revolution meets the genetic revolution

My working hypothesis is that the best way to imagine the future is to better understand the past and what’s led to the present. “What got us Here won’t get us There” is undeniably true. Yet, understanding the how’s & why’s that got us Here might provide nuanced clues about getting There.

With that, let’s take a quick tour through two seemingly disconnected histories to grab the takeaways most relevant to the future of livestock production.

Digital revolution

In The Innovators, author Walter Isaacson walks through the many breakthroughs (both obviously significant and seemingly small) from the 1850’s to today that have led to the digital revolution. Here’s the cliff notes on that progression:

  • The computer. Although the idea for a computing machine was first published in 1837, the 1890 consensus was tabulated in 1 year rather than 8 years by using a primitive computer designed by a fella that later founded a company that would become IBM.
  • Transistor. “The advent of transistors and the subsequent innovations that allowed millions of them to be etched into tiny microchips, meant that the processing power could be nestled inside the nose cone of rocket ships and in computers that sit on your lap.” Discovered in AT&T’s Bell Labs, the transistor allowed the cost and complexity of computers to massively shrink. Pocket radios were the use case that made transistors widely used which dropped the cost further.
  • Microchip. The microchip was an integrated circuit that simplified the computer’s innards down from 10,000 little components with 100,000 hand soldered wires connecting them. Another critical step in increasing power, decreasing complexity & size, and decreasing cost. The military & NASA were the first big customers, using microchips for missiles & rockets until the cost of microchips declined enough for consumer products. The market that was tapped to create high demand – and reliable demand – in order to decrease the cost per microchip? Pocket calculators.
  • Internet. The concept of a decentralized network of connected computers was developed in the 1940’s but ARPA made it happen in the late 1960’s, largely for military and academic institutions – individuals still didn’t have computers until…
  • Personal computer. The Steve Jobs part of the story most of us know – his genius was to make the computer accessible to individuals who wanted to open a box and pull out a machine that could be turned on and immediately usable, instead of the hobbyist computer junkies who wanted to build the computer themselves and were the entire market up to that point.
  • Software. The Bill Gates part of the story you may know also. His genius was realizing that hardware would become a commodity, but software is what unlocks value….he certainly wasn’t wrong about that.
  • World wide web. The development of this protocol unlocked the internet in ways that led to our daily experience online today.
  • Cloud computing (this one isn’t included in the book but IMO is as significant as the others)
10/10 recommend this 👆🏼

What does all of that have to do with cattle genetics? Good question….

Cattle Genetics Revolution

I recently spoke with Jerry Thompson and Matthew Cleveland of Genus ABS who generously shared their insights on the 4 big innovation waves that have hit cattle genetics.

Artificial Insemination & EPD’s

What led to widespread adoption of AI in dairy production? (Side note: livestock and tech have *very* different meanings for the letters AI.)

Quick note on EPD’s: Expected progeny differences are predictions of the genetic transmitting ability of a parent to its offspring and are used to make selection decisions for traits desired in the herd. Expected progeny differences (EPDs) have been applied to improve the genetics of beef cattle for almost four decades.

Here’s how Cleveland & Thompson describe the EPD phenomena:

“The ability to calculate EPD’s drastically accelerated AI adoption. AI has been used since the 60’s and 70’s, but in the 80’s and 90’s EPD’s took off as a function of computing power to implement them. We knew how to do EPD’s before but couldn’t do them at scale because the equations were too big. You could calculate for 5 animals by hand but beyond that it was super difficult. That began changing in the early to mid 80’s drove that when universities started putting together computing clusters which enabled calculation of EPD’s. We’ve known for hundreds of years about selective breeding and looking at animal performance but EPD’s were a huge driver of genetic change.”

AI adoption was accelerated by EPD’s which were accelerated by advancements in computing power.

Genomics

Some brief background on genomics from the good folks in extension:

Recently, genomic testing for beef cattle has evolved to include “high-throughput” testing, meaning that thousands of markers (or single nucleotide polymorphisms, or SNPs) are read from an animal’s DNA. Producers need only to submit a blood, hair, or tissue sample from an animal to the breed association. After collection and submission to the respective breed association, samples are submitted to the genotyping laboratory where several thousand markers are read from the DNA extracted from the samples. The most common genomic test available for cattle reads around 50,000 DNA markers or SNPs using a technology embedded in a small chip called a SNP chip.

Having the ability to read thousands of SNPs is a tremendous advantage for producers because most economically important traits like calving ease, dry matter intake, feed efficiency, hot carcass weight, marbling score, and tenderness are controlled by many genes as opposed to a single gene like hide color or horned status. This means that many modern tests can make predictions about the genetic merit of an animal more precisely and at a younger age than traditional expected progeny difference (EPD).

I asked Cleveland & Thompson, what brought about the rise of genomics in cattle?

“Genomics allows rapid genetic progress and have had a huge impact in dairy. Although we’ve been using genomics for close to 30 years, it was on an extremely limited scale because of limited genomic information and cost. The idea of incorporating genomics in commercial breeding programs was published in 2001, but it was largely theoretical. But in 2008, the price of genotyping went down and the first chip became available (for testing of many traits at once). USDA put together groups to genotype the first 1,400 bulls. This started the process toward low cost genotyping with fast computing power. There was great foresight from USDA.

In dairy, genomics have become ubiquitous not only for selection of sires, but also for ranking of commercial herd and selection of dams. We’ve seen hundreds of dairy bull breeders consolidate because the cost to play has gone up massively. You see the genetics companies building in house programs and proprietary genetics just like the pig industry did. The massive consolidation has been easy because of low number of breeds and common selection criteria, plus breeding decisions made on public indices.”

I hadn’t fully appreciated how genomics completely flipped old time lines for genetic progress on their head, nor the level of precision in decision making that genomics unlocks. In Cleveland’s words, here’s why that matters so much:

“The implications are that the rate of improvement continues to accelerate. Whereas historically you needed 5 years to get proof (of animal performance), now producers can make selection decisions a week after birth. Both in terms of genetics at a specialized breeding company and within your own herd to select which cows to breed. So you immediately know the next generation. As calves are born, you conduct genetic testing, rank the calves, then make your sell or keep decisions. Repeat.”

Earlier decisions, faster decisions, better decisions….which creates an easy ROI in dairy.

Sexed semen —> Beef on Dairy

Here’s an overview of sexed semen – what it is and why it matters – from NIH:

“In dairy farming, there is surplus production of unwanted male calves. Incorporating sexed semen into the breeding program can minimize the number of unwanted male dairy calves and reduce dystocia. Sexed semen can be used to generate herd replacements and additional heifers for herd expansion at a faster rate from within the herd, thereby minimizing biosecurity risks associated with bringing in animals from different herds. Furthermore, the use of sexed semen can increase herd genetic gain compared with use of non-sorted semen. In dairy herds, a sustainable breeding strategy could combine usage of sexed semen to generate replacements only, and usage of beef semen on all dams that are not suitable for generating replacements. This results in increased genetic gain in dairy herd, increased value of beef output from the dairy herd, and reduced greenhouse gas emissions from beef.”

Here’s Thompson & Cleveland’s take on the timing & implications of sexed semen in dairy and the rise of beef on dairy breeding programs:

“The idea of sexed semen was 1st presented around 2003. We launched an alternative tech 5 years ago that has accelerated the use of sexed semen, and beef as a strategy for dairy. It is the most profitable option by driving genetic improvement in replacement heifers while maximizing value by creating high value dairy beef calves. There has been massive adoption of sexed semen in beef while sales of conventional dairy semen decrease rapidly. The advanced producers are using the sexed semen and beef strategy which we expect to become ubiquitous in the next 5 years.”

Ok so there’s a 30,000 foot summary of the 3 recent phases of dairy genetics innovation:

  • Phase 1: AI enabled producers to level up their genetics every time a breeding decision is made.
  • Phase 2: Genomics allow producers to assess an animal’s genetic promise as soon as a calf is on the ground which allows them to make faster & better breed/sell decisions.
  • Phase 3: Sexed semen allows producers to only breed dams with the best genetics for replacement heifers and to breed all other dairy cows with beef genetics for a higher value calf.

Meanwhile <10% of beef producers are using AI, let alone more advanced genetic technologies. What would make AI economically meaningful in North America beef industry?

According to Cleveland & Thompson:

“Adoption of AI in beef is not a value proposition question – the value is there. It is a logistics question and an industry mentality question. Accessing additional labor to AI is one barrier for the 700k+ producers in North America.

The beef industry is a long way from having breeding programs like in pigs and poultry with dam lines for maternal traits and sire lines for terminal generations. If that changed, then we’d potentially see increased AI adoption in beef.

Even though beef AI numbers are still low and not moving significantly, some producers have not had bulls on their property since the 1960’s and are solely using AI.”

Although the two histories certainly overlap, the parallels speak to how innovation comes about. What are the takeaways from the digital & genetic revolution in cattle?

  1. 'The street finds its own use for things' is a phrase Isaacson uses in The Innovators. I love it. It’s the idea that technology is just technology without the right market, business model, pricing model, and context. Computing power for calculating EPD’s in cattle….can we all agree that was not a use case anywhere on the radar of the early creators of computers? The street finds its own use.
  2. ‘The future is here, it’s just not evenly distributed.’ Beef on dairy is being talked about more today, even tho it’s existed as a concept for 20+ years. Pick 10 other technologies that will likely play a big role in the future and they are probably just now in their awkward adolescent years finding their place in the world, from Artificial Intelligence to Machine Learning to blockchain to CRISPR….they’re here, they’re not yet everywhere though.
  3. Collaboration. Whether among institutions (academia, govt, individuals, big companies or startups) or among individuals, all of these innovations evolved through collaboration. As Isaacson says, “The main lesson to draw from the birth of computers is that innovation is usually a group effort, involving collaboration between visionaries and engineers, and that creativity comes from drawing on many sources. Only in storybooks do inventions come like a thunderbolt.”
  4. Execution > ideas. Many people had the idea of the computer (or almost any other invention) but few brought it to life. Execution is where the magic happens – like the mastermind behind getting microchips into personal calculators knowing that would create high demand which would allow them to decrease the cost which would allow them to find more use cases…brilliant.
  5. Most innovation is evolutionary rather than revolutionary. New breakthroughs build on previous breakthroughs. We’re all standing on the shoulders of giants.

I’m interested in all things technology, innovation, and every element of the animal protein value chain. I grew up on a farm in Arizona, spent my early career with Elanco, Cargill, & McDonald’s before moving into the world of early stage startups and venture capital.

I’m currently on the Merck Animal Health Ventures team. Prime Future is where I learn out loud. It represents my personal views only, which are subject to change….strong convictions, loosely held.

Thanks for being here,

Janette Barnard

Categories
Business Model Innovation Meat

Prime Future 57: The packers get Standard Oil’d. Then what?

This is neither political commentary or prediction. This is a look at the hypothetical implications of a hypothetical scenario that has a zero percent chance of happening.

If an oligopoly market is when 4 firms have 50+ percent share, then US beef, pork, and poultry are undeniable oligopolies. These concentrated markets aren’t uncommon though, we run into them from cereal (Kellogg’s, General Mills, Post, and Quaker) to cell phones (Apple, Samsung, Huawei).

But these examples are child’s play compared to the most extreme example of market power: the classic story of Standard Oil. In the 1880’s, John D. Rockefeller realized the oil business was a fantastic business except for the nagging issue of price volatility. So he found a solution to that little problem, by developing an effective monopoly through the Standard Oil trust. A Supreme Court ruling in 1911 forced the trust to split into 34 companies to increase market competition.

The current rally cry of many US producers is that the problem with the cattle business is concentration among the packers. This is not new; tale as old as time. But carry that rally cry out to the most extreme outcome of de-concentrating processing capacity….what does it really solve?

Just for fun, let’s say the DOJ goes full 1911 and ‘Standard Oils’ the meat industry.

Every plant becomes its own company.

The ‘Big 4’ become the ‘Midsize 22’.

Then what? Before we lock into any hypotheses about a re-fragmented meat industry, what was the result of busting the Standard Oil trust?

Keep in mind that also around 1911 the rise in automobiles meant gasoline (previously a worthless byproduct) was suddenly worth more than kerosene, and that other regions of the world began producing oil competitively so the entire oil market was shifting as Standard Oil was split. Here’s a snapshot of oil prices before and after:

So the Standard Oil trust was busted and then prices went…up? While there are clearly more factors at play than we’ll dig into here, my takeaway from this chart is that this whole scenario is not as straight forward as anyone would like it to be. There are a lot of factors at play; markets are dynamic and impacted by all the things from pandemics to stimulus programs to weather.

The livestock & meat industry’s common hypothesis is that if the packers were less concentrated, then market power would ‘return’ to feedyards & producers upstream and downstream customers in foodservice/retail. It would ‘free up margin’ by taking away the packer’s pricing power on the buy and sell side. Econ 101.

But is reality as clean as an econ textbook? Are we *certain* that the net effect of increasing packer competition would definitively be positive for the rest of the value chain?

The 2 dimensions I’m interested in are price (purchasing live cattle, selling boxed beef) and innovation (finding new ways to better serve customers & end consumers).

Let’s start with downstream. What would the implications be for further processors, retailers, foodservice, and end consumers?

Price: Packers sell to further processors, distributors, retail and foodservice…segments that also happen to be highly concentrated. Let’s say a national retailer like Walmart who sells ~20% of US retail beef today buys from 1 or 2 companies. Each supplier has multiple plants that service multiple Walmart distribution centers with multiple SKU’s at tailored specs. Plants have become specialized with specific programs or specific customers. The big processors were able to flex reasonably well as COVID shut down foodservice because of diversification of channels across plants – individual plants didn’t have that diversification.

In a Standard Oil trust busted world, is a national retailer now going to work with 10 independent plants that are each independent suppliers? What does that do the retailers ability to keep meat cases full with homogenous supply of fresh meat at spec? Big companies like to deal with big companies that can handle big business. What does that increased friction in the whole process do to the price of meat at retail? On the other hand, what would increased competition among packers do to the price of meat for retailers?

Innovation: A key rationale for minimizing oligopoly or monopoly markets is that competition leads to innovation. Agree, of course. But you know what else leads to innovation? Resources. What is the optimal mix of incentive to innovate and resources to innovate as a function of market power? I don’t know. But low margin businesses without scale don’t tend to be fountains of innovation.

Innovation = Incentive + Resources

Then let’s look upstream. What would the implications be for cow-calf producers and feedyards?

  • Price: Cow-calf producers don’t sell to packers, they sell to sale barns or stockers or feedyards. The feed yard space is way less concentrated than processing but way more concentrated than cow-calf. Say feedyards have more pricing power if packers are split up….does that trickle up to cow-calf producers or does it just mean feedyards are the new margin sinkhole of the beef supply chain?
  • Innovation: Let’s say more of the total value chain margin stays upstream. Maybe that leaves some financial wiggle room to focus on things besides survival So do producers start thinking about things consumers are talking about like carbon footprint? I don’t think so. Not unless the incentive structure changes and packers pay more to feedyards who pay more for calves that are raised a certain way at the cow-calf operation.

A complicating factor is that even if you increase processing competition nationally, it does not necessarily mean you increase competition regionally.

And if packers cannot consolidate processing capacity, would the result be more vertical integration in an attempt to consolidate supply chain control?

An obvious factor that makes meat processing different from cereal is that it’s a capital intensive business so barriers to entry are high, really high. It’s an economies of scale business, so it’s a business that ‘wants’ to be consolidated to chase more economies of scale.

But even if the US government regulated away processor’s ability to consolidate, what would that mean for the US industry’s ability to compete against emerging regions? The world’s largest hog farm was recently built in China for 84,000 sows to produce 2.1 million hogs annually….wouldn’t it stand to reason that the world’s largest processing plant(s) will soon follow?

Would a Standard Oil’ing of meat packing be good for downstream players? Maybe, in the short run. Probably not in the long run.

Would a Standard Oil’ing of meat packing be good for upstream players? Maybe, in the short run.

But what’s not good for downstream players in the long run cannot be good for upstream players in the long run.

Hear me loud & clear that profitability at all stages of the value chain is the #1 foundation of a viable cattle industry. Increasing margin capture throughout the value chain is a good thing, a great thing. But is reducing packer power the panacea that people often describe it as? I may be wrong, but I just don’t think it is.

Maybe looking at impact of competition on pricing power & innovation is the wrong framework….maybe higher margins don’t lead to innovation, maybe innovation leads to higher margins.

Are oligopolies good or bad? Should the big 4 be broken up? Irrelevant questions.

The actionable question is, how do you win when you buy from or sell to an oligopoly marketplace? Control the control-ables and innovate the innovate-able.

At the end of the day, animal protein is a commodity driven business. And what do commodity markets do? They move in cycles. Sometimes tree growers profit, sometimes lumber mills profit. Sometimes the cow-calf producer wins, sometimes the packer wins. Sometimes dairy producers make hand over fist, sometimes processors do. Sometimes oil drillers print money, sometimes refineries do.

‘your margin is our opportunity’

Look at other industries where big companies in one segment of a value chain amassed market share and then stopped innovating. Think IBM in the 80’s. You know what happened when those companies got satisfied with their market share and stopped innovating? Apple. Microsoft. Dell. A resurgence of insurgents jumped in with new innovation that captured market share…and then those ‘new’ tech companies get big and face their own anti-trust scrutiny. It’s almost like everything is a cycle and the cycle is what creates opportunity…

You could easily argue that type of insurgency is what upstarts like Cooks Venture or Shenandoah Valley Organic could be in the US poultry business.

Carl Lippert recently summed this up well in his article The Farm Barbell,

“The future of agriculture is large farms producing commodities and small farms creating value added products.”

That’s true for producers AND for processors.

The only way to stay in a commodity driven business AND get out of the trappings of commodity cycles is to build a competitive moat, to pursue value added markets. That’s also true for producers AND for processors. We’ve talked about this before:

The livestock & poultry industry has spent decades driving cost out of animal production systems to increase profit. And we’ve done it well. Really well. More pounds per animal. Less feed per pound of gain. Least cost feed formulation. Increased efficiency.

And yet, we see record high number of farm bankruptcies, near record low farm income, and volatile train wrecks of milk, live cattle and hog markets the last 6 months. All of which point to revenue challenges in animal agriculture.

Commodity production is an existence governed by a ruthlessly brutal dictator: The Market. It’s time to focus on enabling livestock producers to increase Revenue, to escape the commodity game that’s ruled the industry, to differentiate.

The punchline of Lippert’s article sums up the implications of this whole discussion for startups in animal ag:

“Startups should build penny shaving machines for scaled farms and margin capture machines for small farms.”

Yes.

(For more on the Standard Oil saga, I highly recommend the book Titan by Ron Chernow.)

Livestock Market Transparency is Possible. Here’s how. (link)

On a related note, this piece was written at the height of 2020’s chaos:

Pricing is a hot topic in light of live cattle and boxed beef prices heading in opposite directions, and the same dynamic to a lesser extreme in pork. These pandemic market dynamics highlight the need for improved price discovery and market transparency across the entire meat, poultry, and livestock sector. These are great problems for technology to solve. Here’s why: (link)

Prime Future is a weekly newsletter that allows me to learn out loud. I’m on the Merck Animal Health Ventures team. Prime Future represents my personal views only.