Agriculture's Honest "Take 5" Weekly Roundup: 03/10/23
Agriculture's Honest "Take 5" Weekly Roundup: 03/10/23
(~10 min read) Building a value chain, hybrid wheat, unit economics, and more...
Welcome to this week’s Agriculture’s Honest “Take 5” roundup where we break down five curated pieces of industry content. In addition to the “Take 5”, stay tuned for this month’s deep-dive post where we evaluate a specific industry topic. Now, on to the Takes!
TAKE 1: “Build it and the value chain will come, eventually”
A hard problem that companies developing technologies in new categories must overcome is the availability of outsourced expertise. In a new category, there is no existing value chain in which skills and resources can be easily obtained. Not only does this make it hard for startups to focus on core competencies, but it often becomes resource burdensome. With no choice, these startups do everything themselves, often breeding a “not invented here” philosophy that eventually hurts them once the surrounding value chain arrives.
As a new category matures, different core competencies within the emerging value chain start to become evident. Since it’s impossible for any company to do everything well, employees or close bystanders of those companies begin to fill in the value chain pockets with other new companies that bring complementary products and services. This typical cycle for new categories often goes as such:
For other companies that are created later, along with the customers the industry serves, it’s good that this segmentation happens. It leads to better company success and overall products. An interesting example of this comes into play with United Airlines and Boeing. In the early 1930s, the two companies used to be one. With US congressional pressure, aircraft conglomerates dissolved in 1934, forming the distinction between manufacturers and transport. Though some of this segmentation was due to political influence at play, we can all thank this bit of history as it undeniably led to increased safety and service.
Automation in agriculture is one of these unestablished categories being created today. While there’s mechanization at the farmgate (dominated by row crops), there is an emerging effort for true automation. With the very different skill sets and business models required for automation, this category is one in which the books are only being written now.
Future Farming featured an article on how new contractors can accelerate the option of automation. From a distribution level, this would be huge as deploying and servicing automation in a field or indoor farm is very hands-on. For tech startups, this element of the business is not what they do best. With the combination of increased labor issues, more automation startup choices, and customer receptivity, the time seems ripe for the value chain of ag automation to be extrapolated. We are entering step 3 in my diagram above, exemplified by companies like SwarmFarm. However, there is a ton of new enabling value chain businesses that need to be created to push the automation category of agriculture further and faster. What a fun time to participate!
TAKE 2: “Despite history, wheat genetics are getting some wins!”
BASF announced an end to their hybrid wheat development in North America. This really doesn’t come as a surprise given the industry has seen decades of difficulty trying to enable hybrid genetics of wheat. Wheat genetics are very complex compared to other crops like corn and soy. While self-pollination and a low seed multiplier are some technical factors that limit successful development, there are a ton of other structural reasons why the world has few hybrid options for one of humanity’s most important crops.
It’s not that there haven’t been attempts. The hybrid vigor of wheat is seen as a major milestone with a lot of psychological sunk costs. However, there are factors at work that make this market extremely hard including:
Past wheat genetics have proven to see little gains in yield improvement above the basic inbred varieties
Wheat is commonly grown in dry-land environments with lesser quality land, naturally putting a somewhat yield and value cap on the crop
Non-standardized breeder rights across geographies
Wheat is a low-value crop, especially compared to corn or soy. Farmers must see significant productivity improvements to justify the higher seed price which is difficult for low-value crops
The poor multiplier effect of seed creates very high seeding rates, working capital requirements, freight and logistics, and production difficulty
These are some tough things to overcome, many of which aren’t in a private company’s control. Overall, a breeding program is expensive and takes a long time. Hence, seeing an enormous financial opportunity is a gatekeeper for progressing down a program. Some of this can be distorted when 60% of plant varieties are developed by public breeding programs as opposed to private corporations.
On the flip side, there have still been some very positive developments for wheat. In particular, Bioceres’ (disclosure: my employer, Ospraie Ag Science, is a shareholder of Bioceres) breakthrough HB4 drought tolerance wheat has had great traction with Brazil being the latest country to approve cultivation. This is significant as the technology has proven 20% yield improvements in water-limited conditions.
Additionally, Syngenta has been attempting hybrid wheat since 2010 through their AgriPro brand which will see commercialization in 2024. In addition to yield prioritization, much attention will also go toward health traits. Since wheat is directly consumed vs. crushed for oil, breeding for health benefits enables differentiated wheat products that are valuable to consumers. It’s important to note that many of these “health trait” opportunities will likely be fragmented with small markets. For this reason, a decade+ program of GMO development isn’t feasible for this specific application. This is where gene editing can thrive given product iteration tends to be quicker and cheaper. I highlighted this opportunity with CRISPR gene editing in a past “Take 5” edition, explaining that positioning gene editing as a method to breed healthier products would position the technology better with consumers.
TAKE 3: “Prioritizing unit economics”
I’m consistently surprised by how few companies communicate or show the details of their unit economics. At the most basic first principles level, unit economics are the building blocks for everything a business must prioritize and plan around. Without positive economics working for customers, companies, and investors, everybody wastes valuable time.
Capital Gains describes this phenomenon best as identifying the most granular areas of a business that can be replicated to produce the common accounting metrics (e.g. revenue, EBITDA, cash flow, etc.) everybody likes to talk about.
“Figuring out a company's unit economics starts with figuring out the "atoms" of that company’s business.”
As stated, some common ways to break a business into “atoms” would include:
An assumption level of homogeneity amongst the customer base
Not easily divisible because if it is, it means you can continue to peel more
Broken into discrete product or business model categories, if any
An ability to match a cost structure with the associated unit
Management teams shouldn’t just go through this practice to show and satisfy investors, but purely for their own necessary planning purposes. In order to properly plan and prioritize, one must know where one sits in the present day. Therefore, knowing unit economics empowers leadership to strategize options. Can I initially sell at a loss and recoup value through market penetration? How much more can I spend on customer acquisition to stay within my hurdle rate bounds? These are questions that cannot be answered without a complete surgical review of one’s business from the ground up.
TAKE 4: “Apple harvesting automation”
Like many areas of agriculture, labor resources in the apple industry is a persistent problem. Luckily, there are companies that are attempting to solve this through automation. At the most recent international apple-only trade show, robots and automation were of high importance and urgency. The grower consensus was ~3 years until commercial apple robots are available.
Of labor in apples, harvesting is top of mind as it is the largest labor cost of all. While there are startups working on apple harvest automation, we are reminded through Abundant Robotics’ 2021 failure that it is not easy.
Though the common dialogue for automation is consistent labor with reduced cost, there are at times, other interesting value drivers at play. Using Washington apples as an example, consumer demand for Honeycrisp apples in the past decade has been red hot. Luckily for growers, Honeycrisp varieties are also almost 2x the farmgate price as most other varieties.
Changing apple varieties in Washington, by season:
The catch is that Honeycrisp apples require up to 4-5x passes through the orchard due to nonuniform ripening. This contrasts with the most popular variety of Red Delicious which usually require just one pass and is the cheapest variety to harvest. Compared to Granny Smith varieties, Honeycrisp is 6% higher for labor costs as a % of total labor. In a world where labor is scarce and expensive, growers opt for varieties that offer better labor structures despite the stronger consumer demand of others.
This conundrum is an example where automation cannot only provide a better cost structure but also increased revenue. In the case where deploying robotic automation is low marginal costs if it’s already at the orchard, the additional harvest passes have little impact. Therefore, adding automation to this scenario allows growers to plant higher-value varieties like Honeycrisp. A product that can add top-line revenue while reducing cost is one that has enormous value to farms.
TAKE 5: “Sustainability defined…or not”
Seed World’s recent article on the clouded “sustainability” definition is one that muddies everyones’ mind. But seriously, what does this mean?
For example, many individuals will discuss “organic or non-GMO” as a means of sustainability. But what about synthetic biology that has the potential to replace petrochemicals? Synthetic biology synthesizes microbes, making the end product a GMO. Hence, does a GMO that replaces petrochemicals count as sustainable or unsustainable?
Another example is carbon vs. water. An advantage of vertical farms is that they use 99% less water than outdoor-grown produce in Salinas. In a world where freshwater is moving to scarcity, this would seem sustainable. However, they also have a significantly higher carbon footprint than outdoor ag without the use of renewable energy (today anyways). Hence, there is a tradeoff of sustainability here. How does this definition work out?
My intuition tells me that there will likely be tradeoffs for different types of sustainability. Therefore, instead of using this generic word, it’s more important for companies and people to explain how they position themselves within sustainability. Are you pursuing pesticide-free food? Are you reducing the water intensity? Are you limiting your carbon footprint? Are you providing a better lifestyle to others around you? Please fill in the blank here…
