Agriculture's Honest "Take 5" Weekly Roundup: 02/17/23
(~10 min read) Europe is making noise, US import trends, wasted vertical farm resources, and more...
Welcome to this week’s Agriculture’s Honest “Take 5” roundup where we break down five curated pieces of industry content. Stay tuned for this month’s deep-dive post where we evaluate a specific industry topic. Now, on to the Takes!
TAKE 1: “The European Union is making noise”
Over the past week, there’s been a number of quiet yet important announcements across the EU:
In 2020 as part of the Green Deal, the EU published its “Farm to Fork” strategy with goals to reduce the overall use of chemical pesticides by 50% by 2030. The document reads:
The use of chemical pesticides in agriculture contributes to soil, water and air pollution, biodiversity loss and can harm non-target plants, insects, birds, mammals and amphibians. The Commission has already established a Harmonised Risk Indicator to quantify the progress in reducing the risks linked to pesticides. This demonstrates a 20% decrease in risk from pesticide use in the past five years. The Commission will take additional action to reduce the overall use and risk of chemical pesticides by 50% and the use of more hazardous pesticides by 50% by 2030.
Recently, the European Parliament put forth a proposal to accelerate the reduction in hazardous pesticides from 50% to 80%. In addition to increasing the target reductions, the baseline to measure progress by 2030 would also see change. Instead of comparing 2015-2017 used as the baseline, the new reference period would be 2018-2020.
While the 2020 Farm to Fork strategy was aggressive, this really ups the move to biologicals and IPM programs. It’ll be breathtaking how quickly things start to change and the potential externalities this has on European food production. The EU tends to be a first-mover in agenda items. Hence, this could very well be a precedent set for other global economies including the United States.
Because EU lawmakers believe integrated pest management (IPM) adoption has been too slow, a leaked proposal would tax pesticides to fund the adoption of IPM programs. With the taxation of pesticide products, the proceeds would find their way into a state fund with the purpose to “foster the implementation and update of integrated pest management and to make related measures more attractive for farmers”. This proposal is far from inked, but it’s another aggressive step from the EU’s migration to biologicals.
France, the EU’s largest ag producer, saw farmer protests after an EU court overturned a French policy that previously admitted the use of an EU-banned neonicotinoid insecticide for use on sugar beats. Growers and sugar beet groups expect this move to threaten domestic production and hurt the overall farm economy of France.
The EU is really tossing some significant hurdles toward the ag industry. Despite the huge negative externalities this may cause to their domestic food supplies, the Parliament seems rather confident. Perhaps it’s because of this latest statistic that claimed 41% growth in EU organic farming over the past 5 years. Note, however, that almost 60% of that organic area is classified as permanent grassland or green fodder. In other words, very little farm production area is organic today. The whiplash of these implementations to IPM and biologicals cannot be overstated…
On a brighter note, an EU court did suggest that organisms obtained by in-vitro random mutagenesis (a gene modification method) are excluded from GMO rules. Many prematurely got too excited over this news (including me), thinking this was applicable to CRISPR and other gene editing techniques. However, this is not necessarily the case. The conclusion is based on random mutation whereas gene editing is targeted mutation. Overall, this is positive news. The reality is that random mutation can modify thousands of genes. In targeted mutation (such as CRISPR and other gene editing techniques), a single gene is modified. Hence, intuitively, targeted mutation should be less controversial than random mutation. It is my belief that this EU court opinion lowers the barriers to gene editing techniques being regulated as non-GMO. This would be incredible news for EU market opportunities in genetics, but of course, it’s still TBD.
TAKE 2: “The US loves its fruit and veg imports”
US imports of fresh fruits and vegetables increased by 10% in 2022, totaling over $31 billion. This builds on a growing trend in which the imported weight of fruit and vegetables has risen 129% and 155% in the past ~20 years.
Of the US imports, Mexico has positioned itself as a dominant source with over half of production coming from the neighboring country. If bananas are excluded from imports, Mexico’s share is two-thirds.
Labor is a huge contributor to this trend. Mexico's minimum wages (measured in daily wages) are just ~15% of that of the US’s $7.25/hr. With most US produce grown in high labor cost states like California, Washington, and Oregon, it’s no surprise the US lacks competitiveness in global markets. To this extent, there are really just three options for the US (1) regain competitiveness through automation (2) apply steep tariffs on imported produce or (3) accept we will continuously lose our domestic production. As for me, I’m a fan of option 1.
TAKE 3: “Wasting vertical farm resources”
Fischer Farms reported a successful trial growing wheat in a vertical farm with expanded interest in soy and rice production. First, I love the ambitious goals of this group. However, wheat (or any row crop for that matter) has no right to be grown indoors at scale. Growing almost any plant indoors is not hard. However, doing it profitably is. Therefore, it’s not a conversation of can you but should you.
Fischer’s trials revealed a wheat productivity equivalence of 10 indoor acres to 273 conventional acres. Outside of this, there’s no further information. However, let’s give a little thought to some napkin math:
Using 50 bu per acre, the 273 acres would yield nearly 14,000 bu of wheat. The price of wheat is rather high now based on a historical basis. However, let’s just use $8/bu for modeling purposes, totaling ~$112,000 of crop revenue. This is $410/acre.
Using the same price above, the indoor facility would equate to an impressive $11,200/acre. However, this is just revenue and not cash flow. The energy, labor, and capital expenditures to create that $11,200/acre are likely overwhelming.
I wouldn’t be surprised to see a 10-acre vertical farm facility worth nine figures in capital expenditures. While the labor needed to harvest wheat indoors would immediately make the project a non-starter, even a strong EBITDA margin could not pay back the facility’s expenditures. It simply doesn’t work.
Fischer is not the first company to attempt this. InFarm also trialed wheat with impressive results, though with no information on commercial viability. Shane Thomas highlighted this in Upstream Ag Insights last November.
Overall, I think the message I have is that indoor ag complements the holistic system well. A huge benefit of indoor ag is that it can be supplied closer to the point of consumption, increasing shelf life and limiting waste. For wheat or other row crops that don’t have the same shelf life dynamics as fruit and vegetables, the primary benefit of growing indoors is lost. For indoor ag, it’s less about taking out all ag production and more about complementing existing methods. I simply do not see indoor farming of cereal or oilseed crops as a good use of proceeds.
TAKE 4: “Prioitizing water”
The mainstream tendency is to correlate the environmental variable of “ESG” with greenhouse gas emissions. With a prioritization of GHG reductions, water tends to become overlooked. However, in a recent agribusiness survey, 33% of companies prioritized water conversation as the most important attribute. In this survey, water came out in front of net zero as a prioritization.
Water is a very strange variable. Mattering on the local regulations, seniority, and access, among other reasons, someone’s experience and price with water rights has huge variation. In the Midwest and most of the country, water is not a huge budget factor. Outside of initial capital costs for infrastructure, the recurring water rates aren’t impactful. However, this changes in parts of the West, particularly California.
California has always had quite volatile weather campaigns and frequent droughts. However, the important equation comes down to unreliable and infrequent rains to replenish an ever-demanding water market. With enough time, the compounding result is a lack of water and that’s where California and much of the West sit today.
The capped rates and restrictions on surface water over past years have created an incentive to move to groundwater pumping, an electricity cost that has now ballooned to $184 million for farmers. However, with the acceleration of groundwater pumping, permanent damage has been done. 2021’s drought coincided with a recent law that requires local groundwater users to avoid significant undesirable results from pumping. However, this clearly didn’t stop many.
Around 1,000 domestic wells were reported dry during 2021, most of them in the Central Valley
The current system leaves California’s $50 billion ag sector at high risk as surface and groundwater cannot be easily counted on (generally speaking). In a world where sectors must compete for water, the government won’t have any heartburn by prioritizing cities and people. For this reason, the government has taken interest in multiple programs such as purchasing $1.5 billion of water rights from farmers and paying farmers not to plant crops.
The result of water shortages and increased regulatory structure means higher fallowed acres, lower yields, and value destruction for California and surrounding Western states. This creates a big dilemma as past decades have seen farms rotate acres to more profitable per unit of water crops (fruits, vegetables, and nuts). The problem is these same crops are a higher initial investment and are less flexible. Therefore, water uncertainty makes crop planning very complicated as it’s tough to win on either angle:
Annual, low-value crops (rice, cereals, corn, tomatoes, etc.) are not nearly as profitable as other crops. Therefore, high water costs in addition to everything else make profitability questionable.
Perineal, high-value crops (fruits, trees, orchards, etc.) need an extreme amount of water. The uncertainty on water availability for those crops prohibits the chance to plan on decades-long investments to start those crops.
While I can always find an optimistic scenario to be hopeful for, the reality is that California (and the Western US) ag is in a difficult place that could see structural change.
TAKE 5: “Farm adoption”
The recent McKinsey report on farmer adoption dilemmas has been widely seen and discussed by now. It’s complemented well with another McKinsey report on farmer innovation through uncertain times.
In trying to avoid regurgitating other already great perspectives and opinions on the material, there are a few things I wanted to note.
Tech adoption at the farmgate has great nuance. A huge factor that no one builds for is low switching costs and flexibility. It might seem weird to think of building for low switching costs, but farmers highly value this because the year-to-year environment uncertainty makes crop plans variable. Due to crop insurance and weather dynamics, farmers aren’t incentivized to invest more than the bare minimum on a year that’s expected to result poorly (e.g. drought loss). Therefore, the ability to easily opt-in and out of products is an important benefit.
There should be expectations that new technologies do not have good adoption rates. As new tech emerges in the world, initial use cases and benefits are not well understood. With much of agtech still in its infancy, the lack of traction shouldn’t come as a huge surprise.
The struggles of precision data adoption give off a vibe that farmers are skeptical about innovating. There’s been really influential technologies developed that have had extremely fast penetration, debunking the theory of farmer skepticism. In a later deep dive post, I’ll discuss some of these technologies and what existing companies can learn from them.