108. Is aggregation theory dead in commodity row crops?

“Software is Feeding the World” is a weekly newsletter for Food/AgTech leaders about technology trends.

Greetings from the financial capital of India, Mumbai (aka Bombay), where the temperature is hot, the humidity is high, and the city never sleeps. The population of the Mumbai metro area is close to 26 million. If the metro area was a country, it would be in the top 50 countries by population.

Programming note: I will be on the road for the next couple of weeks. The newsletter editions will be shorter (thankfully!).

Commodity row crops and aggregation theory

I joined The Climate Corporation in 2017, to start the product team to build an AgTech ecosystem of solutions around Climate FieldView. One of my assumptions was that Climate could easily create density of commodity row crop growers on the demand side, and density of AgTech solution providers on the supply side. It is easier said than done for a few reasons, the primary reason being the structure of the industry itself, especially in the commodity row crop space.

On the supply side, in most verticals within agriculture, a few companies dominate. For example, seed & chemicals, equipment, off-take, etc. The incumbents have a strong hold on distribution and grower access. Many (or most) of the incumbents operate with a zero-sum game mentality.

It is difficult and expensive for an upstart to play the distribution and marketing game.

Within agriculture, the answer to the question of whether a startup can reach distribution faster than an incumbent can reach innovation is mostly in the negative.

In the industrialized world, the number of commodity row crop farmers due to large landholding is a few hundred thousand farmers. The density of growers interested in a particular AgTech solution might be limited, unless it is a truly horizontal capability.

When Grain Bridge was acquired by Bushel, then Grain Bridge CEO Mark Johnson, said grain marketplaces were dead. (The Day the Grain Marketplace Died - Oct 2021))

The primary reason was the lack of fragmentation on both the demand and supply side, making a marketplace less valuable.

There are only so many possible buyers in a region, due to transportation costs.
There are only so many farmers in a region and a grain buyer likely knows all of them.

Mark Johnson’s thesis has been validated beautifully by the Chinese juggernaut PinDuoDuo. They have tapped into a very large and fragmented base of farmers (supply side) in China, growing perishable items (not commodity row crops) and an even larger base of consumers (demand side) looking for fresh, high quality, and nutritious products. You can read my conversation with Xin Yi Lin of PinDuoDuo here.

Direct connection to farmer (PinDuoDuo based on Turner Novak’s analysis)

Are these markets “too thin” for aggregation theory (popularized by Ben Thompson of Stratechery) to work effectively?

The value chain for any given consumer market is divided into three parts: suppliers, distributors, and consumers/users. The best way to make outsize profits in any of these markets is to either gain a horizontal monopoly in one of the three parts or to integrate two of the parts such that you have a competitive advantage in delivering a vertical solution. In the pre-Internet era the latter depended on controlling distribution.

Aggregation Theory will be the proper framework to both understand opportunities for startups as well as threats for incumbents:

What is the critical differentiator for incumbents, and can some aspect of that differentiator be digitized?
If that differentiator is digitized, competition shifts to the user experience, which gives a significant advantage to new entrants built around the proper incentives
Companies that win the user experience can generate a virtuous cycle where their ownership of consumers/users attracts suppliers which improves the user experience

Collaboration is the key

One potential answer is increased collaboration within the ecosystem. Increased collaboration is only possible without a zero sum game mentality. As more of the industry participants collaborate within the space, it creates new opportunities for incremental value creation within the different parts of the food and agriculture value chain.

Do ecosystem services like carbon, and water quality act as a forcing function for added collaboration, given the scope, and difficulty of these problems?

First and foremost, it requires a non-zero-sum thinking within the ecosystem. It requires to focus on a few use cases to begin with (application before platform?), and then use them as an anchor point to collaborate with other entities within the ecosystem. Daniel Schultz of Agtech Marketing Insights covered this topic in “The Cat, The Fox, and the Unfocused Value Proposition.”

What is the most painful challenge I can help my customer overcome?
As the result of using my product or service, what change is brought into my customer’s life and the lives of those they care about?
What is the risk or negative impact of not using my product or service?

Make something different. Make people care. Make fans, not followers.

What do you think? I would love to get your feedback, and I will explore these topics in more detail in the coming weeks.

H/T to Sachi Desai for starting this conversation.

Carbon insets and offsets

The Climate VC newsletter provides a simple and clear illustration of the differences, and indicates why insets are important in food and agriculture.

From Climate Tech VC newsletter

In the Carbon Insets value chain, the emissions reduction is kept within the supply chain, rather than sold to another outside party.

The potentially interesting evolution of scope 3 inset accounting will decouple physical assets from carbon impact. It will allow for tokeniziation, higher liquidity, and will more closely resemble offsets.

Food and agriculture has some infrastructure (in some cases nascent) in place to scale insets programs, though many challenges remain.

Low-hanging, low-carbon fruit. Ag practices already exist for decarbonizing food supply chains using nature-based, highly scalable solutions. Relative to new technologies for cleaning up hard-to-abate industries, ag decarbonization is much lower cost. The key is pricing incentives.

It is lower cost, but in commodity row crops the margins are thin to begin with, and any additional cost, makes the ROI equation difficult.

Existing financial mechanisms. There are financial systems already in place to incentivize farmers to employ regenerative practices. No new payment systems needed here.

Financial incentives and mechanisms to access those incentives primarily exist in developed commodity row crop markets only. Incentives are administered by many different public, and private entities, and often times it is not clear who, when, how or why someone qualifies for those incentives. Accessing incentives is bureaucratic, and involves some red tape. Companies like Ambrook Ag are solving some of these problems.

Big pie. Agricultural soils are arguably the world’s largest carbon sink.

True, but challenges of permanence and additionally are significant. It brings up issues of quality, and pricing quality appropriately. There is no need for a zero sum game mentality.

Consumer-facing. Food is quite literally in our faces. Ag cos are therefore often the first to face the music on consumer sustainability sentiment.

Very true!

Sustainability co-benefits. Decarbonizing food supply chains also produce other good stuff like biodiversity, water and air quality, and nutrient-dense food.

The co-benefits traditionally have been challenging, as “good stuff” like biodiversity, water and air quality are negative externalities. Incentive alignment with the right pricing mechanism will be important to address the negative externaliy problem.

In the news

Switch Bioworks, a startup developing sustainable biofertilizer, announced today it raised $4.3 million in pre-seed funding led by Anthos Capital and Acre Venture Partners, joined by Emerson Collective and several others.

Fertilizer is critical to agriculture, comprising a $200+ billion industry that sustains food production for half the world’s population. Unfortunately, most nitrogen fertilizer is currently based on fossil fuels and its production and application is detrimental to climate and planet health. Side effects include the release of nitrous oxide – a greenhouse gas that warms the planet over 250X more than CO2 – and nitrate runoff that leads to waterway contamination and biodiversity collapse.”

Data is the new oil, we are told. Every country needs a data strategy, and all of us should own our data, and be paid for it. But really, there is no such thing as data, it’s not yours, and it’s not worth anything.

Among the top 50 publicly traded North American companies that produce, distribute, and sell foods with the highest GHG emissions footprints, as of January 2022, only 21 of those 50 companies have set short-term emissions-reduction targets that include Scope 3 emissions.

Katharine Hayhoe, chief scientist for the Nature Conservancy in the US and professor at Texas Tech University, said the world was heading for dangers unseen in the 10,000 years of human civilisation, and efforts to make the world more resilient were needed but by themselves could not soften the impact enough

Deforestation poses massive risks to financial companies in industries like cattle, timber, and palm oil, and they are off track to meet their deforestation commitments made at COP26. 211 disclosing companies identified over US$79.2 billion of forest-related risks; the cost of responding to identified risks was US$6.7 billion.

So, what do you think?

💗 If you like “Software is feeding the world”, please share with a friend.

🙏 If you don’t mind answering 3 questions anonymously (2 are optional), I would love to get your feedback.

About me

My name is Rhishi Pethe. I lead the product management team at Project Mineral (focused on sustainable agriculture). The views expressed in this newsletter are my personal opinions.

Rhishi Pethe