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

Greetings from the San Francisco Bay Area.

Narrow (thin) markets* in commodity row crops

Monopolies are bad in general, other than for the individual or entity who or which is the monopoly. State owned monopolies are the worst, as they don’t even have a profit motive. As a small kid in India, we didn’t have a phone to begin with and we didn’t get a phone till I was about 10-12 years old.

My parents had no desire to live off the grid, but there was just one seller for telephone services. It was the Indian state. It took 13 years from when my parents registered to get a land-line phone, to actually getting a land-line phone. (This was pre mobile phone era, and pre opening up of the Indian economy in 1991).

The opposite of a monopoly is a monopsony. In a monopsony, there are many sellers, and only one buyer. For example, in the case of space equipment, where there were a few sellers, but there used to be only one buyer - NASA.

In a competitive market, you have a large number of sellers and a large number of buyers, and it is best suited for improved customer experience, and innovation.

Thin markets

What happens when you have a small number of buyers and a small number of sellers? How does this market perform compared to a monopoly, monopsony, or a competitive market. These types of markets are called narrow (or thin) markets.

For example, there are two big aircraft companies (Boeing & Airbus) and a few hundred airlines. You typically see this in infrastructure plays, as there are few sellers who can actually execute a project of certain kinds (for example, building airports).

You see a similar dynamic play out in commodity row crops in North America. It is common to talk about how there are only a few seed companies, or only a few equipment companies, or only a few offtakers (or processors).

Source: Rhishi Pethe

U.S. agricultural production is becoming more concentrated at the farm level. For example, in 1970, nearly 650,000 dairy farms operated in the U.S.; today roughly 40,000 remain.

The number of commodity row crop operations in the US is limited to a few thousand operations. If you look at all farms, 11% of the farms account for 80% of the production value.

US commodity row crop markets are characterized by a few sellers (farmers) and few buyers (off takers) on the output side, and a few sellers (input, OEMs, etc.) and a few buyers (farmers).

The US commodity row crop markets fit the definition of narrow (or thin) markets.

Narrow markets create challenges around transparency and pricing fairness during the product procurement stage. Low transaction volumes and low liquidity in narrow markets reduces visibility on price and volume data.

This makes incorporation about how new data about a commodity is being included in the price quite challenging, leading to price volatility. It is often difficult to figure out what a farmer really pays and how much does a seed company charge for a bag of seed, due to all the different rebates, discounts, and specials. The narrow markets make obfuscation easier than a competitive market. Small producers are at a natural disadvantage in a narrow market. Large producers can spread their fixed costs over a larger area.

Markets become narrower (or thinner) as consumer and animal feed demand becomes more differentiated due to heightened product heterogeneity. Beyond conventional preferences of taste, appearance, convenience, and price, many Americans now desire food attributes related to health, ESG concerns, treatment of animals, fair practices, different attributes for animal feed etc.

The evolved preferences do present farmers with opportunities to differentiate their products and develop market niches, but they make the market narrower in each attribute niche.

Are there oligopolies in agriculture?

Here are some statistics based on a report titled “Food and Power: Addressing Monopolization in America’s Food System” published by the Open Markets Institute (2021)

• Four corporations, Cargill, Archer-Daniels Midland, Bunge, and Louis Dreyfus, control close to 90% of the global grain trading business. Vertical integration is common, with farmers relying on the same corporation to purchase seeds and inputs, process raw materials, and manufacture products like animal feed and corn syrup.
• 2 corporations manufacture nearly 50% of all tractors & other essential farm machinery in the US.
• Similar trends are seen in seed companies for corn & soybean, and herbicides & pesticides.

Source: The soberting details behind the latest seed monopoly chart (Civil Eats) (2019)

What is driving the concentration in the industry? Is it technology, distribution, business model, or some other factor?

In the case of internet businesses, higher volume and scale drove down marginal costs to zero. This allowed a few companies to grow, and become giant behemoths.

In the case of agriculture, the incumbents have not changed much in the last few decades, other than resetting the chess board a bit.

Many ag and Agtech companies have talked about a data flywheel in agriculture.

We have not seen a strong data flywheel effect in agriculture as it is very difficult to get leverage without distribution. Access to distribution is controlled by incumbents and due to the existing physical infrastructure and relationships.

Even in a technology business in agriculture, the marginal costs don’t go to zero or decline at a fast enough rate. It makes the entry of new players difficult. Given the not-so-large number of commodity row crop farmers in North America, there might not be enough business for a new player to reduce the marginal cost of a new customer to a level which makes unit economics sustainable.

Agtech Implications

What are the implications for Agtech companies and Agtech in general, if they operate in thin markets like the commodity row crop market in the US?

If you are selling a low selling price product to commodity row crop farmers, then you are in for a tough ride. You have a limited number of customers you can sell to, and the average revenue per customer is low, while the sales and marketing costs are still high. This is not a great combination, especially if you are a startup.

Given farming diversity, any particular cut of heterogeneity makes the markets even thinner.

Agtech is a graveyard of startups, especially the ones who try to sell directly to farmers in North America. Yes, it is absolutely true, your solution has to create value for the farmer. But even if it does, unless the average revenue per customer is high, it becomes challenging to sell in a thin market. We have many such examples, even when the product being sold was by a large incumbent. For example,

• Corteva and Granular have reached a conclusion. SaaS based products with a few hundred dollars of revenue per farming operation are very difficult to sell, and to create a real business out of it. Corteva has decided to sunset certain products like Granular Insights etc. It is also very difficult to build a technology product, and thin markets don’t help. Input companies are concluding digital is a means to an end to help sell more & better inputs.
• Farmer’s Edge has famously crashed and burned, even though it had a host of other internal issues. (You should read my friend Shane Thomas’ analysis on it.)
• Bayer’s Climate FieldView started off with a $ 999 per year price tag a few years ago. The price was still too large to create significant friction in adoption. Bayer dropped the price to $ 99 per year. Farmers also struggle with $ per acre pricing, and prefer fixed pricing. Bayer still offers a $ 1 / acre prescription plan, but the expensive seed and fertility prescription plans of $ 3 and $ 4 per acre have disappeared. Most input companies treat their digital offerings as a sales enablement and customer engagement tool, to be paired with input and advisory services.

Technology products (involving hardware and software) become cheaper while the quality improves.

Thin markets are not ideal for startups selling technology only or digital only products. They don’t have access to distribution, small markets will make it challenging to build a large business for startups due to high S&M costs, but lower ARPU (average revenue per user).

So what should you do if you are a startup with a digital or technical product idea for commodity row crop farmers in the US?

• If you think your average selling price is going to be lower compared to other inputs, find market traction and then try to get acquired by a large incumbent.
• Try to go B2B instead of selling directly to farmers.
• Try to get included as an add-on-service or product pushed by an incumbent.
• For incumbents, try to find smaller players with reasonable traction, and partner with them to add their capabilities in your bundle.

In part 2 (coming in a few weeks), I will explore some ideas on how thin markets can be influence and changed, using a mix of technology, and business model innovations.

In the News

AgTech and Agronomy

The Production Board invests in Brazil’s largest ag retailer in SPAC deal to promote agtech adoption

​In India, the farm-to-market business model helps farmers sell their produce from their farm gates through mobile pickup stations.

UPL a global provider of sustainable agricultural solutions, has acquired the business of TeleSense, the world’s leading provider of remote monitoring solutions for crop storage and transportation, to advance its mission to reduce food waste and support food supply chain sustainability.

Robotics and Automation

When are the electric tractors coming? Will electric airplanes get there first? ​

​Deere's Self Driving Tractors and the Future of Ag Tech​

​Interview with AGCO CEO: “Our focus is automating features, and on each one of those features, our target is for the farmer to get a payback in one to two years.”

Sustainability

Plant-based execs, their investors and the other inhabitants of the echo chamber didn't think that these realities applied to them. Together they have created a category failure, maybe one of the biggest in food industry history.

Pepsico and ADM partner on sustainability and regen agriculture.

* This week’s newsletter was inspired by some text messages with friend and former colleague Sachi Desai of Bayer Crop Science.

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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.