118. Narrow (thin) markets in commodity row crops (part 2)

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

Greetings from the San Francisco Bay Area. We are definitely in the fall season, as the weather has cooled down compared to a few weeks ago. More people are back in the office, the traffic is becoming crazier every day.

I will get my COVID booster (4th shot) today.

Narrow (thin) markets in commodity row crops

In last week’s newsletter, I talked about narrow (thin) markets in commodity row crops in North America. To recap what thin markets mean,

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.

Source: Rhishi Pethe

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.

Thin markets pose unique challenges for startups.

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).

New business models and new technologies

The thin market is a constraint for distribution, which makes leverage lopsided and favors the existing actors. For new entrants, you need to have a much better solution, but it also has to be cheaper. In other industries, a large volume of customers for a new entrant can help them drive down the cost curve. But due to a thin market, there are a limited number of farmer customers to drive down costs.

Due to this innovation returns to the status quo for incumbents, as old players are incentivized to keep market share.

How can these thin markets be navigated? Can the market conditions be changed, using different business models, and the age old change agent - technology?

For example, it might make more sense to start with a B2B opportunity, as it makes starting off a bit easier. But this might be a marginal change (definitely in the short to medium term), as you might only be able to sell to existing players.

Can technology and digital enable new business and distribution models? Digital can enable the removal of the middle person.

Can a large part of the inputs business convert to a D2C (or direct to farmer) business? Can you simplify the supply chain with fulfillment centers, which removes the middle man (or woman) and transforms a significant portion of your value chain?

Is the distribution problem really an agriculture problem, or is it a logistics, infrastructure, and technology problem? For example, Pin Duo Duo consolidated buying & selling, and provided the logistics infrastructure.

Is it possible for farmers to buy most of their inputs online, and have a recommendation and analysis layer which reduces the need for the middle man? At least in the US, the logistics infrastructure does exist.

For example, Amazon now has fulfillment centers within one hour of 77% of Americans, UBS estimates. That’s a lot, but it still trails well behind Walmart, whose nearly 5,000 stores across the US put it within an hour of 99% of the US population by UBS’ tally.

Image: Source

Can a partnership between input companies and a national retailer like Walmart provide the logistics infrastructure (given 99% of the US population lives within an hour of Walmart)?

Why would Walmart do it? This could be an interesting expansion of business for Walmart, which is seasonal in nature. They already have a supply chain infrastructure in place.

It could potentially bring some additional customers. (albeit a small number, given the small number of commodity crop growers). For example, Kohl’s has benefited from Amazon returns, and they signed up 2 million new subscribers in 2020.

Farmers have typically relied on agronomists, and input salespeople to make decisions on input buying. Most of this experience has been an in-person experience. COVID taught us we can do many aspects of our jobs remotely. For example, Warby Parker made ordering a pair of prescription glasses online easier. Stitch Fix has automated something so personal like fashion choices.

Even something as critical as going to the doctor, has worked out reasonably well in a remote setting. For example, in a study of 2,393 participants from an academic integration multispecialty healthcare institution, 2080 (86.9%) cases displayed diagnostic concordance between virtual and in-person visits. (“Medical specialties also displayed a wide range of concordance levels. Diagnostic concordance was 77.3 percent for otorhinolaryngology (study of diseases of the ear, nose, and throat.) and 96 percent for psychiatry.”)

As the medical diagnostic example shows above, there are certain situations where a remote session works as well as an in-person session, while certain issues (ENT) which might require special equipment or lighting do not work as well.

Can we think of innovation where seed and chemical companies provide agronomic products, and expertise, OEMs provide execution, a large retailer like Walmart provides distribution, and a sophisticated technology provider provides the technology backbone for it?

To get past the unique challenges posed by thin markets, will require new business models, different partnerships and alliances, and new technology and user experiences.

In the News

AgTech and Agronomy

Sky-high costs for fertilizer, crop protection products and labor are increasing the number of US farmers turning to agtech tools and products, according to a new survey from McKinsey & Company. Some 50% of small farmers plan to use new yield-increase products; 30% of large farmers (those with more than 5,000 acres) plan to use “green” products such as biofertilizers, citing lower costs per acre.

That Friedberg, a veteran of the agtech space, feels he needs to make such a significant investment in an ag retailer speaks volumes to the challenges agtech entrepreneurs have faced in getting their innovations adopted. By partnering with Lavoro, TPB is hoping to drive more agtech adoption by leveraging the retailer’s influence on farmers.

Aqua-Yield’s “nanoliquid” technology increases plants’ absorption of other liquid inputs such as fertilizers, herbicides and pesticides.

The UpTerra technology conditions the water to bring it to its natural energetic state like that of mountain spring water using Bio-Mimicry Technology that can process water from 30 to 1,500 gallons a minute. This water is much more bioavailable to plants or any living cell compared to tap or irrigation water. We also mimic the bio-signals of fertilizer or any input and using tesla-like coils we imprint this signature into the water as water has a memory. This provides the same nourishment of the “physical” input. The plant recognizes the bio-signal and is happy to take it on. The results speak for themselves. Less water, less fertilizer, and higher yields, all while having a positive environmental impact as there is no wasted material or input.

A universal retrofit option, FarmHQ also provides remote monitoring for irrigation reels, letting users of irrigation reels and pumps upgrade their irrigation equipment with one simple installation and put them on the same monitoring and control system, providing significant financial savings and less stress.

U.S. Department of Agriculture (USDA) Secretary Tom Vilsack today announced that the Department is awarding $502 million in loans and grants to provide high-speed internet access for rural residents and businesses in 20 states. I love these infrastructure improvements!

Crucial plant breeding decisions happen after harvest

Robotics and Automation

Australian farmers invest in robots and autonomous vehicles. Robots are being used to commercially farm more than 405,000 hectares of Australian farmland, with growers seeing them as the answer to workforce shortages.

New John Deere Gator comes GPS-ready for boundary mapping and field upkeep applications

Sustainability

Consumers not giving up meet so fast

Corteva acquires Symborg. Symborg possesses a diversified existing portfolio, an emerging biocontrol pipeline, and a skilled employee base with robust technical knowledge and demand generation expertise.

Bayer and Perdue partner to offer incentives to push farmers toward more sustainable agriculture practices. I love these cross-supply chain collaborations!

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