One sector of the ag and food industry is into a tough stretch. Another is on the cusp of revolutionary growth.
By John DePutter – December 6, 2019
From the standpoint of economic well-being and growth, the agricultural industry currently has two sides: one encountering a slow down and another in the early stages of a strong and exciting upswing that has lots of time ahead of it before it peaks.
You’ve probably heard plenty about the slow down, and likely experienced it directly.
Mainline commercial cropping agriculture is under great economic pressure. A massive boom culminated in the US in 2012 and now American farmers are experiencing a downswing in major crop prices and profits. In Canada, the profit boom reached its peak later than in the US, somewhere between 2013 and 2018, varying by province and by type of farming business.
The commodity boom is long gone. Prices for corn, soybeans, wheat and canola descended into low-level trading ranges a few years ago, where they are now stuck.
Why the lower prices?
Crop farmers are incredibly good at producing crops. The high prices of the past years (especially the extreme highs of 2012) motivated farmers around the world to produce more and more grains and oilseeds. This increased production has continued long after the high prices have disappeared, producing ample supply. The result? Subdued markets.
Eventually this will change, but likely not any time soon. The downswing for commercial cropping profitability has probably not bottomed. The bottoming process will be variable from area to area and from farm to farm but overall, more time is needed – maybe another decade – before the low prices and slim profits cure the low prices and slim profits. The point is, it will take more time for farmers to respond to lower prices by producing less, and more time for the low commodity prices to encourage more demand.
There are also new kinks and frictions affecting the moving parts of the free-market machinery which threaten to delay the next major upshift in the grain/oilseed crop sector:
- Sharply rising yield trends will keep global production and supplies ample, with only temporary weather-related interruptions.
- A long expansionary phase for global trade has recently shifted into a phase of increased protectionism and trade schisms.
- Many farm input costs stand to rise more than crop prices. It’s part of the traditional cost:price squeeze that historically has followed a great boom. (Canada’s crop input price index rose 25% from 2010 to 2018.)
- Low interest rates have fed crop expansion and farm profits. It’s uncertain how long the current phase of low rates will last. If interest rates creep higher over the next five to ten years, a lot of farm financial statements will be negatively affected.
- The past five years, a weak Cdn $ has supported profits for Canadian crop farmers. There’s no guarantee this will last. If the Cdn $ happens to move up toward the 80 cent mark (or higher), this would negatively affect a lot of bottom lines. (Not predicting it – just saying it’s a threat.)
- Farmers face challenges from a lack of political clout and urban connectedness, which, when totaled up, add time and costs to farm businesses. Tax issues, environmental costs and constraints, transportation regulations and costs, consumer demands, animal rights activism… These “political/urban relations” are not going to get a whole lot better anytime soon.
Result: In the face of economic pressure, the days of asset-appreciation as a smart investment strategy seem to be over, at least for now.
Granted, there are some investment opportunities in the traditional crop production space that merit consideration. If the land next door comes up for sale and can be bought without adding a heavy debt load, it can be a great investment. If a better grain handling and drying system is critical to a farm’s success, that should happen. Note too, there is some relatively under-priced farmland to be had, here and there in a few pockets of Canada.
Meanwhile, don’t despair. No doubt some commercial cropping operations will do very well in the coming decade. We’re not telling people to abandon ship.
However, it’s important to be picky and careful about deploying capital. Investors in ag assets like farmland, grain bins and machinery are not fishing in the same stocked pond of 8 to 12 years ago, when various crop markets were on the rise. Nowadays the values of those assets are bucking the headwinds of a low-level macro-trend for crop prices and generally declining net profit.
So that’s the sector that’s under pressure. And you’ve probably heard plenty of talk about it already.
But what you haven’t heard nearly as much about is this: We are currently on the cusp of the next big wave in ag and food.
I call it the “Agri-Food Innovation Revolution.”
Innovation is somewhat of an overused term these days, but the amount of ingenuity and development in this industry cannot be overstated — it’s opening up a new landscape of opportunity for those forward-thinking enough to see it.
Much of this is being driven by small businesses involved with everything from digital and bio-innovation to consumer-driven product development.
A lot of the innovation that I see is happening in two key areas:
Key area #1: Production and supply chain efficiency
Digital innovation is changing the way food is produced, processed, distributed and sold. Certain precision farming techniques stand to limit input costs and cut down on time and energy for farmers, and it’s the same for processors and others along the food chain. New methods, techniques and equipment are coming along that can enhance yields, improve efficiency and quality, and streamline the distribution of products from farm to fork.
Imagine: A system that transmits field condition data to alert the farmer when it’s time to spray or irrigate. Or robotic weed control. Or blockchain technology offering traceability in a manner that the farmer has control over the data and profits from it. Or a system that alerts livestock operators to disease and disease carriers – and traces their origin…
These are real products that are on the market or on their way to market.
Of course, not all products and services are going to work or take off. Not all will serve to lower costs and increase efficiency. Technology just for the sake of technology is not sustainable. The best products and services will be the ones that are easy to adopt, easy to use regularly, and the ones that can significantly improve efficiency, productivity, and the bottom line.
The fact is, technology for ag and food is developing rapidly. The changes we’ve seen so far — such as auto-steering, GPS, phone apps and so forth — are just the start of what’s to come. I believe innovation will continue to explode. In total, the new devices, services and ideas of the future hold the potential to truly revolutionize our industry.
Key area #2: Creation and development of new ag & food products
This field of development includes bioproducts such as bioenergy and biohealth items. We see new crops, new foods, and new feeds on the way. Examples in this category are novel crops, niche-market food products, specialty feed products… We’re facing a tidal wave of bio-innovation. Some products are made possible by digital technology and genetic research and some come from simple, new ideas being brought to the marketplace.
Examples here may include: a new healthy snack food with growth potential; a new beverage made from food-production by-products; a new method of isolating specific protein or nutraceutical components of crops; a feed formulation that utilizes non-traditional sources of cheap protein…
This area is largely consumer-driven. It’s in response to ever-changing consumer attitudes and appetites. We’ve seen change coming in this area for a while. But now it’s happening much faster than ever before.
Granted, not all new crops and products will make a hit. Not all will be profitable to produce. But some will – and those that do will be great success stories.
Who’s leading the innovation?
Some of these bold new businesses stem from family farming operations which are developing a new piece of equipment that works for them, or who opt to diversify into novel new crops or to add value through on-farm processing. Others involve new entrants to the industry. Some new crops, ideas and businesses are coming here from outside North America.
Among the requirements to succeed, “scale-ability” for these businesses is key: the potential to multiply production and build consumption levels. Lots of new, young companies won’t make it. Lots of small companies won’t make the leap to become big companies. Others will.
The challenge and the goal is to find the investment gems: those that have the best chance of growing; the best chance of making a big leap.
A time of opportunity
Amidst the slowdown we’re seeing in other areas of the industry, it’s important to step back and see the bigger potential at play, as the ag and food industry evolves in this inventive era.
The people who will succeed — and profit most — in the coming years will be those who are able to make the most of the opportunities that are already here and the emerging opportunities that are on their way.