Dissecting Agriculture 3.0
As part of CropLife Media Group’s ongoing State of the Industry coverage, MacroGain Managing Principal Jim Budzynski recently presented a Webinar titled “Agriculture 3.0: The Next Chapter in American Food Production.” In his presentation, Budzynski covered three key topics: global macroeconomics, the drivers of farm income, and Agriculture 3.0 defined.
While some may have initially questioned the inclusion of a section on global macroeconomics with a mostly rural-based American audience in attendance, according to Budzynski it is an increasingly important area for both growers and retailers to pay attention to going forward.
“It’s actually got everything to do with agriculture,” he said. “We are probably more at the whim of global markets now than we’ve ever been.”
Budzynski provided a 15-year “snapshot” of the U.S economy, one in which corporate and financial profits are up while the national debt is at a staggeringly higher level than even during the Great Depression. At the same time, interest rates the world over are holding steady at an all-time low, and the deleveraging, or devaluing, of assets that occurred both during and post-U.S. housing market crash have left the U.S. with a dangerously low asset-to-liability ratio (3:1 whereas 2:1 is ideal).
“While it’s popular now to talk about Greece and what a mess they are economically, at the rate we are rising our debt we’re going to have similar problems down the road,” warned Budzynski. “So there’s a significant challenge there.”
But what does all that mean to agriculture?
“My view (of the economy) is pretty simple,” explained Budzynski. “There’s a wave of liquidity which is being driven by all of these governments holding interest rates so low. Where is that liquidity going to go? It’s going to hard assets such as farm land, corn, oil, and wheat. Things you can lay your hands on.
“As a result, highly liquid, globally demanded commodities are the beneficiary, or the victim, depending on how you look at it.”
Budzynski presented four possible scenarios (with the odds of likelihood in parenthesis) for where the global economy is headed:
- “GEM” (Global Economic Meltdown) – Synchronized and protracted global economic downturn increasingly likely. (10% Odds)
- “Japan” – The U.S. mimics Japan’s two decades of weak growth after the epic collapse of their housing and stock market bubbles. (40% Odds)
- “That 70’s Show” – Strong global demand for commodities from emerging markets (especially Asia) will drive commodity prices dramatically higher despite weak U.S. growth. (35% Odds)
- “Reflation” – The economic equivalent of a successful “Hail Mary” pass, global central banks will stimulate a synchronized global recovery and deftly remove excessive monetary stimulus before inflation takes hold. High growth rates will push commodity prices higher. (15% Odds)
Drivers of Farm Income
Of course, while the current state of global business is crucial to taking a proper “market temperature,” perhaps of more concern to our audience is the status of global farming markets.
“We’ve moved from industry economics driven by supply variability to one driven by a demand explosion and value-added processing,” said Budzynski.
In other words, as the developing world becomes more affluent food demand will likely grow dramatically, presenting the industry with yet another dilemma: Can productivity growth keep up with the increased demand?
“It’s kind of a horse race between demand and supply,” said Budzynski. “If you think about population growth, calorie intake, changing diets, and biofuels, they’re going to grow the demand for food by three percent a year. With that being said what we’ve seen a lot of over the last few years is the impact of a supply-demand imbalance.”
Corn utilization and ethanol will have a big impact on supply-demand economics, said Budzynski. He predicts there will be a Bullish increase of two billion bushels of corn being earmarked for ethanol production over the next 10 years.
“Imagine an industry as old as ours that suddenly has a new use pop up that demands 40% of the output, which is essentially what we’ve enjoyed over the past four or five years,” said Budzynski. “In fact, if you add to that the amount of soybeans China is buying it’s as if we had 20 million acres of corn and soybeans going to each of those markets which weren’t there 10 years ago. As a result, we’ve had a great tailwind, but the question is what does it look like moving forward?”
According to Budzynski, the answer to that question is that now energy and agriculture, like it or not, are forever “linked in arbitrage,” meaning the price of oil directly affects the price of ethanol, and therefore corn, and vice versa.
“We all better be watching the global energy markets because we’re not a disinterested observer anymore,” advised Budzynski. “It’s really a huge part of what we have to keep our eyes on.”
Agriculture 3.0 Defined
As the number of farms in the U.S. steadily declined over the past half century from around 4 million farms nationwide to just 200,000, the remaining active farming operations now must evolve to survive in an increasingly competitive global market. That’s Budzynski’s Agriculture 3.0 in a nut shell.
He says there are nine factors or “drivers” propelling the industry’s transition to Ag 3.0, including:
- Business Structure – from individual ownership/lifestyle focused to institutional ownership/business focused.
- Risk Management – from traditional hedging for price risk to self-managed risk and hedging.
- Differentiation – from less differentiated/economies of scale to more differentiated/marketing and brand economics.
- Biotechnology & Traits – from limited understanding of MOAs to rational product design driven by understanding MOAs.
- Disease and Weed Management – from reactive/curative use to proactive/preventative use.
- Nutrient Inputs – from “Quantity over Quality” to “Quality, not Quantity”.
- Environmental Sensitivity – from a medium to low level of sensitivity to a higher level of concern for the environment.
- Tillage & Equipment – from scale efficiency focused to energy efficiency focused.
- Precision Agriculture – from focusing on data collection to focusing on decision support and interpretation of data.
“Part of moving from 2.0 to 3.0 is thinking ‘How do I differentiate my output to capture more value?’” explained Budzynski. “’How do I improve not only the quantity I’m producing, but also the quality, and get into niches where I can get a premium for that?’”
Even with the renewed focus on higher quality output, Budzynski said there are still fundamental aspects regarding food production that, quite frankly, may never change.
“I think efficiency will always be central to what we are doing because it’s a business now that is of enough scale (for that),” he said. “Simply put, I don’t think efficiency goes away as a driver, but we’ve got to walk and chew gum at the same time. We’ve got to be efficient and figure out a way to get deeper into the value-added traits that will allow us to bring more value to our customers and to our operations.”
One of the main change drivers of Ag 3.0 going forward is the budding natural and organic foods market, which has matured from a $1 billion industry back in 1990 to a $26.7 billion industry in 2010.
“It’s fashionable in our industry to kind of poo-poo this as a small little niche market that we shouldn’t worry about,” said Budzynski. “So I look at it and say ‘Is this ever going to be 70% of the market?’ No, absolutely not, but if it even jumps from 4% to 15% there’s going to be a lot of people making a pretty good living delivering those kinds of products to customers.”
Another market trend Budzynski addressed was that of farm bifurcation, which is reportedly similar to recent developments in the hog and cattle markets among others.
“People talk about farm consolidation all the time, but it’s really not consolidation, its bifurcation,” said Budzynski. “By that, I mean the middle disappears. The industry becomes a whole bunch of small players on one end and a small group of very large players on the other end.”
What all this means for individual growers, according to Budzynski, is to be determined by the business savvy of those growers and retailers at both ends of the spectrum.
“We’re going to have some turbulence in this industry. We always have and we always will,” he concluded. “The smart people who kind of keep their eyes open about all of this stuff are going to do just fine. There are a lot of people around the world that are going to want to eat more, and I think we’re going to be in a great position to provide it for them. I think people who are prudent and manage their business right can do extremely well embracing some of these things in Agriculture 3.0.”