December 3, 2012

State of the Start-up Economy (U.S.)

Posted by Kevin Kimle under Economics, Entrepreneurship
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Headlines and Articles

Fort Collins considers ways to feed and nurture urban agriculture – Coloradoan
ConAgra tries to change perceptions about frozen foods – Omaha World Herald
The big myth about entrepreneurship - Business News Daily
Agriculture in China predates domesticated rice – Science Daily
Argentina, Brazil join U.S. in international corn alliance – Farm Futures
A new kind of agriculture replaces intuition with precision - Fast Company
Private equity pins hopes on China agriculture – Wall Street Journal

____________________

Entrepreneurship is neither a science nor an art. It is a practice.
~ Peter F. Drucker

State of the Start-up Economy (U.S.)

If the state of the start-up economy in the United States is measured in terms of temperature in late 2012, it is tepid.  It is perhaps warming a bit from 2008 to 2011 levels, but still lagging in most measures compared to the last forty years.

New business creation is the simplest measure of start-up and entrepreneurial activity, and most measures of this activity are low relative to the past.  Census Bureau Business Dynamics Statistics briefing published by the Kauffman Foundation show that the rate of new business formation has fallen to between 7 percent and 8 percent (as a portion of all companies), down significantly from the rate of 12 percent to 13 percent in the 1980s.

Businesses less than five years in existence now represent 35 percent of all companies in the U.S., down from the 50 percent they represented thirty years ago.  This decrease in number of new firms is accompanied by a decrease in the share of employment at those young firms, down from 20 percent in the past to 12 percent today.

The most recent Kauffman/LegalZoom Startup Confidence Index (October) showed a small indication of improvement in start-up entrepreneur confidence, though caution was also apparent.  While a a majority of start-up business owners do not believe the economy will grow in the next 12 months, 83 percent are nonetheless confident that their own profits will.  However, in a measure of the ultimate expression of their outlook for their businesses, 63 percent of start-up business owners do not plan to hire additional employees in the next year.

The recession starting in 2008 and slow rates of economic growth in the U.S. since that time certainly play a role in reduced start-up business activity, but the rates of start-up and entrepreneurship have trended significantly downward in the U.S. since before that time.  There may be emerging signs of increased entrepreneurial activity in the near-term, but nothing that would indicate a return to the type of start-up activity of the past.  New business creation as measured by various sources has fallen by more than 100,000 firms per year.

U.S. Business Births

The downward trend in start-up activity in the U.S. is a significant issue if there is to be renewed and sustained economic growth.     Think of start-up business activity as a leading indicator of overall economic activity.  Start-up firms create the many of the new technologies, services, and business models that fuel the growth in productivity, jobs, and ultimately wealth.  Therefore, continued low rates of start-up business formation  portends poorly for prospects of longer term economic growth.

Subdued start-up activity compared to historical norms explains part of reason for continued high rates of unemployment.  Kauffman Foundation data shows that if not for start-up businesses there would be no net new job growth in the United States since 1977.  New businesses are needed to generate new jobs that take the place of those eliminated by older firms as well as create growth for entry of new people into the workforce.

Startups-Kauffman-Foundation

So why the grim picture of start-up business activity in the U.S.?  Has something fundamental changed in the American character?  Has the frontier mentality that has driven generations to try, fail, and try again in business disappeared?  Has something in the culture that defines opening a new business as the ‘American Dream’ changed?

In my view nothing has permanently changed to leave the U.S. at lower rates of start-up business activity.  Some things have changed, however, that impact the incentive to create start-up businesses.  Until these incentives change, it seems unlikely that start-up business activity will return to or exceed historic norms.

Reduced start-up business activity results at least in part from diminished incentives to invest time and money, driven by a variety of macroeconomic issues.

The near-zero interest rate monetary policy environment in place more or less since 2001 is not friendly to start-up business activity.  This environment encourages consumption over saving.  Start-up business creation arises from the central ethic of entrepreneurial capitalism, delaying today’s consumption for investing in tomorrow’s opportunity and tomorrow’s productive people and assets.

Near-zero interest rates drive dollars out of saving to consumption and toward investment in assets such as real estate or commodities.  It is perplexing to watch Federal Reserve and Treasury officials put so much effort into propping up real estate values when the bubble in real estate prices was caused largely by their policies in the first place.  They continue to act as though the future of the U.S. economy depends on restoration of bubble-like real estate prices, when these prices effectively represent a misallocation of investment into non-productive assets.

Increased levels of public versus private spending also represents allocation of resources away from private sector new business creation.  Trillion dollar annual federal government deficits not only represent a risk to future investment through higher debt obligations, it also represents crowding out of private investment in the near term.

In addition, the price of success appears to be rising, thereby reducing the incentive for creation of new businesses.   Unsustainable government spending is creating pressure to raise revenues, so there is an apparent electoral appeal to loading higher tax rates on higher income earners.  The problem is that many of those  higher income earners are those who will help create start-up businesses.  Tax success and we are bound to get less of it.

Most current and future generations of American entrepreneurs will find ways to succeed, much in the manner of their eighteenth, nineteenth, and twentieth century forebears who created new businesses through any number of recessions, bad policies, envious politicians, wars , and natural disasters. However, the issue for restoring and then exceeding historic rates of start-up business activity, and ultimately economic growth, is what happens on the margin.

The incentive for creation of and investment in start-up businesses by entrepreneurs and investors who might not otherwise do so is important.  These bonus entrepreneurs push the boundaries of invention, innovation, competition, and life improving events beyond what they would have been without them.  They are the difference between creating 500,000 start-up companies annually in the U.S. or 700,000, between 2 percent and 4 percent annual income growth, between 8 percent and 4 percent unemployment, and between a future of limping economic progress and one of unbridled prosperity and potential.

 

July 20, 2012

Primacy of the Individual Entrepreneur

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All rational action is in the first place individual action. Only the individual thinks. Only the individual reasons. Only the individual acts.
~ Ludwig von Mises

Primacy of the Individual Entrepreneur

I gave a talk last Saturday at the annual meeting of the National Governor’s Association at Williamsburg, Virginia.  I arrived Friday night, returning from Africa and out of the loop on U.S. news.  It turns out a speech given on Friday in the same state, except at Roanoke, has generated some controversy.

President Obama said in the Friday speech that individuals don’t create jobs, telling entrepreneurs: ‘If you’ve got a business – you didn’t build that. Somebody else made that happen.’

My opening remarks at the NGA meeting turned out to be exactly the opposite of the President.

Entrepreneurs are the enablers of new markets, innovation, and economic creativity.  Of course, entrepreneurs work with others to make things happen and are the beneficiaries of mentors, helpers, encouragers, investors, cheerleaders and many others.  Few great things, if any, were the result entirely of one individual.  However, you remove the individual, you remove the result.

Does the light bulb happen without Thomas Edison?  Perhaps eventually, but not as soon or as effectively.  Does the mouldboard plow happen without John Deere?  Perhaps eventually, but not as soon or as effectively.  Do frozen vegetables happen without a Charles Birdseye?  Perhaps eventually, but not as soon or as effectively.

Individual entrepreneurs and business people are the key to creation of new technologies, products, companies, business models, and distribution systems.  Deployment of new and better products and services makes our lives better and creates wealth.

The reason why such a thing that we label as an ‘economy’ exists is because of what individuals do.  Individuals buy, sell, trade, negotiate, compete, and partner with one another.  As they do so, technologies, products, services, companies, markets, and industries develop.  Phenomena economists work to describe and understand like prices, wages, money, interest rates, recessions, and wealth creation are all the result of countless individual actions.  Economic activity is the result of purposeful actions and choices by you and me, each of us doing our best under particular circumstances to meet various wants and needs.

Classical economists of the 18th and 19th century dubunked the old assumptions of the pre-capitalist era: that competition was unjust, that change in traditional production methods was socially unacceptable, that technology was evil because it replaces labor, that a task of government is to prevent efficient business people from gaining wealth, and that to restrict the freedom of entrepreneurs by government coercion is an appropriate goal for social harmony.

Apparently there is still work to be done to promote a deeper understanding of the role that economic freedom has played and will yet play in the technological progress of the the last two hundred years.  Our lives today are healthier, longer, and more fulfilling because of the free interaction and exchange of individuals.

Today’s grumblers harken back to the medieval era expropriators who found any number of means to straightjacket business people and tradesman who threatened to their idea of appropriate economic and social norms.  The ruling class today, as then, pushes for government control of all activities of individuals.  These controls are couched within any number of terms promoting various societal goals.  But society is the combination of individuals.  Society exists nowhere outside the actions of individuals.  To speak of social goals as though society itself is a being, a thing of itself, is nonsensical.

There clearly needs to be a more vociferous defense of individual freedom in today’s political environment.  The tremendous progress of technology and the resulting increase in wealth and welfare of the last two centuries were made possible only through the pursuits of individuals in an environment of economic freedom.

America has its political heroes of the past: George Washington, Thomas Jefferson, and Abraham Lincoln.  Did we build monuments to honor their memories for merely lack of better alternatives?  No.  We built them because we understand that the country is a different and better place because of their impact as individuals.  They certainly did not accomplish what they did alone, but without their leadership history would look much different.

America also has its entrepreneur heroes of the past: Thomas Edison, Henry Ford, Steve Jobs, among many others.  The world is a different and better place because of their impacts as individuals.

I challenge students in my entrepreneurship course each semester to work to make a positive difference in whatever way their interests, skills, and passion leads them.  I have no plans to drop the challenge or the recognition and reward of those individual students who step up to the challenge.  My hope is that America remains a country where their initiative is celebrated and supported.

 

June 21, 2012

Economic Growth in China and the United States

Posted by Kevin Kimle under Economics, Innovation
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Most economic fallacies derive from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another.
~ Milton Friedman

Economic Growth in China and the United States

I recently returned from an extended trip across various parts of China, with most of my time spent evaluating agricultural opportunities.  On my return this week, a student stopped by my office to ask about the trip and the conversation turned to economic growth.  Why does China’s economy grow annually from 8 to 10 percent and the U.S. economy struggles to grow currently at even 2 percent?

Economic growth, or wealth creation, at its core is about increased productivity, the ability for each of us to produce more with our time.  Adam Smith got at this in 1776 in The Wealth of Nations.

To take an example, therefore, the trade of the pin-maker; a workman not educated to this business, nor acquainted with the use of the machinery employed in it, could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make twenty. But in the way in which this business is now carried on, not only the whole work is a peculiar trade, but it is divided into a number of branches, of which the greater part are likewise peculiar trades. One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving, the head; to make the head requires two or three distinct operations; to put it on is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some factories, are all performed by distinct hands, though in others the same man will sometimes perform two or three of them. I have seen a small manufactory of this kind where ten men only were employed, and where some of them consequently performed two or three distinct operations. But though they were very poor, and therefore but indifferently accommodated with the necessary machinery, they could, when they exerted themselves, make among them about twelve pounds of pins in a day. There are in a pound upwards of four thousand pins of a middling size. Those ten persons, therefore, could make among them upwards of forty-eight thousand pins in a day. Each person, therefore, making a tenth part of forty-eight thousand pins, might be considered as making four thousand eight hundred pins in a day. But if they had all wrought separately and independently, and without any of them having been educated to this peculiar business, they certainly could not each of them have made twenty, perhaps not one pin in a day; that is, certainly, not the two hundred and fortieth, perhaps not the four thousand eight hundredth part of what they are at present capable of performing, in consequence of a proper division and combination of their different operations….The division of labor, so far as it can be introduced, occasions, in every art, a proportionable increase of the productive powers of labor.

China’s economic growth rates are high because it can adopt the pin-maker’s technology, among countless others, that were developed over decades in other countries and implement them in a relatively short period of time. China’s economic ‘pie’ continues to expand rapidly, not because wealth is somehow taken from another country, but because of rapid productivity gains.

At the heart of labor specialization is freedom for individuals to exchange.  It is through exchange, individuals trading with one another, that labor specialization has continued to evolve.  Labor specialization, in turn, leads to innovation.  When an individual specializes in something, they develop a deeper knowledge of how to do it well and also how to improve over the course of time.  This improvement, whether making pins, growing corn, or producing chicken meat, is innovation.

Why do individuals take an interest in innovation?  At a basic level we like to innovate to make our lives easier, to make more money, and ultimately to save time.  Time saved equals labor productivity equals wealth creation equals economic growth equals prosperity.

Today in developed countries (U.S., western Europe, Japan) the ‘average’ consumer spends their income in the following categories.

  • 20% housing
  • 18% transportation
  • 16% household stuff
  • 14% food, drink
  • 6% healthcare
  • 5% entertainment
  • 4% clothing

Prior to economic opening-up, the ‘average’ Chinese consumer may have spent their income in a vastly different way.

  • 75% food
  • 10% clothing
  • 5% housing
  • 5% heating
  • 5% light, soap

Individuals in China are in a relatively fast transition from the latter to the former.  At it’s core, this is what 8 to 12 percent economic growth in China for the last twenty years has been about.

Is there an inevitable end to the process?  No.

While there may be an end to the process of China’s transition to a modern economy at breakneck speed, the low-hanging fruit for economic growth, there is no inevitable end to the process of innovation and improvement, in China, the U.S. or anywhere else.    The key element to continued innovation, however, arises from freedom of individuals to exchange.  Exchange of goods and services is certainly important, but more important is the exchange of ideas.  Free exchange of ideas, the intermingling of knowledge, leads to the next marginal improvement and innovation.

Why does trade between China and the United States matter, or between any countries really?  It matters because it is part of the specialization, innovation, and economic growth framework.  The ability of individuals from two countries to exchanges goods, services, and ideas leads to economic growth.  Trade restrictions may be in the short-run interest of a particular group seeking shelter from competition as well as the politicians representing it, but are most certainly not in the interest of individual consumers and the general public.  Trade restrictions are economic growth inhibitors and wealth destroyers.

Trade between China and the U.S. in 2011 was $504 billion according to the Department of Commerce.  The list of goods that make up that huge number reflects the comparative advantage of each country, with China’s shipments to the U.S. being dominated by goods that are produced using China’s relatively less expensive labor and leading U.S. shipments being comprised of agricultural products and technology-based products.  Greater specialization by producers of these goods in each country will lead to productivity gains over the course of time and subsequent wealth creation.

I’ve met business people from both the U.S. and China working on shipment of products, exchange of services, technology trade, and the sharing of knowledge and ideas.  This is important work for individual businesses, but part of the fabric of future economic growth for both countries.

 

May 11, 2012

The Broken Road To Innovation

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It’s easy to come up with new ideas; the hard part is letting go of what worked for you two years ago, but will soon be out of date.
~ Roger von Oech

The Broken Road To Innovation

Each spring semester we conduct a student travel course under the theme of agricultural entrepreneurship, culminating in a trip in May after classes conclude.  This year’s version was to North Carolina.  I deeply appreciate the time the entrepreneurs and businesses take to introduce themselves to our group.

Trips like this are a great chance for students to broaden their view of agriculture, technology, entrepreneurial career paths, and innovation.  For me it’s much the same, with perhaps a little more opportunity to be reflective of past experience.

A theme that emerged from some of the site visits this week in North Carolina trip was how broken the road is that leads to successful innovation.  There is clearly no single formula for developing an idea and moving it successfully into the marketplace, whether it is related to a new food product, development of a new biotechnology, or introduction of new information technology.  The only common element is that successful innovation is typically only remotely related to the original idea or business concept.  The road to successful innovation has sharp turns, curves, double backs, and U turns.

We visited with Medicago, a company that is developing a new means of vaccine production that could radically alter the normal assumptions of scale in that market.  Whereas vaccine production normally occurs using eggs, a slow and expensive process, Medicago is using tobacco plants to produce vaccines.

Use of tobacco plants for vaccine production is nothing terribly new, however.  I remember more than ten years ago that there were companies attempting to genetically modify tobacco plants to express proteins that could be used for various pharmaceutical uses.  To my knowledge, none of those efforts bore significant marketplace success.

Medicago’s approach is to infect the tobacco plants with an agrobacterium such that the tobacco plant expresses proteins that can serve as vaccines for various flu viruses and other diseases, different from past approaches.  They’re on the cusp of developing a method of vaccine production that is a game-changer, enabling production of vaccines as a speed and scale that allows much more timely responses to flu outbreaks and more virile pandemics.

For the many scientists and entrepreneurs i involved in various projects and ventures related to plant pharma, this is likely an unexpected outcome.  It has been a very long and broken road to the one of the first potential big breakthrough innovations in this market space.

We also appreciate the time spent with the Fulton Breen and his team at XS Inc.  XS was one of the early B-to-B Internet companies in the late 1990s, along with a company I started, E-Markets, so Fulton and I lived through the craziness of the Internet boom and bust and all the accompanying jockeying that occurred at the time in the ag space.

The original business for XS, online auctions for excess crop protection chemicals, has become a nice business for the company.  Not the billion dollar business many thought it could become, but a business with significant and growing transactions.  That original business, however, is  a shadow of the company’s data management business.  A business that was not clearly envisioned at the it’s founding is now the basis for the company just being named one of the 2012 North Carolina Companies to Watch Award Recipients.

A core skill of innovators is the ability to leave behind or modify the idea that has had its day or simply will not work and move on to what comes next.   Successful ideas are often kissing cousins of failed ideas, and the ability of people to move from one to the next is what enables success.

“Mr. Edison, please tell me what laboratory rules you want me to observe” asked M. A. Rosanoff.

“There ain’t no rules around here,” replied Edison.  We’re trying to accomplish somep’n!”

 

April 11, 2012

Crude Oil as the Next Supply Shock?

Posted by Kevin Kimle under Commodity Prices, Economics
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The exchangeable value of all commodities rises as the difficulties of their production increase.
~ David Ricardo

Crude Oil as the Next Commodity Supply Shock?

A friend who manages a a good deal of trade of agricultural commodities recently spoke to me about how the increase in domestic oil production has complicated movement of agricultural commodities  In particular, he talked about how the boom in oil drilling in North Dakota has made it hard to procure trucks.  Trucks are used into North Dakota to haul sand to oil rigs for use in hydraulic fracking and used to haul the oil out of North Dakota toward refineries.  One large oilseed processing plant in western North Dakota has had to operate at less than full capacity because it can’t get the trucks and rail cars it needs to operate.

Is oil the next commodity set to experience a supply shock?  Natural gas is already there (see past post), with futures now trading at about $2.00/btu as opposed to $10/btu a few years ago.  Shale technologies may not result in a comparable drop in crude oil prices, but these new technologies can still compete even if crude oil dipped below $50/barrel.  Long term, if the technology continues to progress and can compete with Middle Eastern oil, the world could look different in many ways.

The Bakken Formation, spanning western North Dakota, eastern Montana and into Canada, is thought to be the largest oil deposit in the lower 48 states.  It covers 15,000 square miles and holds more than 4 billion barrels of oil.  New technologies involving hydraulic fracking and horizontal drilling have made it possible to extract oil from rock as thick as concrete.

Other areas will also become more intensive oil producers.  There is much activity currently in Kansas, for example (see Kansas Prepares for Gold-Rush Style Oil Boom)

The U.S. won’t be alone in tapping new oil supplies.  China, currently another major oil importer, has the world’s second-largest store of shale oil.  Countries on every continent have shale oil, making oil a ubiquitous commodity that gives every region of the world the wherewithal, at least theoretically, to be energy self-sufficient.

Search the phrase ‘peak oil’ and you’ll find any number of past and recent articles on the sure eventuality of the world running out of oil.  Prices may not reflect it right now, but contrary to peak oil ideas, it seems that new technology may leave the world awash in crude oil.  For all the bashing fossil fuels take in the media as a non-renewable resource, it seems that they remain throughout history a fuel source with continually replenishing supplies.

So what?  Does this matter to agriculture?  Certainly it does, as agriculture is an energy-intensive industry up and down the value chain.

At an micro level, changes in energy prices can drive changes in costs and technology.  For example, diesel irrigation engines in parts of Nebraska (and likely other places as well) are being replaced this spring with natural gas powered engines because per hour fuel costs will drop from about $12 to under $4.  A center pivot in Nebraska will, on average, put on 600 to 800 hours run time each summer.  The reduction in variable fuel costs by switching from diesel to natural gas reduces expenses by about $42 per acre or 20 cents per bushel.

At a macro level, changes in crude oil prices will have a significant impact as well.  For instance, the economics of ethanol production are liable to be impacted if crude oil prices fall.  Given that more than 5 billion bushels of corn are forecast to be used for ethanol production from the 2012 U.S. crop, almost 40 percent of production, there are significant implications if ethanol production is impacted by lower crude oil prices.  Corn prices are linked to ethanol prices which are linked to crude oil prices.

It may be unwise to proffer a bearish outlook for crude oil and other commodity prices at a time of a weak dollar and the continuation of low interest rate, easy money policies by the U.S. Federal Government.  Commodities are denominated in dollars, and insofar as the dollar remains weak, commodity prices will remain high.  As the current market for natural gas depicts, however, supply shocks are eventually reflected in prices, even in dramatic ways.

Natural Gas Prices 2007 to 2012

‘Brown revolution’ needed to improve soil health

 

March 12, 2012

Trends Impacting the Food and Agribusiness Value Chain

Posted by Kevin Kimle under Agribusiness, Innovation
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Trends Impacting the Food and Agribusiness Value Chain

In the last post, I addressed three areas of significance for innovation in the global food and agribusiness sectors in response to a survey that the International Food and Agribusiness Management Association is conducting with McKinsey & Company to better understand where the global growth opportunities are in food and agribusiness across the value chain.

Another question I addressed in the survey was related to the value chain.  Three trends I believe will have significant  impact on the value chain for food and agribusiness I listed in response to the survey are below.

Information at your fingertips

When we launched our first Internet-based electronic commerce application at E-Markets in 1997 for contracting specialty grains and oilseeds, the novelty was in tying participants from across the supply chain into a single information system.  The results were more efficiency, better coordination, and a system of traceability.  Today, that software application is described as cloud computing, a trend that is just beginning to take shape.

The foundation of cloud computing, information available at any node, combined with mobile devices will have powerful implications for many industries, agriculture and the food industry included.  The information-at-your-fingertips metaphor is a powerful one.  As business people and consumers demand this capability for how they make transactions and interact with information, there will be many changes in how business is conducted.

A student start-up emerging from the Agricultural Entrepreneurship Initiative Student Incubator Program, ScoutPro, is a great example.   Michael Koenig’s observation as a crop scouting intern was that he could do his job much more effectively if he had crop pest data at his fingertips, not as a cumbersome catalog carried in a field, but rather as a software application.  Eighteen months later he and his team have launched  company that provides mobile applications for crop scouting.

At the consumer end of the food business, there will be ramifications for the industry as well.  Consumers want more information at their fingertips, and it will affect their purchasing choices.  ShoptoCook, for example, provides consumers at the point of purchase with recipes, shopping lists, and other information.  If your company has an sku item in a recipe ingredient list pulled up on a kiosk at a retail store or on a smartphone, do you think it’s important to have a position in the list?

Nutrition Literacy

There are many signs of a higher proportion of consumers becoming much more literate, or at least interested, in nutrition.  There is also much more being published at the consumer level regarding the science of nutrition, the interaction of the body with various ingredients and compounds.  This will have significant impacts on food demand.

The boundaries of nutrition and science are being pushed, particularly by athletes and fitness buffs.  A fuller understanding of athletic performance and how it’s affected by nutrition has been a fact among high-performance athletes for some time, but there is evidence of this seeping into broader consumer markets as well.

For example, there has been fast growth among athletic nutrition franchises such as Complete Nutrition and Nutrishop. While these stores cater to the portion of the market focused on exercise, fitness, athletic performance and nutrition, it is a fast-growth market.

P90x is a personal training program that has become a cult-like phenomenon, with something close to 4 million people in U.S. using this extreme (90 minutes per day) personal fitness regime.  Part of that regime is nutrition, with a detailed nutrition guide that provides a philosophical and scientific base for health, fitness, and nutrition.  If 4 million people in the U.S. are following a nutrition plan like this, it points to an important trend where a higher proportion of consumers become much more discriminating in food and ingredient choices.

A regional grocer, HyVee, has developed NuVal, a food-scoring system that helps consumers see – at a glance – the nutritional value of the food they buy.  It doesn’t prevent my kids from grabbing the bag of Doritos, but it is interesting to hear them talk about and compare the nutrition labeling scores on various products.

New Supply Chains

The agricultural supply chain is the system of organizations, people, technology, activities, information and resources involved in moving and transforming commodities and food products from inputs to final customer.  There are trends pointing to changes in traditional supply chains and supply chain relationships.

First, I believe that a higher proportion of supply chain developments are currently being driven by events and issues at the production end of the chain.  Whereas processors have historically held much sway in the industry for structuring supply chains. today there is greater scarcity of production capacity rather than processing capacity.  This leads to many supply chain decisions being dictated by production issues such as access to supply, access to land resources, access to transportation infrastructure, etc.  I’ve written in a past post (Economic Center of Gravity in Agriculture) that a very interesting dynamic in agriculture today is the migration of the economic center of gravity toward the production side of the supply chain.

The dynamic in supply chain structure changes is expressed in many ways.  One example is the fragmentation of supply chains previously driven purely by scale economies.  In Iowa, a beef packing plant that has been more or less closed since 1999 in Tama is set to re-open this summer, but under a new model.  Rather than compete in commodity beef markets, where it would lose on scale economics, it will become a very large custom kill facility where beef producers can work to develop more regional and specialty supply chains. With beef supplies in the U.S. at historic lows, it is certainly an interesting time to launch the venture.

Perhaps the more interesting are supply chain trends playing out in countries other than the United States.  In Brazil, for example, there are cases where small numbers of farmers who collectively plant hundreds of thousands of acres of oilseeds are obtaining funding for development of their own oilseed processing facilities.  In Africa, a fundamental challenge to agricultural development remains development of viable ‘smallholder supply chains.’

The overall picture is one of supply chains emerging in global markets with a greater variety of structures and systems than have characterized agrifood markets in the past.

 

 

March 2, 2012

Innovation in the Food and Agribusiness Sector

Posted by Kevin Kimle under Agribusiness, Innovation
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Innovation in the Food and Agribusiness Sector

I recently filled out a survey that the International Food and Agribusiness Management Association is conducting with McKinsey & Company to better understand where the global growth opportunities are in food and agribusiness across the value chain.  They are working to gain a broader perspective from industry experts, practitioners, and academics.  I’ll look forward to seeing the results of the survey mid-year.

The questions were timely for me in that I’m scheduled to give a talk to a group on the same topic in late March, so I had a chance to spend some time thinking about opportunities.  Three areas of significance for innovation in the global food and agribusiness sectors I addressed in response to the survey are below.

Technologies for greater productivity

Agriculture and the food industry face the challenge of producing more, which is nothing new, but the scale of production increases needs to pick up.  As global population moves over 9 billion around mid-century, food production needs to double.  Given crop land constraints, 70 percent or greater of this production increase is going to need to come from increased in productivity, getting more output for each unit of input.

Development and application of new technologies that increase productivity has been the story of agriculture for the last century, and certainly needs to be for the next century, even at a greater scale.  Where does it come from?  Plant and livestock genetics?  Mechanization?  Scale?  Process engineering?  Supply chain management?  Information technology?  All of the above in my estimation.

One concern about agricultural productivity is related to investment in basic agricultural research.  Basic research is carried out to increase understanding of fundamental principles.  It is not intended to yield immediate commercial benefits.  However, in the long term it is the basis for many commercial products and applied research.  Modern government, historically the important source of funds for basic research as a public good, is increasingly constrained by other budget priorities.

In 2009, for example, the U.S. Federal Government budgeted $57 billion for basic research, much of that going on to research institutions like universities.  Of that total, only $1.7 billion (3 percent) went to agriculture-related research through the U.S. Department of Agriculture.  The private sector will continue to drive innovation in agriculture and the food industry, but one wonders why the U.S. Federal Government spends little more than any one of the big plant sciences companies annually on agricultural research.  Monsanto, for example, will spend $1.4 billion on research and development in 2012.  Corporate R&D spending by its nature will be more applied and related to commercialization, but there needs to also be basic research that creates the pipeline of technologies that can be commercialized 10, 20 and 30 years in the future.

Food niche markets

The growth and emergence of niche markets in agriculture and the food industry is quite interesting and opens up huge doors for innovation and entrepreneurs.  There have, of course, always been niche markets in the food industry.  Whether ethnic tastes, regional specialties, trendy ingredients, or whatever, the way people eat changes through the course of time with fad and fashion emerging and fading.

What is happening today, however, is bigger and has more significant repercussions for the structure of agribusiness and the food industry.  Since the dawn of refrigeration the construction of mass marketing in the 1940s, much of agribusiness and the food industry in developed countries has been built around the idea of commoditization, creation of systems that deliver mass produced, largely undifferentiated products to consumers very efficiently and with rigorous safety standards.  I don’t use the term commoditization in a derogatory way.  The growth in productivity and efficiency in the U.S. agricultural and food sectors has enabled the proportion of disposable income spent by consumers on food in the U.S. to go down from almost 30 percent in the 1930s to almost 10 percent today, a good thing indeed.

What seems to be changing among a higher proportion of U.S. consumers today is a reawakening to a richer array of ingredients and sources of foodstuffs, a partial break away from the mass market if you will.  Income constraints are most certainly an issue for most food consumers, but the depth of demand for niche products is significant.  Demand for organic and ‘local’ foods approached $40 billion in 2011 in the U.S.  As similar trends take hold across the globe it represents both a challenge and opportunity for the industry.

Africa agricultural development

I believe the agricultural development needs of a single continent represent a singular challenge and opportunity, Africa.  For any number of reasons, agricultural and economic development has lagged in most African countries.  This needs to change, and it will.

The FAO projects that Africa population will increase from 1 billion today to 1.8 billion in 2050.  It is imperative that Africa greatly expand its agricultural production capacity, but there are significant obstacles, political, cultural, economic, to doing so, both from within Africa and from forces outside the continent.

In many countries in Africa today, more than 80 percent of the population is one drought away from starvation.  Yet in some of those same countries there is much potential for agricultural development.  I assert that in many countries agricultural development is the necessary foundation for economic development.  The basis for economic development and wealth creation is specialization of labor.  This cannot occur where the bulk of the population spends most days just trying to provide for their basic needs.  For example, a rural peasant woman in modern Malawi spend her time roughly as follows*:

  • 35 percent farming food
  • 33 percent cooking, doing laundry and cleaning
  • 17 percent fetching water
  • 5 percent collecting firewood
  • 9 percent other kinds of work, including paid employment

In the U.S., we can go to a grocery store and trade our labor (wages) for products resulting from the efforts of ten of thousands of others simply by what we place in a single grocery cart.  There are significant pockets of Africa where people spend a high proportion of their day’s labor simply working to feed themselves.  This is poverty.  Prosperity involves moving from self-sufficiency to interdependence on others who specialize in their labor and become more productive.  This process has to start in much of Africa with development of agriculture.  Bill Gates recently made remarks and wrote articles that get to the heart of matter related to use of modern agricultural technology.

In the next post I’ll write about trends that will create growth and business opportunities within the agricultural supply chain.

* Page 40. The Rational Optimist. Matt Ridley.

 

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