Article of the Day

Battle of the Statehouses – Wall Street Journal

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Iowa has long been the New Jersey of the Midwest with the nation’s highest corporate rate and a punishing 8.98% top income rate. Republicans this year made the Hawkeye State more competitive by putting the top income tax rate on a path to 6.5% by 2023. Over the next three years, the state’s 12% corporate rate is set to decline to 9.8%—assuming GOP Gov. Kim Reynolds isn’t defeated. Her Democratic opponent Fred Hubbell has warned President Trump’s trade brawls may compel him to hit pause on the tax cuts.

~ Wall Street Journal, Battle of the Statehouses, October 24, 2018

Economic Incentives and Growth

Election day nears and debate about tax policy has some prominence in both federal and state elections, at least in Iowa.

2018 in Iowa saw something I wasn’t sure I would experience, passage of tax reform legislation.  Since the 1990s I’ve had spirited discussions with a variety of elected officials about a tax structure for my home state that puts it at a disadvantage.  A sigh and shrug.  “Taxes are hard.”  So is life, but most of us get out of bed each morning and make a go of it.

Iowa has consistently ranked between 40th and 50th in various tax rankings.  It’s not a fact disconnected from those rankings that the state often ranks in the same place for business startups, venture capital investment, new manufacturing investment, etc.

The 2019 State Business Tax Climate Index from the Tax Foundation produced the data in the Wall Street Journal article.

2019 State Business Tax Climate Index

From the report: In 2018, Iowa legislators adopted a comprehensive tax reform package which will ultimately reduce both individual and corporate income tax rates and eliminate the state’s unusual provision of a deduction for federal income tax payments, subject to revenue availability. These changes are not in effect in 2018, but Iowa’s rankings can be expected to improve as reforms phase in over the next few years.

So movement in the right direction at least!

The White House in September was touting U.S. Census Bureau numbers on new business applications.  When a new business forms, it applied for an employer identification number from the Internal Revenue Service, so this can be tracked in a fairly real-time fashion.

New Business Applications by Quarter 2004 to 2018 United States

New Business Applications by Quarter 2004 to 2018 Iowa

The first quarter of 2018 there were more than 850,000 applications in the United States for EIN’s, the highest number, by FAR, in a long time.  Iowa actually tracked this trend with almost 6,000 applications at the same time, though it fell off from the fourth quarter of 2017 whereas the U.S. continued to shoot up.

How many of these corporations actually end up creating jobs is difficult to forecast early, however.  Some corporations, for example, may be formed as holding companies or ‘shell’ corporations created for tax purposes.  There is nothing wrong with this, but economists are interested in how many end up creating new economic activity, jobs and wealth.

Economists that monitor new business formation have feared for quite a while a long-term drop off in entrepreneurial startup activity.  The Kauffman Foundation, for example, has charted this trend and created constructive conversations about its roots and the implications.

Might we be seeing a return to historic levels of new business formation?  If so, this is good news indeed for economic growth.

The White House naturally enough touted tax and regulatory reform as the basis for growth.  Leaving the political arguments aside, at the heart of this notion is that incentives matter.

Economic growth results when people:

  • Produce/work
  • Save
  • Invest

Disincentives to these three activities will reduce economic growth.  Incentives for these activities will increase economic growth.  There are caveats, for course, but these represent the core drivers of economic growth.

Federal and Iowa tax policy are now set to provide stronger incentives for production, saving and investing.  Improved economic growth, all other things being equal, will be higher.

Of course other things are not always equal.  Trade policy, for example, has created significant disincentives in agriculture for production, saving and investment.

But maybe, just maybe, Iowa can leave behind references from the Wall Street Journal and others as the ‘New Jersey of the Midwest.’

Article of the Day

Brazil to Boost Grain & Meat Production by 30 Percent by 2028 – Reuters

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The trade dispute between the U.S. and China is potentially setting the stage for a decade-long impact on U.S. agriculture

~ Dave Miller, Iowa Farm Bureau

Five Insights from 2018 Business Beyond Boundaries Program

We had the privilege of hosting two groups of farm and ag business professionals from Brazil the last two weeks for the 2018 version of the Agricultural Entrepreneurship Initiative‘s Business Beyond Boundaries program, one cohort in central Iowa the other in California.  The program is about developing entrepreneurial skills and behaviors and exploration of innovation in agriculture.  Thanks to the rich assortment of entrepreneurs, experts and professionals that we meet there are a number of insights each of us takes from the program.

Five of these insights include the following.

  1. Brazil is positioned for continued growth in agricultural production potential – The untapped agricultural production potential of Brazil is very significant.  The Agriculture Minister predicts 30 percent growth in grain and meat production in ten years, but that may be too small.  Double cropping potential, undeveloped land, large farm sizes, and a number of other factors give Brazil significant upside production potential.
  2. Crop specialization in the future leans toward the U.S. in corn and Brazil in soybeans – Back in the 1990s I created an econometric model of the world of agriculture supply an demand 10 years in the future.  I recall that it predicted part of the significant growth in Brazil soybean production, though it fell short of the actual growth.  It also predicted emphasis in Brazil of soybean over corn production and in opposite in the U.S.  That prediction still remains the case.  A lot depends on trade flows, but the likelihood of divergence between corn and soybean acres in the U.S. ten years from now is significant.
  3. The challenge for global agriculture is more about quality than quantity – The often-cited challenge to agriculture of feeding more than 9 billion people is less significant than about how they will want to be fed.  The world can produce a lot more food, but can it meet the expectations of an increasingly choosy and discriminating customer base?  Tomorrow’s food consumer will have expectations that in many ways cannot be met by today’s agrifood supply chains.  Particularly in the U.S., there are significant opportunities to create new, non-commodity supply chains.
  4. Agricultural technology can spread quickly, but a culture of innovation and adoption does not – There are a number of intriguing agricultural technologies that will be marketed and tested in the next period of years, some with great value others more questionable.  Effective integration and adoption of technologies may be a challenge, however.  Creating a deeper culture of experimentation across the industry will be important.
  5. Consumer and technology trends point toward a more disaggregated agriculture – Parts of agricultural supply chains have tended to be controlled by relatively small number of large firms.  Fragmenting consumer markets and technologies that empower more direct coordination and connection of consumers to agricultural producers point to a much more decentralized, fragmented, disaggregated agriculture in the future.  More on this topic will be offered in a future post.

Thank you to the many hosts and contributors to the 2018 program!

Screen Shot 2018-07-30 at 12.53.13 PM

 

 

Article of the Day

Daron Acemoglu on technology and the future of work – MIT News

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In short, software is eating the world

~ Marc Andreessen 

Economics of a pre-tech versus a tech world

Much of my startup experience is in what today is classified as ‘agtech.’ And agtech is by all evidence a big deal.  There are many accelerator programs related to starting agtech businesses, funding of agtech startups has grown, etc.

Funding for agtech startups has increased significantly.  As tracked by AgFunder News, investment in agtech increased from about $150 million in 2010 to more than $800 million in 2016 and more than $500 million in 2017.

Stepping back from agtech for this post, I’d like to address the larger issue of just tech.

Technology is nothing new, of course, whether agriculture of any other industry.  What may be new is the speed and scale at which technology can shape new opportunities and disrupt existing businesses and industries.

The taxi industry is not new.  Smartphones are relatively new, however.  Put a smartphone in the hand of someone who wants a ride and in the car of someone who is willing to provide that ride and there are significant opportunities for businesses like Uber and Lyft.  There are also a host of issues arising from incumbent businesses fighting to preserve the past order.

Uber and Lyft for the taxi industry, Amazon for books initially and now retail, AirBnB for lodging, Google for media – technology enables new businesses to disrupt the existing order of industries. New businesses creating new competition for incumbents isn’t new, but the speed and scale that technology enables is new.

At the heart of the economics of technology is its ability to alter both average total cost and marginal cost.  And to alter them both significantly.

Recall (maybe from ECON 101) that prices and quantifies in a given market will be determined where marginal costs equal marginal revenue.  The general rule is that the firm maximizes profit by producing that quantity of output where marginal revenue equals marginal cost.

The chart below is a simple description of what a technology can do for a market when marginal costs and average total costs are decreased significantly.  The world for an existing business in the pre-tech world doesn’t change just a little.  The world changes completely.

Economics Pre-Tech and With Technology

Prices with technology are below the average total cost of pre-tech businesses.  Tech-enabled businesses operate at quantities (horizontal axis) and a scale not possible pre-technology.  Tech enabled businesses operate at prices not possible pre-technology.

Pre technology businesses are obliterated by tech enabled businesses.

While a simplified and extreme example, the chart depicts why information technology, the Internet, machine learning, sensing devices, artificial intelligence, and other technologies are such a big deal for many markets and industries.

Two tech businesses, Google and Facebook, now bring in more than one-fifth of global advertising revenue.  Digital advertising was really just in its infancy ten years ago, and now two businesses have more ad revenue than the global publishing business combined.

Did newspapers and magazines do something wrong?  Not really.  But the world changed.  Having scale for advertisers not that long ago meant being able to reach perhaps hundreds of thousands of potential customers by advertising with a large newspaper or magazine.  Today with Google and Facebook, you can reach billions.  Or if you have a more targeted and local business, you can do that too.

In the next post, I’ll dive deeper into agtech.

 

Building an Ecosystem for Agtech Startups

Excerpts from Kevin Kimle’s February 15, 2018 testimony to U.S. the House of Representatives Small Business Subcommittee on Agriculture, Energy, and Trade

Technology is nothing new, of course, whether in agriculture of any other industry.  What may be new is the speed and scale at which technology can shape new opportunities and disrupt existing businesses and industries. Agtech is by all indications important.  There are many accelerator programs related to starting agtech businesses, funding of agtech startups has grown, etc.

Funding for agtech startups has increased significantly.  As tracked by AgFunder News, investment in agtech increased from about $150 million in 2010 to more than $800 million in 2016 and more than $500 million in 2017.  Transactions like Monsanto buying Climate Corp in 2013 for $930 million or in 2017 DuPont Pioneer buying Granular for $300 million certainly got attention of investors, entrepreneurs and agricultural business professionals.

Both Climate and Granular were founded in Silicon Valley, the hub for tech startups and investing. Will there be a Climate or Granular type exit event for an agtech startup from the Heartland? Is there an ecosystem for agtech startups apart from Silicon Valley?

A 2017 report from M25 examined the Midwest and labeled it as the region that will give rise to the next crop of $1 billion-plus companies (Schulman 2017). From where does that observation arise? What’s going on in the Midwest?

Can the Midwest be a Hub for Agtech Entrepreneurship?

The Midwest is home to the greatest concentration of animal protein supply chain activity in the United States and early-stage agricultural technology activity in the Midwest is particularly relevant to these supply chains. For purposes of this paper, the Midwest is comprised of Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota and Wisconsin.

The Midwest has a strong concentration of public and private entities focused on developing agricultural technology. It is home to land grant public universities that provide a unique network of cutting-edge basic and agricultural science platforms. There is also a concentration of agricultural businesses engaged in technology development at many different levels. The Midwest is a catalyst of US agricultural innovation, knowledge transfer, and entrepreneurship development.

And yet there is much untapped and undeveloped potential for agtech entrepreneurship and investment-related activity.

Examples of geographic clusters of early-stage agricultural technology development in the Midwest include established public and private organizations that shape the environment for technology development, business development and entrepreneur/startup mentoring and support:

  • Des Moines/Ames, Iowa.
    • Multiple plant science agricultural business such as DuPont Pioneer and Stine Seed
    • Iowa State University – land grant public university.
    • Iowa State University Research Park – assistance and accessibility for early stage businesses
    • Iowa State University Agricultural Entrepreneurship Initiative – development program for agricultural entrepreneurs and agricultural innovation
    • Agriculture Startup Engine – investment platform for agtech startup businesses
    • Iowa AgriTech Accelerator – Mentor-driven business accelerator designed to foster innovation in the AgTech industry
    • Cultivation Corridor – Organization aiming to create a global center of excellence in agbioscience, biorenewables, biotech and advanced manufacturing
  • Omaha/Lincoln, Nebraska.
    • Home to agricultural businesses such as Green Plains Energy and Valmont
    • University of Nebraska – land grant public university
    • Nebraska Innovation Campus: support for early stage companies
    • Water for Food Institute – research institute for achieving food security with less pressure on water resources.
    • University of Nebraska Engler Agribusiness Entrepreneurship program – support and encourage entrepreneurship amongst students
  • Louis, Missouri.
    • Monsanto – plant science agricultural business
    • Bio-Research & Development Growth Park – bio-research facilities for emerging scientific enterprises
    • Danforth Plant Science Center – nonprofit scientific facility to increase understanding of plant biology
    • Yield Lab – agtech accelerator with a stated mission to sustainably increase the global food supply and reduce inputs to agricultural production and distribution
  • Twin Cities, Minnesota
    • University of Minnesota – land-grant public university
    • Home to agricultural and food businesses such as Cargill, General Mils, CHS, and Land O’Lakes.
    • Techstars Farm to Fork Accelerator – focused on the tech/digital side of food and agriculture from agtech, manufacturing and supply chains, to food safety, waste reduction and traceability.

Though agtech investing has risen significantly in the U.S. and entrepreneurial activity in the Midwest as evidenced by programs related to agtech has also increased, evidence of significantly higher venture capital funding in the Midwest is limited.

Venture deals in the United States have been most heavily concentrated in Silicon Valley, with up to 50 percent of total VC investment dollars in the country flowing to companies in northern California during some quarters. The Midwest remains underdeveloped relative to other parts of the United States in attracting venture capital funding. While venture capital invested in the Midwest rose from $1.8 billion in 2007 to $4.0 billion in 2017, this represented only 4.7% of the total in the U.S. in 2017, making the Midwest a poor performer in terms of per capita venture capital investing (National Venture Capital Association Data).

Early-stage business activity is difficult to track by its nature. Inventors, entrepreneurs, and investors advance projects without extensive public disclosure, and personal networks are an important means of communication and development. To provide a proxy for the state of early- stage agricultural innovation activity in the Midwest, an analysis was conducted of business plans developed by students at the Agricultural Entrepreneurship Initiative at Iowa State University compared to those tracked by AgFunder in 2016. The dataset offered here is a snapshot of early-stage business development activity, much of it related to agricultural technology.

AgTech Interst by Subsector

This analysis revealed a higher interest by ISU students in production agriculture oriented technologies than those tracked by AgFunder. Areas of activity such as animal health and management, decision support technologies, food science, energy efficiency, feed efficiency, sustainable production systems, environmental mitigation and manure management are more focused on the agricultural activities present in the Midwest.

Ecosystem Opportunities and Challenges

The common metaphor for fostering entrepreneurship as an economic development strategy is “ecosystem.” But what makes an ecosystem vibrant for entrepreneurial activity?

A Harvard Business Review article provided a true/false quiz on the topic (Isenberg 2014).

You know that you have a strong entrepreneurship ecosystem when there are more and more startups. FALSE

Offering financial incentives (e.g. angel investment tax credits) for early stage, risky investments in entrepreneurs clearly stimulates the entrepreneurship ecosystem. FALSE

In order to strengthen your regional entrepreneurship ecosystem, it is necessary to establish co-working spaces, incubators and the like. FALSE

According to entrepreneurs the top three challenges everywhere are access to talent, excessive bureaucracy, and scarce early stage capital. TRUE

Wanting a vibrant entrepreneurial ecosystem for agtech entrepreneurs in the Midwest and actually having one are different.

Specific challenges include the following.

  • Funding – The right money at the right time for each startup business is always a challenge. The good news is that there are many more sources for early-stage funds than 20 years ago. The popularity of shows such as Shark Tank has led to a proliferation of competitions that often have financial prizes, and is a cultural phenomenon that shouldn’t be discounted. There are pitch and business plan competitions, incubation and accelerator programs, a greater array of local and regional funds today than ever before.
  • Mentoring – Most startup success stories will also have stories about key mentors that provided key advice and perspective at key times.  Entrepreneurs break rules and make mistakes in an effort to drive their businesses forward. As with funding, mentoring programs are now much more common than 20 years ago. However, the most valuable mentors for entrepreneurs are entrepreneurs, and those can be difficult to find depending on where you live. For entrepreneurs working to build high-growth businesses, the best advice will come from those who have built their own high-growth businesses. But the number of individuals who have ‘done it’ is not high, especially in a region with lower population density.
  • Change-making culture – An element of support for entrepreneurs is cultural. A culture that is accepting of the risks and contrarian nature of new ideas is important. The friendly and egalitarian culture of the Midwest may at times be at odds with widespread celebration of entrepreneurial rule-breaking and risk-taking. There is an old saying in the Midwest that’s indicative of a culture that, at times, may not be conducive to entrepreneurs: “Nothing is punished in a small town like success.”
  • Agglomeration – Economists view agglomeration as an issue important in economic development in that firms and professionals from an industry are often located near to each other. This concept relates to the idea of economies of scale and network effects. As more firms in related fields of business cluster together, their costs of production may decline significantly (firms have competing multiple suppliers; bigger talent pool; greater specialization and division of labor result). Cities form and grow to exploit economies of agglomeration. But what about the Midwest and agriculture? By it’s nature, agriculture is spread out. The biggest concentration of agricultural production in the U.S. is in the middle of the continent while the highest populations densities are on the coasts. While it’s a good thing that cities and agriculture don’t on a large scale compete for land in the U.S., it also means that agricultural professionals and entrepreneurs don’t have the agglomeration affects of something like the tech industry in the Bay area of California.

On the other side of each of these challenges lie opportunities. Agtech investing and the popularization of it as a sector unto itself now results in websites, funds, conferences and other events that enable coordination, new relationships and other positive spillover affects.

For the agtech ecosystem in the Midwest to continue to become more vibrant three things are critical.

  1. Expose more young people to the concept that entrepreneurship is an option – Whether university programs or even high school programs, young people will benefit from being exposed to entrepreneurship. Fewer young people today grow up in families with farms and small businesses, so we need them to meet entrepreneurs and small business owners and have experiences that expose them to the idea that they can not only someday get a job, but also make a job.
  2. Continue to develop more forms of early-stage funding – The more sources of funding for early-stage startups, the richer array of startup businesses that will emerge. Competitive filters on funding, whether a pitch competition or review panels for government programs, are important not only to insure the best ideas rise to the top but also to institutionalize feedback loops. The more sources of early feedback for aspiring entrepreneurs, both positive and negative, the better off they will be.
  3. More Midwestern funds – The development of more professional funds in the region, whether angel, seed, venture, private equity, or whatever will benefit the region. Investors from one region and entrepreneurs from another can work sometimes, of course, but location matters. If there are more funds in the Midwest, there will be more investing in the Midwest.

Rural Vitality

Are there implications of agtech development for the economies in rural areas?

The adoption of agtech will result in a more productive and sustainable agriculture. The process of farm to fork will be more automated, connected, sensed, and traced. The ability to do and create new products, services and experiences will create opportunities that can work anywhere, including rural areas.

Will there be agtech startup businesses in rural areas? Yes. Agglomeration affects will still favor more urban environments for many agtech firms, but smaller towns that support entrepreneurs will result in startup activity. As one example, the Startup Factory program at Iowa State University has started to work with rural communities on running parallel programs for entrepreneurs in Ames and in those communities.

The most significant impact of entrepreneurs on rural economies, however, will come from Main Street businesses.   The entrepreneurs with high growth agtech businesses to have emerged from programs at the Iowa State University Agricultural Entrepreneurship Initiative are to be commended. But a much higher rate of new business formation and employment has come from the many alumni who have started a new livestock operation, crop farm, vegetable farm, seed business, trenching business, crop input supply business, etc. And many or most of these businesses are in rural areas. We estimate that twenty times more alumni have started these types of farms and businesses than have started higher risk/higher reward businesses.

A 2008 survey of Iowa State University alumni from 1982 to 2006 found that 15.8 percent had started at least one for-profit business (Jolly, Yu, Orazem, Kimle 2010). These businesses resulted in creation of 222,569 jobs. These companies had 2007 revenues of approximately $64 billion. For an indication of magnitude, note that Iowa gross domestic product was $135.7 billion in 2008.

Of the 222,569 jobs created at the businesses started by ISU alumni entrepreneurs, only 35,242 of those were created in the state of Iowa, 15.8 percent of the total. A higher proportion of total companies founded by alumni were located in Iowa (35 percent), but those businesses located outside Iowa had more jobs created per enterprise. Large metropolitan areas both in the Midwest (Minneapolis, Chicago, St. Louis, Kansas City) and outside the Midwest (Phoenix, Los Angeles, Dallas, Seattle, San Francisco) recorded multiple alumni starting businesses. A alumni base that was greater than 75 percent from the state of Iowa created 84 percent of jobs outside the state of Iowa.

There are likely multiple explanations for this. The top response for business location in the survey was ‘where I lived’ (82 percent ranking it as very important) indicating that alumni had already moved away from Iowa to pursue their careers when they started their entrepreneurial ventures. Rather than move back to their native state of Iowa, they located their business where they lived currently and had built their post-undergraduate career and lives. The first business start for alumni was on average 10 years after graduation.

The founding of entrepreneurial ventures by ISU alumni outside the state of Iowa may signify the ‘brain drain’ problem long cited in the Midwest. But the graduation period for this survey group, 1982 to 2006, had an extended period of economic distress in agriculture and other Iowa industries. Job opportunities for ISU graduates were outside of the state and even region and they settled and started their businesses elsewhere.

Will a future survey of 2007 to 2031 graduates show similar results? Preliminary indications are that no, a higher proportion of entrepreneurial activity will occur in Iowa and the Midwest. Certainly the attractiveness of a career in agriculture in 2018 compared to 1988 is higher based on enrollment at Colleges of Agriculture at Iowa State University and other universities also. More young people seeking careers in agriculture is likely positive for rural areas. 66.6 percent of 2015/16 ISU College of Agriculture and Life Sciences graduates, for example, accepted their first jobs in the state of Iowa.

More programs, competitions, and cultural celebrations of entrepreneurship are also positive for the economies of rural areas.

Shark tanks can work anywhere.

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References

Isenberg, Daniel. “What an Entrepreneurship Ecosystem Actually Is.” Harvard Business Review. May 12, 2014.

Jolly, Robert W., Li Yu, Peter F. Orazem, and Kevin Kimle. “Entrepreneurship and higher education: an overview of the Iowa State University alumni survey.” (2010).

Schulman, Katherine. “Agtech in the Midwest: Creating Fertile ground For the Next Unicorn.” M25 Group. 2017.

Article of the Day

What Americans can learn from other food cultures – ideas.ted.com

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There is no sincerer love than the love of food.

~ George Bernard Shaw 

Driver of Agriculture Megatrends – Culture

The third and last driver of agriculture megatrends I’ll address is culture.  How do changes in how food is communicated and celebrated in society impact the future shape of agriculture?

Components of Food Culture

The five components of food culture include the following.

  • Tradition – Foods, ingredients and cooking methods passed down from one generation to the next.
  • Geography/Natural Resources – The land, water and weather’s impact on food availability and distribution.
  • Cooking – The art, technology and craft of food preparation.
  • Food service – Businesses, institutions, and companies responsible for any meal prepared outside the home.
  • Affluence – The impact of disposable income on food consumption patterns.

First an example from food service.

An important issue in the modern world is expenditures for food at-home versus away-from-home.  In the United States, for example, consumers now spend about 50 percent of food dollars away-from-home.  Per meal expenses are higher away-from-home, so it is less than 50 percent of meals that are consumed away-from-home.  However, this dynamic explains the importance to agriculture of ingredient decisions by large food service businesses such as McDonalds.  Back in the 1980s, my Dad was absolutely convinced that the occasionally-offered McRib sandwich at McDonalds positively impacted pig prices when the sandwich was available.

Food Expenditures at Home and Away From Home United States

The U.S. Grains Council Food 2040 study predicts that the United States will move to 58 percent of food expenditures being away-from-home by 2040.  For China it predicts the same number will move from about 25 percent today to 65 percent in 2040.  For Japan, 75 percent!

Our ultimate customer in agriculture is the individual, but as their food decisions become more integrated into away-from-home experiences, those food services businesses become even more important.

What about food retailing?  The most important trends right now are 1) electronic commerce and 2) the growth of fresh format retailers.

Food Retailing Projections 2016 to 2020

Source: Willard Bishop. 2016 The Future of Food Retailing.

Twenty years after early entrepreneurial efforts to take food purchasing online mostly failed (WebVan), the Internet has begun to impact food retailing.  From Amazon to local grocer HyVee, electronic ordering and delivery of food is growing quickly.

An affluence-related cultural impactor is the link between health and wellness and food and nutrition.  This expresses itself in food consumption expenditures in many ways.  Specific products, for example, burst onto the market.  Coconut water sold less than $50 million in the U.S. ten years ago and now exceeds $500 million.

Product categories are also impacted.  Natural and organic food product sales in the U.S. have had compound annual growth of 10 percent and now account for more than $60 billion annually.

A sizable group of consumers in the U.S., and in many other countries, now bring a set of value judgements to food purchases that are difficult for many in production agriculture to understand.  One result is a frantic search by food companies to be able to make sustainability claims for their food products.  The challenge is that they need to reach back into production agriculture to get data to be able to make claims.  Do many want to pay more to agricultural producers if they can make sustainability claims?  Not right now, but the issue, and others arising from food culture, will not go away.

Article of the Day

In Chinese culture, fish symbolize abundance and prosperity. A growing middle class now earns the equivalent of about $25,000 in U.S. dollars annually, giving buyers disposable income to spend on such high-end food as salmon.

Salmon prospects bright among China’s growing middle class – Alaska Dispatch News

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With a population of more than 600 million people, an emerging middle class that is driving strong consumption, and a robust and resilient economy, Southeast Asia presents a compelling growth opportunity for Starbucks.

~ Howard Schultz 

Driver of Agriculture Megatrends – Economics

The second driver of agriculture megatrends I’ll address is economics.  How do changes in production, consumption and wealth creation impact the future shape of agriculture?

The first example of an economic driver of agriculture megatrends is per capita income.

In the previous post, I described how demographics impact food consumption and spending and some implication for the future.  An example of economics intersecting with demographics is per capita income.  Food demand may not have positive signals from demographics in China, for example, but it does have positive signals from economics if per capita income is growing.  In China, tens of thousands of consumers are entering the middle class every week.  As this happen, people are working for wages ands shifting food consumption from grow-your-own or carbohydrate-centric to purchased food and higher protein food choices.

Countries_by_GDP_(PPP)_Per_Capita_in_2015

Source: International Monetary Fund

Many economists describe the beginning of these middle class habits that impact food consumption patterns as somewhere between $5,000 and $10,000 annual income.  Globally, according to one estimate, 384,000 people per day join the middle class.  The number of global middle class participants at the end of 2016 numbered 3.2 billion.  This implies that the point of one-half of global population will likely be reached sometime around 2020. (Kharas 2017)

Food categories for upgrade by the new middle class especially impact proteins; meat, dairy, eggs, and alternative proteins such as fish.  These food products are more intensive to produce, so middle class growth in regions without developed agricultural supply chains will have significant impact.

What role will trade play in meeting the needs of the emerging global middle class?  Corn and soybeans are two significant inputs for protein production, for example, and carryover stocks figures imply that the United States currently has excess production capacity in both.  In 2016 the U.S. produced its first 15 billion bushel crop.  With continued yield increases and higher acreage it isn’t at all inconceivable to envision the first 20 billion bushel crop in the U.S.  But where will it be used?  Its use will need to be either through straight exports of corn, or through exports of products that were produced in the U.S. using corn as an input.

The second example of an economic driver of agriculture megatrends is energy.  The U.S. agriculture industry used nearly 800 trillion British thermal units (Btu) of energy in 2012, or about as much primary energy as the entire state of Utah (U.S. Energy Information Administration).  Energy is a major input for agriculture in many ways.

US Energy Production as a Share of Energy Consumption

What has changed in the last decade is the United States’ role in global energy production.  The shale revolution in particular has put the U.S. on track to be a net exporter of energy as opposed to a net importer.

Why does this matter to agriculture?  It matters because it means the price of energy relative to the rest of the world goes down.  The United States has many sources of comparative advantage in agricultural production, and you can now add energy to that list.

Of particular interest in next-generation agricultural production is the price of electricity.  Whether electric motors, indoor agriculture, or other electric powered agricultural technologies, electricity only becomes a more important input in tomorrow’s production agriculture and the U.S. advantage in this area is growing.

 

 

References:

Kharas, Homi. The Unprecedented Expansion of the Global Middle Class. February 2017. Brookings Institution Working Paper 100.

Video of the Day

How demographics impact the cost of capital – Peter Zeihan

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…because of demographic aging on a global scale, the United States is emerging as the only market over the long-term. 

In the United States, you have the market, the financial capital, the labor system, the consumption base, the energy—and you can project power out, rather than have to defend your own borders. That does not exist anywhere else on the planet, and is not going to exist anywhere else on the planet in the next fifty years.
~ Peter Zeihan (excerpts from Reasons the U.S. will Dominate the World Economy, Forbes) 

Driver of Food Megatrends – Demographics

I’ve given a number of talks in the last two years on megatrends that will determine the future shape of agriculture.  I build my analysis of megatrends on a foundation of three drivers.

  1. Demographics – Statistical data relating to the population and particular groups within it.
  2. Economics – Knowledge concerned with the production, consumption, and wealth creation.
  3. Culture – How human achievement is communicated and celebrated in society.

Framework for Megatrends

The fun part of these talks is the look-forward: How are megatrends expressing themselves in changes we see today, and how will they shape the agriculture of tomorrow.  Therefore, I typically don’t spend time elaborating on how I derive the megatrends I propose.

In the next three weeks, I’ll use this forum to elaborate briefly on demographics, economics, culture, and how each shapes impactful megatrends.  I’ll start with demographics.

I borrow heavily in my thinking about demographics from Peter Zeihan,  Zeihan is a geopolitical strategist who specializes in global energy, demographics and security. He analyzes the realities of geography and populations to deepen the understanding of how global politics impact markets and economic trends.  His two books, The Absent Superpower and The Accidental Superpower are provocative reads.  He, more or less, predicted Brexit and the election of Trump.

Zeihan’s analysis boils down to the idea that most of the developed world outside the United States, has reached it productive peak.  Mature workers, 45 to 65 years old, are at their productive peak and are in net savings mode.  For societies as a whole, this leads to ready supplies of capital and output growth.  But now that’s begun to shift as those workers turn to retirement and begin to hold on to and burn their savings and then take their production out of the marketplace.  Capital becomes more expensive and growth lags or sags.  There simply aren’t enough workers at younger demographics to make the world work the way it has for the last century.

Developed World Demography Without US 2030

Zeihan’s chart of demography of the developed world excluding the U.S. in 2030 tells the story.  There isn’t a bench in the younger demographics to replenish those retiring from the workforce.

China Demography 2040

The same holds true for China.  The one-child policy has in two generations moved China to one of the most rapidly aging populations in the world, important due to sheer numbers (1.4 billion people).

US Demography 2030

Meanwhile, U.S. demographics in 2030 are projected by Zeihan to be on a more sustainable track.  Higher birth rates than other developed countries along with immigration keeps the younger demographic groups recharged.

What about demographics and food?  Below is a table with a simplified view of how I analyze the impact of demographics on food choices, consumption and spending.

 

Demographics of Food

For the United States these demographic drivers hold a few clues as to current and future trends.

  • Trends related to health and wellness are linked closely to demographics.  A higher proportion of the population puts health concerns toward the top of their list when making food choices.  Growth in organic food sales is a manifestation of demographics, for example.
  • Many tag those born in the U.S. between 1980 and 2000 as millennials, and their food choices are notable for a couple reasons.  First because that demographic is big, having by some counts now surpassed the baby boomer demographic, counting somewhere between 75 and 80 million people.  So there are a lot of them.  Second, their food choices tend to mimic older demographics sooner than past generations.  Millennials make food choices earlier based on lifestyle and health, often in spite of budget constraints.  In a 2013 survey of U.S. consumers conducted by a student research group at Iowa State University, it found that Millennials made food choices based on health issues just as often as older demographics.

In a nutshell, food trends in the U.S. related to origin, production method, and health impact will not go away.  In fact, we are likely still in the early stages of those sorts of trends in consumer food demand.

For countries outside the United States, it’s a mixed bag.

  • Europe, Russia and most Eurasian countries are not growth markets from a demographic perspective.  The population is aging with birth rates much below death and net-migration in most countries so the amount of calories needed to support those populations is in decline.
  • In China the demographic picture is aging also, but that is offset by income growth.  However, the interplay of demographics and income growth makes future food consumption predictions really difficult to nail down.
  • Many countries across southeast and southern Asia as well as Sub-Saharan Africa have the most positive developing country demographics.  Food demand increases are a sure-thing and will be significant.  The significant question is where it will be produced.

In next week’s post I’ll address economics as a driver of food megatrends.