Agribusiness


 

I do not think it is an exaggeration to say history is largely a history of inflation, usually inflations engineered by governments for the gain of governments.
~ Friedrich August von Hayek

Agriculture and Macroeconomic Risk

In the previous post, I wrote about commodity price volatility and its implications for agricultural commodities.  There is little at this time that points to anything but a continuing period of price volatility in commodities generally, and agricultural commodities in particular.

There is a history of the sort of bearish currency economic environments we find ourselves in currently.  They don’t typically end well for agriculture.  Before Ben Bernanke and Alan Greenspan were empowered to engineer ‘rescues’ of the world’s financial system, there were other central bankers and government officials that similarly impacted global economies.

A common theme in looking at historic periods of extreme commodity price volatility is that they occur during periods of high government spending and subsequent devaluations of currency through various policy decisions.   In today’s monetary policy environment an example is the Federal Reserve’s purchase of U.S. government bonds.  Further back in time, an example is the decision of the U.S. government to go off the gold standard in 1971.

I’ll provide historical perspective using corn prices.  Below is a chart of average corn prices received by farmers in the United States since 1866.  While corn prices vary from year to year based on changes in supply and demand, you’ll notice that substantial changes, or permanent changes in price levels. have occurred rarely, and appear to be correlated with significant monetary policy changes. Click on the chart for a larger view.

Between the Civil War and the First World War, corn prices traded largely between 30 and 60 cents/bushel.  The dollar’s value was pegged to gold, as were the currencies of other major economies.

This changed with the outbreak of war in 1914 in Europe.  Indebtedness increased for countries involved in the conflict and government finances deteriorated as spending on the war grew beyond all expectations.  The gold standard was abandoned by major economic powers, including the U.S., during the war.  Inflation ensued and commodity prices increased, including agricultural commodities.  Prices of outputs increased faster than inputs, with corn prices more than doubling to $1.45 per bushel in 1918.  Farmers in the U.S. enjoyed a period of prosperity that came to be known later as the ‘Parity Pricing’ era.  Farm groups would argue in later decades that government policies should aim to return farm prices to levels indexed to those during this time of farm prosperity.

The major monetary issue after the war was how to return to the gold standard, in particular whether to return to prewar values.  The U.S., England, and France each chose different paths (Germany its disastrous path also), but eventually each ended up defining their currencies in terms of gold.   The U.S. returned to gold at the $20.67 parity from before the war.  This move was particularly hard on farmers, as prices of grain and other farm products decreased faster than the cost of inputs.  The average price for corn received by farmers fell from $1.44/bu in 1919 to $0.54/bu in 1920.  A prosperous time in agriculture came quickly to an end, even while the rest of the U.S. economy quickly adjusted and went on to a decade-long period of growth.

The Roosevelt administration didn’t abandon the gold standard, but did devalue the dollar relative to gold in 1934.  At the same time U.S. corn prices rose from $0.49 in 1933 to $.80 in 1934.

It wasn’t until the end of World War II, however, that saw the next significant change in commodity prices.  At the end of the War the U.S. and other winning powers adopted what became known as the Bretton Woods Agreement, a gold/dollar standard.  Corn prices briefly rose to the $2/bushel level in 1947, but as adjustment to new dollar valuation settled in, corn prices moved into a range between $1.00 and $1.50 per bushel during the 1950s and 1960s.

In 1971 the Nixon administration abandoned the gold standard of $35/oz.  Government spending in the U.S. had risen rapidly since the mid 1960’s, a consequence of the Vietnam War and Great Society social program spending.   This put pressure on the existing dollar valuation in terms of gold, and the era of floating currency values began.   Corn prices, as well as other commodities like oil, rose in tandem with the decrease in the value of the dollar.  In 1974, the rise in commodity prices coincided with a surge in corn exports, and the average bushel of corn sold in the U.S. went for $3.02/bushel.   The U.S. suffered inflation through the rest of the 1970s, but new, higher trading ranges for commodity prices had been reached.  Corn traded largely between $2 and $3 per bushel until around late 2006.

What’s changed in terms of monetary policy in the last decade?  Corn has traded in the last two years in a huge range, between $4 and $8 per bushel.  Crude oil has traded largely above $80/barrel.

The macroeconomic environment since 2000 (bursting of the tech bubble) and 2001 (September 11) has been one of near-zero interest rates.  This has led to a weakening in the value of the dollar.  Commodities are priced in dollars, so the lower the value of the dollar, the higher the price of commodities.  In 2000, one dollar purchased 1/270th an ounce of gold and 28 pounds of corn.  In December 2011, one dollar purchases 1/1,700th an ounce of gold and 9 pounds of corn.

Some economists argue that dollar depreciation hasn’t been that severe and do so by noting the smaller changes in the value of the dollar relative to other currencies.  I argue that most currencies have depreciated alike, with most governmental monetary authorities following similar cheap currency/loose money formula for the last period of years.

Periods of high government spending are historically in tandem with periods of currency debasement.  It takes many forms, but the idea is that governments have an incentive to pay back debts and/or fund continued spending in lower valued currency.  Periods of war from history have the common thread of high government spending followed by currency manipulation and subsequent inflation.

War and defense  spending plays less of a role in government expenditures today, but social programs have driven government spending levels, as a proportion of GDP, to historically high levels along with government debt.  The current situation in Europe mirrors historic instances where high government spending leads to a series of unpleasant choices with currency devaluation coming in line before austerity.

The average price received by U.S. farmers for a bushel of corn in 2011 is pegged by the USDA at $5.90/bushel, an all-time high.  Prices have backed off in the last several months, but is there any reason to expect prices to retreat significantly?  It wouldn’t seem so, particularly during a week when the U.S. Federal Reserve agrees to provide dollar liquidity to European governments facing their own problems with unsustainable government spending.

If anything, corn appears cheap compared to other commodities, gold for instance.  Since 1980, it’s usually taken 100 to 200 bushels of corn to ‘buy’ an ounce of gold.  Today, that number is at about 350.  Perhaps gold it too high, but in the current environment, I think most spread traders would be long corn and short gold, betting on a narrowing of the spread.

My biggest concern related to macroeconomics and agriculture is related to my earlier assertion that these sort of events don’t typically end well for agriculture.  Periods of currency devaluation result in asset and commodity price inflation.  The front end of these times can often be positive for agriculture, particularly for producers, as prices rise faster than costs.  The back end of these times echo back to the 1920s, late 1940s, and early 1980s, not good times for agricultural producers.

In 2007 I had an agribusiness executive who was nearing retirement tell me this was the third promised ‘golden era’ of agriculture in his career.  The first in the 1970s, the second (very brief) in 1995, and now the third.  A combination of market reactions and political changes can eventually change the macroeconomic environment that shifts the prices by which we buy, sell, and invest in unexpected directions and magnitudes.  A significant shift in macroeconomics  promises a significant shift in the agricultural business environment as well.

Headlines and Articles, Nov 27

‘Secret’ farm bill faces uphill climb in 2012 – The Hill
Farmers torn over pros, cons of ethanol subsidy – Lafayette Journal & Courier
Proposed dairy policy changes stir discussion – Wall Street Journal
Agriculture’s Cassandra: McKinsey’s dire warning – WorldCrops.com
Farmer Says: Hitch Your Wagons to Some ‘Guar’ – Wall Street Journal
Entrepreneurs learn to tap angels, venture firms  – St. Louis Post-Dispatch
China to bolster agricultural trade with Africa – Independent Online
Why entrepreneurs matter more than innovators – Gallup Press

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Touch your customer, and you’re halfway there.  
~Estee Lauder

Who’s your customer?

I recently attended an event for young entrepreneurs.  I chatted with one aspiring entrepreneur, who explained his ideas for a premium beef business.  He explained that he has purchased the cows, but needs more capital to breed them and get the business off the ground.

I asked him a question I often pose to aspiring business people.  Who is your customer?

“People with money,” he replied.

“Who’s your customer,” I asked again.

“Doctors,” he said.  “They have money.”

“Dr. who?”

“I’ll have billboards.”

“Billboards?”

“You know,” he said.  “Billboards.  Doctors and other people with money will see my advertisements.  My Internet address will be on them, and they’ll order my beef.  No middleman.  Distributions centers…”

“What are there names?”

“Who,” he replied, puzzled.

“Your customers.”  What are their names?”

He just stared back at me…

You get the idea, but the most common weakness I see in business concepts in many aspiring entrepreneurs is their lack of understanding of their prospective customer base.  As a matter of fact, the most common word error on undergraduate papers in my classes is “costumers” rather than “customers.”  Microsoft Word spell-check doesn’t pick it up; right spelling but wrong word usage.  The students are creating businesses to serve those who make costumes?

Errors can occur from two directions.  One is that product designers, engineers, scientists and inventors miss connecting a  technology and solution to a problem of practical, economic consequence.  A solution is created for a problem no one cares about, or at least not enough to pay to solve.

Second are business people who understand how to close a sale, but miss the larger issues of customer value creation and passion.  They can sell ice to Eskimos, but maybe that isn’t a sustainable long term strategy for growing an enterprise.

Walter Isaacson’s biography of Steve Jobs captured the second view.  He writes about Jobs’ axiom that companies stagnate when sales people run the show.

“I have my own theory about why the decline happens at companies like IBM or Microsoft. The company does a great job, innovates and becomes a monopoly or close to it in some field, and then the quality of the product becomes less important. The product starts valuing the great salesmen, because they’re the ones who can move the needle on revenues, not the product engineers and designers. So the salespeople end up running the company.  I don’t think anything will change at Microsoft as long as Ballmer is running it.”

Aspiring entrepreneurs often miss the basic necessity of creating customer value, and more established companies forget the necessity of continually re-inventing their customer value proposition, otherwise known as innovation.  I have to wonder if agribusiness firms aren’t particularly susceptible to innovation myopia by nature of the structure of markets in our industry.  Agribusiness firms, as they grow, focus on industry structure, pricing systems, and margin structure.  How do we ramp up production capacity while squeezing out every possible cost from the value chain?

The nature of competitive markets, particularly those that are commodity-based, tends rightfully to be on per unit cost minimization.  Does this lack of structure for strategic innovation among agribusiness firms leave many companies in a bad position in today’s evolving agriculture and food sectors?

I find many interesting examples of customer change in markets for ‘alternative’ food products.  The USDA in the last month, for example, noted that spending the U.S.  for ‘local’ food products is about $5 billion annually.  Add this to the almost $30 billion in demand for organic food products in the U.S. and you have almost 5 percent of food spending in the U.S.

Many students in my classes, at least those who grew up on farms, as well as friends who work in agribusiness dismiss these markets as markets for hippies and yuppies.  There may be a somewhat counter-cultural feel to parts of these markets, but I find much entrepreneurial energy in them.  In particular, I find leading information on where markets for food products may be headed.  Big changes are afoot, and agribusiness firms that completely ignore these changes do  so at their own peril.

Michael Porter and Mark Kramer referred to an interesting play by Nestle on ‘local’ in the January issue of Harvard Business ReviewNespresso is one of Nestle’s fastest growing divisions, with annual growth rates of 30 percent for the last ten years.  Nespresso combines an espresso machine with single serve coffee capsule containing unique coffees from around the world.

Netspresso Capsules

The challenge for Nestle in growing this business has been development of a supply chain of specialized, high-quality coffees.  Coffee is produced largely by small farmers in impoverished countries in Latin America and Africa.  Rather than work through traditional coffee procurement channels, Nestle has built a system of localized procurement over the course of the last decade.

Nestle works intensely with smallholder coffee producers to improve genetics and cropping techniques, all while creating markets that reward quality.  While growing its supplies of high quality specialty coffees cost-effectively, Nestle was able to impact the livelihoods of smallholder farmers positively in ‘local’ market channels that span half the globe and represent an efficient, if non-traditional, supply chain.

The moment for a broader view of strategic innovation has come to agriculture and the food industry.  As host of factors is driving this, including the increasing segmentation of food markets occurring at the same time as the industry faces the challenge of how to produce more.  It is incumbent on agribusiness managers to push their organizations toward the new boundaries of market and customer evolution.

Talent Search for Agribusiness Firms

Economic times are good in agriculture, and that is reflected in the hiring among agribusiness firms.  With many or most positions being knowledge-based, the talent search for agribusiness firms becomes more important as people are the key resource.  So what does the pipeline for talent look like for agribusiness firms?  Does it come mostly from graduates of Colleges of Agriculture?  Does a college education focused on agriculture pay off for students with an interest and background in the industry?

The market for graduates of the College of Agriculture and Life Sciences at Iowa State University is very good.  This shows up in many ways.  For me personally, I see it through participation in placement of students in industry.  This can occur through connecting a student to an associate in industry as they explore career alternatives or through trying to match up someone from industry who is recruiting with a student that has interests, experiences, and talents that fit.

I also see it through the participation by almost 200 companies in the College of Agriculture and Life Sciences Career Day, where agribusiness firms compete for top talent in internship and full time positions.  Mike Gaul from Career Services continues to report placement for our students of almost 100 percent within six months of graduation.  A report by a number of universities show starting salaries for College of Agriculture graduates at $42,026 for Ag Business graduates, $38,139 for Ag Studies/Education graduates, $40.246 for Agronomy graduates, $43,953 for Food Science graduates, and $47,444 for Ag/Biosystems Engineering graduates, all good starting wages.

There are academic studies that estimate that the number of agricultural graduates qualified for management/business positions with agribusiness firms represents only 60 percent of the job openings.  Agribusiness firms turn to graduates of allied fields such as business to fill the remaining 40 percent of their job openings.   The reason may be an under-supply of agriculture graduates relative to demand, or alternatively, that non-agriculture graduates have skills that are not being developed as fully in traditional agriculture programs.  The former suggests a need for increased recruitment into traditional agriculture majors, while the latter suggests a need for changes in curricula and course content to improve the competencies of agricultural graduates.

Georgeanne Artz, Peter Orazem, and I published a paper examining this issue last week, Does the Jack of All Trades Hold the Winning Hand?: Comparing the Role of Specialized Versus General Skills in the Returns to an Agricultural Degree. We analyze a survey of Iowa State University alumni, those graduating between 1982 and 2006.

Contrary to perceptions, we find that most agriculture majors end up working outside the agriculture industry.  There are substantial returns to agriculture majors working in agriculture, but only when the firms are located in urban areas.  Some majors, most notably Animal Science and Agricultural Education and Studies, appear to have substantial sector-specific skills as measured by large pay gaps between jobs inside and outside agriculture.  Others, most notably Agricultural Business, earn a wage premium outside agriculture consistent with the development of skills that are broadly valued across sectors.  Importantly, differences in GPA of majors across the two sectors vary only by small amounts, suggesting that sectoral wage differences are due to the skills developed in the major and not to differences in the abilities of individuals across the agriculture and non-agriculture firms.

On average, non-agriculture majors earn about $13,000 more than agriculture majors.  In urban areas, there is no significant difference in average income between agriculture and non-agriculture sectors.  However, agriculture majors earn a substantial premium over non-agriculture majors in urban agricultural firms, while non-agricultural majors receive a significant premium over agriculture majors in non-agricultural sectors.

The pattern is markedly different in rural markets.  Salaries for all majors are over $18,000 less in rural markets.  Salaries in rural agricultural firms are even lower, averaging $30,000 less compared to their urban counterparts.  However, there is no premium paid to agriculture majors in rural agriculture firms.  Still, non-agricultural majors receive a $15,000 premium in rural non-agriculture sectors.  Clearly urban versus rural residence is a key factor in assessing the returns to agriculture majors overall and relative to other college majors.

The range of salaries across ag majors is remarkable.  Within agriculture, the highest average salaries go to Animal Science majors whose pay more than doubles the average in Agricultural Engineering and Plant Science.  Outside of agriculture, the top salaries in Agriculture Business are more than double those in Agriculture Engineering and Natural Resources.

Equally remarkable differences exist in the probability of finding employment in the agriculture industry.  Less than 4 percent of Food Science majors work in agriculture, barely more than the proportion of non-agriculture majors.   Meanwhile, over one-quarter of Plant Science and Agriculture Engineering majors take jobs in the agriculture sector.  Average earnings fall as the fraction employed in agriculture, suggesting that agricultural firms do have trouble competing for college talent at least on average.

There are substantial differences across majors in the average paid inside and outside of the agriculture industry.  The majors in the table above are listed in order of the size of the premium paid for working in agriculture.  The premium approaches 100 percent in animal science and exceeds 50 percent in Natural Resources.  However alumni in other majors earn a premium for working outside agriculture, the largest a 51 percent premium among Agricultural Business majors.

We also found large negative effects on earnings for alumni graduating during economic downturns.  Those who graduated with agriculture majors during the 1980s, a time of stress in the agricultural economy, were paid less than those who gradated later, and their salaries continued to lag over time.  More specialized agriculture majors graduating during the 1980s agriculture recession were disproportionately impacted, suggesting that having a narrowly focused major may be risky in that it makes it more difficult to adjust to changing economic circumstances.  Significant shifts in industry dynamics, apart from economic distress, may also represent a risk to having a more narrowly focused major.

Taken together, these findings have important implications for curriculum decisions in agricultural degree programs.  While teaching more specialized, industry-specific knowledge and skills can reward students who land jobs in agriculture, it can hurt the majority of majors who find work in other sectors.  Returns to development of specialized skills and knowledge while obtaining an undergraduate degree vary considerably.  In fact, this paper shows that there are inherent risks in specialization of undergraduate studies, whether those risks arise from career changes, sector-specific changes or shocks, or economic circumstances.

Our analysis suggests there is ample justification for continued emphasis on development of generalized skills for any major or program of study.  Examples of such innovations include writing intensive exercises across the curriculum; experiential learning using case studies, simulations, interaction with industry professionals, and projects from private companies; and incorporating oral reports and group projects with more traditional forms of instruction.

Economic Center of Gravity in Agriculture

There has been some discussion recently of a a report from Rabobank entitled “Rethinking the Food & Agriculture Supply Chain.”  (Example)  The world is entering at least a decade of agri-commodity scarcity, the author writes.

Historically it’s been dangerous to predict prolonged periods of commodity scarcity.  It happened in the 1970s during the inflationary period that in some ways is similar to today, and more briefly in the mid-1990s.  I had an agribusiness executive tell me a couple years ago that this was the third promised ‘golden era’ of agriculture in his career.  He said so with an ironic smile.

Leaving aside the issue of commodity prices, there is a very interesting dynamic in agriculture today.  That is the migration of the economic center of gravity toward the production side of the supply chain.

By economic center of gravity, I mean the part of the supply chain where significant influence in wielded on;

  • how transactions are conducted, and
  • how change is or is not introduced to the production, movement and transformation of commodities.

I’ve always been of a mind that in many parts of agriculture and the food industry the economic center of gravity was among processors.  This depends, of course, on the specific value chain you may reference.  Specific value chains for soybeans, pork, and beef, for example, are representative of markets where economies of scale lead to formation of a handful of  companies that process a significant proportion of industry output.  More than just market share, however, the decisions made at companies like Cargill, Con Agra, Bunge, Smithfield and ADM have a very significant influence on how business gets done in their various value/supply chains.

The USDA depicts the agrifood value chain in the graphic below.  It represents an accounting of each supply chain industry group’s contribution to the value of food purchases in the United States.  Farms and agribusinesses add 11.6 cents, food processing 18.6 cents, retail 13.6 cents, and food services 33.7 cents.

Long term trends have seen a greater share of value being added to food dollars spent by food service, retail, and processing.  This is a consequence of an increase in the amount of processed food consumed and the proportion of food dollars spent on meals away from home (about half).  Food processors have, by nature of their location in the supply chain, a significant impact on how commodities move from the farm to consumers.  They add value through changing commodity’s form and through delivering those transformed products to the right place at the right time.

My observation is that, at least in some industry contexts, there is at least a minor shift in economic influence away from processors toward production agriculture.  Economics dictates that returns flow to the most limited resource in a supply chain.  In today’s environment, the most limited resource is not processing capacity.  Rather it is production capacity of commodities.

Evidence of this trend pops up in a number of circumstances.

  • High and volatile commodity and food prices – The FAO’s food price index has come down since summer, but still sits at all-time highs, and has followed the roller coaster ride of commodity prices since 2006.  This is particularly a concern in developing countries where food expenditures take up a significant proportion of household income.
  • Land values – U.S.  average farm real estate values have increased, according to ERS data, by more than 40 percent since 2006.  In the heart of U.S. farm country, the rise is even more dramatic.  Illinois farm land has increased over 200 percent since 2004.  Iowa farm land has increased in value 34 percent since just last year.
  • Investments in land and production capacity in developing countries – Investment in land and agricultural production capacity is taking place in a big way in countries with remaining land resources, in South America, Africa, and to a lesser extent central Europe and the former Soviet Union.  Chinese agricultural investment has become an emerging feature in many parts of the world, for example.  Examples of agribusiness investments in production capacity in developing countries is ample also.  An example recently was Cargill’s purchase of Provimi.  There are all kinds of emerging issues related to investment in these countries, including Brazil’s most recent efforts to gain more control on land ownership.

How these issues will evolve is difficult to predict, but has significant strategic implications for agribusiness firms.  I have met executives here in the U.S. and abroad in the last year that are making important decisions regarding investment and innovation that are impacted by the need to increase agrifood production capacity.

Which assets to own?  Which to sell? The location/origin of these assets? Where to partner and where to build internal capabilities and capacity?  All these issues are important while keeping an eye on how to meet the demands of an increasingly segmented consumer marketplace.

‘A monumental shift’ in farm policy

The World Can Feed Itself

Man’s survival, from the time of Adam and Eve until the invention of agriculture, must have been precarious because of his inability to ensure his food supply.
– Norman Borlaug

The Wall Street Journal carried an article Labor Day weekend entitled “Can the World Still Feed Itself?” The reporter interviewed the Chairman of Nestle (the world’s largest food company), Peter Brabeck-Letmathe.  Mr. Brabeck-Letmathe rekindles the so-called food versus fuel debate, bemoaning the amount of grain and oilseed in the U.S. and Europe being used to make fuel.

His comments need to be understood from the perspective of a large food company.  Life at Nestle’s purchasing department was much easier in the days when surplus grain and oilseed supplies, supported by an assortment of government policies, led to very low prices for major ingredients.  This was the prevailing economic environment for decades.  Margins on branded products made from commodities such as sugar, coffee, corn syrup, flour, and milk were generally fat and predictable.  Today’s world is much more challenging for Nestle’s purchasing department.  Prices are higher for most commodities, and quite volatile.

Much has been written regarding the food versus fuel debate, very little of it informed.  In the case of ethanol use in the U.S., a great piece of analysis from Bruce Babcock and Jacinto Fabiosa was published recently.   Their work demonstrates that ethanol subsidies have contributed somewhat to high corn prices and higher food prices since 2005, but the impacts have been small.

What many or most critics of fuel production from grain and oilseeds typically miss entirely is the impact of market dynamics and innovation.  Individuals, companies, and markets don’t stand still in reaction to changing prices and markets.  Rather they adjust; sometimes quickly, other times more slowly.  But they will adjust, and often in ways unanticipated by most market participants.

As a simple example, the Agricultural Entrepreneurship Initiative is involved in a project reflecting adjustment to utilization of corn for ethanol.  We placed three interns this summer at Farmers Cooperative – Afton to work on a business plan for a new feed business.  This feed business will create feed for cattle from corn stover and grain processing by-products such as DDGs from ethanol plants.  The business concept is to replace expensive corn and alfalfa in cattle diets with cheaper ingredients and to extend diminishing pasture acreage through supplementation with the new feed products.

The student interns conducted market research, financial analysis and reviewed engineering processes for a new business the Cooperative is considering, with the support of ADM Alliance Nutrition.  Without giving away the specific results of the project, I can write that the analysis was very promising.

In a larger context, however, what I learned was that there is a lot going on the feed business to adjust to higher prices for feed ingredients like corn and soybean meal.  A common comment from industry experts involved in the project was that “we were lazy for years with cheap corn and soybeans in terms of experimenting with alternative feed ingredients.”

There’s been a lot of press on various projects to utilize corn stover for ethanol production, but it turns out there is also a lot going on related to use of corn stover for a much simpler processing ‘machine’, the ruminant animal.  Rather than just grazing cattle on corn stalks in the Fall, however, this involves the application of modern processing technology to make it a more scalable business.

Utilization of an under-valued resource in a new way or place is a classic form of innovation, and one that is being exercised as agriculture adjusts to a new market environment where a higher proportion of grain and oilseeds is utilized for fuel and other products.  Higher grain prices have created returns to crop farming not seen in decades, but it is mistake to assume that the only adjustment to those challenged by higher prices is to return to the pre-biofuels past.   Those involved in the feed and livestock business in the U.S. Midwest are adjusting, and I suspect that the purchasing department at Nestle will also.

A crisis is an opportunity riding the dangerous wind.
– Chinese Proverb

In late May/early June  I led a group of ISU faculty, students, and ag industry folks on a trip exploring entrepreneurial supply chains in China. The trip was provided funding the the USDA International Science and Education (ISE) Competitive Grants Program.

This was only my second trip to China, though I did some work in the 1990s on a team that developed Pioneer Hi-Bred’s entry into China.  As a side note, we visited the head office of Pioneer-China, and they now have 600 employees in-country.  It was an interesting way for me to close a loop on some work I did sixteen years ago!

There is tremendous discussion in agriculture today about opportunities, whether trade, investment, or business partnerships.

I was struck by the scale and speed of economic change.  China is able to absorb technology and business innovation decades in the making in a very short period of time.  In an environment of almost unlimited capital, this makes for rapid change.  For those traveling in Chinese cities, you just need to look up.  The number of cranes is unbelievable.  The eastern part of China is a massive construction zone.


Chinese Skyline: Cranes and Hazy Smog

The size of the country and its population magnifies the change.  At 1.4 billion people, China’s rounding number is more people than in the United States in total.

The implications of this rapid change for agriculture are the new demands placed on agriculture and the food industry for a more wealthy Chinese population.  While per capita income in China is moving up rapidly, it still is just around $7,000.  However, even a portion of 1.4 billion people moving up to middle class incomes involves an upgrade in diet and subsequent impacts on agricultural demand.

The chart below is dated, but depicts the general idea of dietary upgrade as per capita income changes.  The proportion of calories consumers derive from animal proteins (eggs, dairy, meat) grows as income moves higher increases.  Cheaper calories from starches (rice in China) give way to more expensive calories from eggs, milk, cheese, and meat products.  You will notice China is on the far left side of the chart (2002 data).

China faces significant constraints in its agricultural production capacity even as its population demands more, however.  China has approximately 300 million acres of arable land, covering 13 percent of its territory. This amounts to 0.67 acres per capita, less than 40 percent of the world per capita average, one-eighth the U.S. level, and one-half the Indian level.   China comprises 22 percent of the world total population, but has only 7 percent of all arable land.

China will apply resources to increase its agricultural productivity; certainly price incentives/high prices will motivate it.  The constraint in land resources, however, is fundamental and limits the agricultural production capacity of the country.

Another significant challenge is the structure of land holdings in China.  The average farmer in China is very small, with only about one third an acre per farmer.  This makes the application of large scale cropping technology very problematic.  One can’t farm gardens/smallholder plots with 200+ horsepower tractors equipped with the latest in precision farming technology.

The limits of production capacity of agriculture in China create a frontier of opportunity for U.S. agriculture.  Untapped agricultural production capacity in the U.S., from more abundant natural resources as well as acumen in agricultural technology, can and will play a significant role in meeting the demands of Chinese consumers.

The U.S. already ships bulk commodities to China, soybeans being the biggest export.  About half our soybeans from Iowa end up in China, for example.  China is importing a little U.S. corn, which will also likely increase.  Imports of higher value food and agricultural items are also likely to increase, along with technologies related to improved agricultural productivity.

Chinese cultural and political currents heavily favor self-sufficiency in agriculture and food.  However, resource constraints and comparative advantage favor trade flows with manufactured products flowing out of China and agricultural products flowing in.  It will be interesting to see how this dynamic evolves in the next decade.

To succeed, jump as quickly at opportunities as you do at conclusions.
– Benjamin Franklin

Marking some of the progress we’ve made at the Agricultural Entrepreneurship Initiative are the Iowa State University students who are working on their own startup companies.  It is interesting to watch them go through the same ups and downs familiar to any entrepreneur, with only occasional flashbacks to past midnight sweats.

One example that has made great progress is recent months is Scout Pro.  In a nutshell, Scout Pro’s software assists farmers, crop scouts, and agronomists in identification of pests using software on a tablet device like an iPad. The concept for the business was developed in a class I teach, the group won the Pappajohn statewide business plan competition this spring, with a more formal launch for their product occurring later this month at the Farm Progress show.

Michael Koenig, founder of the company, has done a great job pushing the concept forward.  His partner students, Stuart McCulloh and Holden Nyhus, have also worked to make their vision a reality.  The video they’ve posted on their website is really good stuff.

The first part of the entrepreneurial process I talk about with students is opportunity recognition, the ability to look at the world through an entrepreneurial lens and recognize economic opportunities.  The Scout Pro team has learned that there is indeed opportunity in the marketplace.  However, they are now learning that executing on that opportunity involves a lot of hard work.  Leveraging resources, team building, and outright execution have very quickly become the primary focus of their efforts.

There have been a spate of articles recently about the decline in entrepreneurship rates in general (Wall Street Journal example).  I will withhold discussion of that topic for another day, but congratulate one company on the progress they have made in creating a startup success.

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