Tired of being a price taker? Build a moat
- By: "Prime" Ag News
- Hay & Fodder News
- Jun 22, 2020
- 431 views
By Janette Barnard - Prime Future
See the original blog post here
USA - The livestock & poultry industry has spent decades driving cost out of animal production systems to increase profit. And we’ve done it well. Really well.
More pounds per animal. Less feed per pound of gain. Least cost feed formulation. Increased efficiency.
And yet, we see record high number of farm bankruptcies, near record low farm income, and volatile train wrecks of milk, live cattle and hog markets the last 6 months. All of which point to revenue challenges in animal agriculture.
It’s time to focus on enabling livestock producers to increase Revenue by getting out of the commodity game that’s ruled the industry, and differentiate.
Let’s look at The Who & How to make it happen. Note this is most pertinent to cattle, dairy, and independent hog producers.
Producers: Stop producing a commodity.
By definition, producers of commodity products are price-takers. The 1,200 lb steer JBS buys from Five Rivers is effectively the same as the 1,200 lb steer JBS buys from Cactus Feeders. And the hams in a combo that JBS sells are effectively the same as the hams in a combo that Tyson sells. The #2 yellow corn from one farmer is the same as #2 yellow corn from another farmer. There’s no distinguishing characteristics, no value added. And as long as this is the game you’re playing, you as a producer are completely subject to the whims of markets. And given the violent whims markets have had lately, why wouldn’t you choose to play a different game?
This essay by Tren Griffin breaks down the way Charlie Munger & Warren Buffet evaluate moats (competitive advantage) as they consider potential investments and evaluate 1) whether the company has a defensible moat, and 2) how sustainable that moat is. “If you have an exclusive supplier of a necessary input, that supplier controls your profits. It is wise to have multiple suppliers of any good or service, at least potentially.” The same is true for demand, if you are selling into one sales channel governed by a commodity market.
Griffin goes on, “The reality is that the nature of moats is not binary. Moats come in all varieties, from strong to weak. They are always in flux and vary on multiple dimensions. For example, some big moats are more brittle than others. Some moats protect valuable market segments and some do not. In other words, moats can be classified along a spectrum from strong to weak, valuable to non valuable and from big to small.”
Commodity production is a moatless existence governed by the ruthless dictatorship of the commodity market.
Producers: Build a moat.
“The underlying principle involved in moat creation and maintenance is simple: if you have too much supply of a good or service, price will drop to a point where there is no long-term industry profit above the company’s cost of capital.”
The alternative to producing a commodity, is to differentiate. To create distinct value for the customer. Value drivers can be grouped into 3 buckets: price, speed, or quality. Let’s set price aside since that is, by definition, the commodity game we’re trying to get out of. Which leaves speed and quality. Speed could also be thought of as convenience. Quality could be multiple aspects including the quality of the customer experience in addition to the quality of the product itself.
Another classic framework to think about potential dimensions to drive a moat around is the 4 P’s: price, place, promotion, product. Again, set aside price. Place – where & how does the customer buy the product? Promotion – how does the customer learn about the brand? What do they know about the brand, and the product? Product – how is your product better in some way than every other producers product? How it’s raised? How it’s packaged? How it’s processed? So many options.
Founders: Put tech to work on revenue.
Its time for a new wave of startups focused on increasing revenue and helping farmers claw their way out of the commodity cycle; this is where animal ag and tech should be colliding. Technology can be a massive point of leverage for producers building moats to increase revenue.
Look at the FarmTech Map by Seana Day of Better Food Ventures. The vast majority of startups have value propositions built around driving cost out of the system through some means of increased efficiency. I recently wrote about the lag of Precision Farming (health, nutrition, etc) in animal agriculture compared with crop production. But maybe that lag isn’t a bad thing. Precision technologies are about increasing efficiencies to the nth degree in order to ultimately reduce cost. But how much can precision production reduce cost in animal systems? Are we 5% away from a current finite minimum? 3%? Who knows. But we can chase the 1-4% cost reduction as a means to increase profit, to eke out a smidge more cost from the system in order to stay alive another day in the commodity game. OR, we can chase a 10-30% increase in revenue to increase profit by building differentiation into the business along any number of dimensions.
Here are a few non-ag examples of tech startups enabling revenue:
- Shopify – giving small businesses an online store front and a way to reach more customers.
- Stripe – enabling online payments so businesses (of all size) can do more sales / safer ecommerce transactions.
- Stitch Fix – while the rest of retail was being eaten by Amazon, Stitch Fix was exploding from startup to IPO by giving its customers an experience, a better way to buy, and in the process helping fashion brands sell more product. This product wasn’t for the masses, it was for the women who wanted to dress well without the hassle of shopping and styling.
Here are a few specific ways tech startups can support the moat constructing producer:
- Low cost, on farm processing
- Marketing mechanisms to reach consumers directly
- Tap into coordinated supply chains, like Agri Beef’s Snake River Farms brand
- Traceability & transparency claims in the supply chain (link the mechanism to facilitate this with the right pricing model & value capture through the supply chain – an equation that hasn’t been solved yet)
Not all of these buckets have market-ready tech solutions, but I hope they will soon because the point is that there’s a massive opportunity for startups to apply technology to REVENUE problems for animal producers, and not just value propositions designed to help producers reduce cost.
Here’s the caveat: This requires a 180* flip of the mental model, for both producers and founders. For producers accustomed to winning the commodity game by cost reduction and scale, it’s wildly different to evaluate a value proposition designed to increase producers’ revenue. What’s the control to compare against? This creates an additional challenge for founders selling a revenue based value proposition.
Animal agriculture has a unique opportunity for differentiation in a way that the majority of crop production does not. Meat and poultry aren’t ingredients, they are the main event of (most) meals! That central-to-the-plate distinction translates to margin opportunity for producers that can adapt their systems and processes to differentiated market opportunities.
Tired of being a price taker? Build a moat.