The real reason test-tube food will win

Talk of alternative proteins, cultured meat, and artificial milk is all the rage. We all like to think the drivers behind this new way of growing food will be about sustainability and the environment. But the real reason will be money. It always is. Because as people, we are hard wired to survive by improving our own quality of life.

Consumer adoption won’t be a problem. Think about how many products on the supermarket shelves are already imitation foods. Whipped cream with no cream, vanilla essence with no vanilla, jam with no fruit. There are a lot. And the reason we buy them is they are cheap. Meat that came from a lab not a cow is closer to real food than much of our diet already is. And if it’s cheaper than a slice of peeled cow, middle to low incomes households will buy it. And they represent most consumers.

Supplier adoption

Why will corporations invest money into factories to grow the stuff? Because lab production is a better investment than farm production.

It used to be that young people would save a deposit, buy a small piece of land and go in to the business of farming. This was possible because land was cheap. Consequently, returns on the investment were good enough to pay the 20-year mortgage and pay for the family. Times have changed. Land is very expensive, and returns have diminished. To become your own farmer is no longer possible. It would take 100 years of saving a deposit from your farm-worker income to buy a small farm now, and small farms lack the necessary economies of scale to be viable anyway. The resulting situation is one of farms that are too expensive and large for newcomers to buy.

Why does the price of land keep going up? It’s much like housing. Banks love rising house prices. It increases their average deal size. If people can somehow pay the interest and sometimes principle, the bank makes money. In housing, this means both parents need full time jobs and overtime to make mortgage. In farming, it means production needs to increase.

And it has, bit by bit. Every year a new technology/fertiliser/feed/management style/drug/genetic/machinery is released to the market that makes an incremental gain in production. As the production or produce price goes up, so does the ability to repay debt. This pushes the land price up to a new equilibrium where a new buyer is just able to service a new level of debt. The cycle repeats.

I frequently hear farmers say about the price they just paid for a new farm that it was probably a bit too much, but in about 3 years values will have lifted and it will be ok. We see this happen repeatedly. In the past decade Dairy farms, Arable land, Kiwifruit orchard prices all soared on the back of temporary high commodity prices.

There are 2 critical problems with this model being able to sustain itself long-term:

1. Diminishing returns. There is only so much you can squeeze out of the soil and climate. We are approaching a peak where production gains per land area will not increase by an agreeable amount each year. The farm-gate commodity prices won’t be high enough to sustain the very high debt levels/land values.
2. There will be a shortage of buyer demand. Land prices are becoming so high that few people/entities can’t afford to buy. With R.O.I lingering at 1–6%, buyers need very large cash deposits.

This leads us back to why test-tube food will win. Land-based farming is too expensive for the next generation to enter, too unprofitable for small investment companies to enter, and investment size is too small for large investment companies ($1bn+) to bother with. The whole land-based farming model starts to de-laminate.

And what is the alternative? Lab grown food controlled by just a small number of multi-billion-dollar companies. Consider this: Very large investment companies want a piece of the worlds food supply. But there are no multi-billion-dollar investments on offer. Even mega-large farms or Conglomerates of several large farms are still under the $200M mark. And they are risky, volatile cashflow investments. Whereas purchasing a patent for growing food in a factory ticks all the boxes.

Financial Performance:

• A patent provided a strangle hold on global food production
• Ultra-large factories can be set up around the world at a cost of several billion dollars, so its the correct deal size
• Lower production costs than land based farming eliminates competitive risk
• Production can be ramped up or down overnight to suit demand and price fluctuations
• not dependant on adverse weather, disease outbreak, remote labour shortage or any of the multitude of risks traditional farming faces

Simplicity:

• The food is produced where the consumers are not where they aren’t (farms)
• While very likely to be GMO, will be able to positively claim no antibiotics, drenches, sprays. And no animals or environment were harmed in the making of this burger.
• Simple supply chain (pastoral supply chain is massively complex)
• It’s 10x better than the status quo

Where does this leave all the startups in the Agtech world?

That’s a tough one to answer. While we’re all racing around attempting to solve problems for farmers in the present-day, so they can make incremental production/profit increases, we’re failing to address problems the looming production revolution will cause farmers. For orchardists and arable growers, the day of reckoning is much further away than for vegetable and pastoral farmers.

Perhaps the real problems our Agtech products need to be solving are in helping vegetable and pastoral growers survive the titanic threat coming their way.

First published in April 2018.