Problems and Potential in Row Crop Farming
Row crop farming has changed dramatically over the last 20 years, due in large part to automation and to fluctuations in market trends. This creates unique challenges for farmers who want to take advantage of improving technology and manage expenses in their day-to-day operations. Row crops are specific crops that are planted and cultivated on a seasonal basis. By looking at specific row crops — such as corn, wheat, and soy — we can sort expenses by category and better understand the biggest issues farmers face, and what trends cause them. By understanding trends, we can effectively invest in high impact companies that are leading the way in solving these problems.
While individual costs may differ from farmer to farmer, the above chart shows the general trend that material costs are the disproportionate expense for row crop farmers. This data comes from UC Davis cost studies, which interview one farmer for each crop.
The majority of row crop costs can be broken down into two categories: labor and material costs. Automation has greatly reduced labor costs for row crops, making labor a relatively small farming operations expense. Even if most farming vehicles are not autonomous at all, they allow a small number of workers to tend to larger tracts of land.
Compared to labor, material cost — which can include various forms of fertilizer, pesticides, land, irrigation, and seeds — is the source of most farmers’ headaches.
Other material costs, specifically fertilizer and seeds, have been subject to high volatility and price hikes by production companies over the past 15 years.
Phosphate, a popular fertilizer, saw prices spike in 2008, increasing 648% in the span of just two years. This put pressure on farmers to figure out more efficient means of applying the fertilizer to their crops. Since then, the cost of Phosphate has dropped to a more manageable price, meaning there’s less incentive for farmers to seek to save money on fertilizer. Still, the material cost of fertilizer is one of the largest expenses for most farmers dealing in row crops.
As for seed costs, a small number of companies like Monsanto dominate the market for genetically modified seeds in the U.S. The sheer cost and market dynamics associated with developing genetically modified seeds have forced price increases for key row crops — as much as 300% in the case of corn. This makes seed one of the fastest-growing expenses for farming row crops. In the absence of a new company that could disrupt the market with more affordable, genetically modified seeds, it’s hard to see this upward trend changing.
To combat rising capital costs, farmers have increasingly turned to outsourcing specific farm tasks. While the geographic spread of operations, extreme seasonality, and operational and capital intensity can make operating a farm services business a challenge, the need is great. But despite all of this, an increasing number of farmers are third-party services businesses for jobs like harvesting, agronomic analysis, transportation, and storage.
Simultaneously, a growing number of farms are operating under even more extreme cash rent structures. Here, landowners disassociate themselves from operations by outsourcing the entirety of farm management to an outside farmer. These arrangements give landowners more financial independence and farmers the ability to capitalize on upside potential without as much exposure to downside. This comes with potential oversight and risk management concerns for the farm owner, but gives landowners the ability to monetize land without worrying about management.
Given BSV’s interest in the potential for automation to continue disrupting and reshaping the agriculture industry for better efficiency, we spend a great deal of time studying trends like these to best understand the significant — but solvable — problems the farming community is facing. We’re eager to work with startups that are disrupting the market to address these challenges — if that’s you, please reach out!
Authored by John Mannes, investor at Basis Set Ventures