Why Food & Agriculture must embrace Digital Transformation

In late January 2019, Dr Vijayender Nalla, Founder at Agribusiness Academy, interviewed Kenneth Scott Zuckerberg, Senior Vice President at Wells Fargo.

We took this opportunity to gain some valuable insights from a thought leader on the digital transformation impacting food, agriculture and financial services.

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While Agri Tech has had considerable momentum over the last 5 years, you have been an advocate for digitization of technology for a much longer period. Could you tell us about your professional journey and your experience with technological transformation across the food and agribusiness value chain?

My experience researching agriculture began in an unusual way. I was first exposed to crop farming and crop insurance during the 1990s as a brokerage firm stock analyst covering the insurance industry. After transitioning to a buy-side analyst role at Lazard Asset Management in 2002, I then began learning about ‘farmland’ and ‘agriculture’ as an asset class. This happened in conjunction with conducting diligence on a wave of life insurance demutualization / initial public offering activity including John Hancock, Metropolitan Life, Mutual of New York, Principal Financial Group and Prudential Financial. Most if not all of these life insurers had significant agriculture exposure in the form of direct agriculture lending, farmland investing and/or timber and forestry holdings. Subsequently, I began researching the equipment sector which led me to John Deere, CNH Industrial and AGCO, three of the largest agriculture equipment and machinery companies in the world.

Your thesis on the current state of the food & agribusiness industry is interesting. Please tell us how you think about agriculture?

Thank you very much for being polite using the descriptive term “interesting”, Vijay; several of my colleagues, clients and friends might describe it as a bit controversial!

Let me start with some background:

First, over the last 50 years, production agriculture has, in my opinion, become a victim of its own success. The positive is that the American farmer and the farm inputs industry innovated and found a way to produce food cheaply. In crop farming, this occurred in the form of dramatic yield improvement via mechanization, the use of fertilizer, plant nutrients and crop protection chemicals and precision farming practices. Dairy and livestock farming also become more productive, with both technological advances and process improvements in milking and animal protein production.

However, monoculture (i.e. specializing in once segment of farming rather than being diversified) has taken a toll environmentally and, more recently, economically. In certain countries, subsidies, misaligned incentives and other factors have led to a ‘volume’ mentality rather than a pure bottom line profit motivation. I fully understand that farming as a lifestyle entails different goals, motivations and expectations than those of Wall Street, but tell me, how does one sustain the family farm legacy if they go bankrupt? Based on analysis that I did with my former partner, Sterling Liddell at Rabo AgriFinance, we found that the average U.S. crop farmer was operating at or below break-even between 2014 and 2017, and the situation hasn’t improved much since as commodity prices remain fundamentally lower than the early 2010s.

Second, in thinking about the food manufacturing and consumer industries, we Americans waste too much food, somewhere between 30% to 40% depending on the study sourced, across the value chain. Reducing food waste is a key way to feed those experiencing hunger today and efficiencies in food production and distribution will go a long way towards feeding an expanding global population.

If we keep eating, wasting and producing the way we are, we will literally run out of the physical resources that we need to produce food

There is something else that needs correcting. While many programs focus on helping lift people out of poverty into middle class lifestyles, the more wealth that people attain, the more food they waste. And the greater the food waste, the greater the negative impact the environment, water supplies and climate change and water. If we keep eating, wasting and producing the way we are, we will literally run out of the physical resources that we need to produce food. Crazy, right?

Third, bringing together points one and two, I conclude that the global food and agriculture sector can address its challenges through digital transformation and innovation. This is something I am particularly passionate about and intersects with my work with Wells Fargo’s Innovation Incubator (IN2) initiative. IN2 is a joint cooperation between Wells Fargo, NREL and the Donald Danforth Plant Science Center, funded with an eight figure charitable contribution from the Wells Fargo Foundation. IN2 promotes clean tech and agri-food technologies that promote sustainable food production, regenerative farming and reduced carbon impact.

That background is very interesting. With that, what is your thesis?

Food & Agriculture must embrace Digital Transformation and Vertical Integration to operate more sustainably and competitively. If not, the Food Value Chain might have a Sisyphus-like fate.

My thesis also has three parts and then a conclusion:

• The entire Food Value Chain is under growth and profit pressure.
• Consumer demand dynamics are changing and influencing new food concepts and entrants (such as Amazon)
• Climate change is worsening and production agriculture is a large contributor to it
• These factors plus technology are disrupting our customers’ business models
• The industry has responded though Mergers & Acquisitions; but this is expensive and does not address long-term challenges.

The conclusion is that F&A must embrace Digital Transformation and Vertical Integration to operate more sustainably and competitively. If not, the Food Value Chain might have a Sisyphus-like fate.

Please share your insights on the observations you list down that support your industry thesis?

Here are the supporting observations:

1. Consumer tastes are changing and younger, health and environmentally conscious consumers have tremendous influence on food product choices and ultimately what is purchased.

2. The food system is NOT broken per se; it just not profitable and the value chain is far too wide for each player to earn a fair economic return. Demographics and changing consumer preferences are disrupting existing brands, distribution channels and how people think about food.

3. The industry, whether it is crop inputs companies, food manufactures or grocery stores, has responded via mergers and acquisition in part as an alternative to internal R&D; this is fine in the short term but it is defensive and doesn’t solve the long-term structural challenges I see, especially at very high purchase multiples (of sales and EBITDA).

Previously, you also told me that your Agtech investment thesis incorporates the intersection of Farming, Finance and Technology. Could you explain this?

So as the aforementioned factors and information technology disrupt farming and food production, agriculture lenders will face additional risks as customer business models lose resilience. The good news is that the “new wave” of technological and analytical tools exist for agriculture that can be applied to banking.

Examples:

• Loan Underwriting / Servicing

Automate the collection of real time client financial data (income statement, cash flow statement, balance sheet)

• Risk Management / Monitoring

Integration of farmer operational and financial data into benchmarking

Automated farmland valuation

• Climate Risk Management

Weather monitoring and analysis to manage climate and property catastrophe risk

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Find out more about Agribusiness Academy at https://agribusiness.academy

Read more about Kenneth on the Agribusiness Academy website, or follow his work on Twitter or LinkedIn.