Unclaimed value between farm and fork

How upstream players could drastically increase their market cap and build a more sustainable food system

Did you enjoy the last piece of fruit you ate? Did you throw part of it away? The answer to these questions will remain a mystery to most of the people who played a role in getting it to you. The retailer can get an inkling from their loyalty program and sales data. The supplier won’t hear much from the retailer. What about the company that provided the fertilizer to the supplier? They will almost certainly stay in the dark.    

Last post, we explored an example where, by painstakingly tracking fruit through the whole supply chain, we uncovered that fruit quality varied significantly between two farms owned by the same supplier.  Even though all the fruit passed through the exact same supply chain, fruit from Farm 1 was much more likely to delight you. By the time it would have been in your home, it had higher sugar content, looked better, and lasted about 4 days longer.  When we investigated, we were surprised to find that each farm was using a slightly different mix of pre-harvest products.  This raises the question: who should get credit for the higher quality fruit?

Today, because of poor feedback in the value chain, it’s nearly impossible for upstream actors like fertilizer, seed, and technology companies to demonstrate the value they create beyond the farm gate.  As a result, they price lower than they could. Measuring full supply chain value could dramatically increase the market cap of these players. This would also create a more functional market, because upstream actors could begin to compete on the basis of important downstream factors like waste reduction and the consumer experience. 

Value increase and “metadata” decrease

In general, commodities get more expensive & less trackable as they move through the supply chain.  By the time a coffee bean or banana makes it onto a store shelf, it might cost 3-10x what it did back on the farm, its carbon footprint will be higher, and in most cases it will be near impossible to tell which farm it came from originally. 

The lack of traceability makes it hard for upstream actors to prove that they are differentiated beyond the farm gate. This leads to what renowned pricing strategists Simon & Kucher call the mini-vation:

“An innovation that, despite being the right product for the right market, is priced too low to achieve its full revenue potential. This is often because it is not enough of an innovation to warrant a higher price, which is caused by either a real or perceived lack of differentiation.

Fruit from Farm 1 truly was differentiated, but in normal supply chain operations this difference isn’t measurable, and therefore not perceivable.  

Better traceability leads to better value capture

Once full supply chain value becomes measurable, input companies can charge higher prices. Assume that the main thing that made fruit from  Farm 1 better was the fertilizer used, even though it’s almost never that simple. Today, the fertilizer company might charge the farmer a quarter of a cent pineapple, which might feel expensive to the farmer.

By the time the fruit gets to its destination market, it’s worth more. In the EU, 5-10% of pineapples are wasted in supermarkets, which might cost the retailer on average 4 cents per pineapple sold. Fruit from Farm 1 lasts 4 extra days, which could reasonably cut waste in half, so now instead of costing 4 cents per pineapple sold, waste costs just 2 cents per fruit. So, our fertilizer company charged 0.25 cents and created 2 cents in value, just on the basis of waste reduction. If we considered the improved eating experience, the value created would be much higher. 

Overall, our fertilizer company is offering the supply chain as a whole an outrageous 800% ROI. They could quadruple the amount they charge and still offer a 200% ROI. If this value capture was applied across the whole agricultural input industry, the overall market cap would 4x. 

A more responsive, sustainable market

It’s unlikely that all input companies would see the same growth. Products that create value consumers and retailers care about would outcompete those that don’t. Today, the input industry is left charging based on factors they can measure at the farm level, predominantly yield increases. If a given input creates a high yield crop with a terrible shelf life downstream, that’s ok. But, if downstream value – like waste reduction through shelf life extension – can be measured and attributed effectively, input companies will begin to compete to capture it.  This will bring a portion of the food system that has an immense amount of influence over what gets produced into better alignment with the needs of consumers and the planet. 

There are several breakthrough green technologies that make a difference at the farm level, but if positioned properly should have consumer value as well. Two examples are cow burp - reducing algae like Alga Biosciences and Rumin8 and on-farm biologicals like Puna Bio and Indigo Ag. Their potential market caps are undefined, and will be largely determined by how and where in the supply chain they decide to charge.  

We still lack much of  the infrastructure needed to prove downstream value, so these startups will likely face a tradeoff: try to capture the 2 cents of hard-to-prove value with consumers, or settle for the easier-to-prove quarter cent from the farmer. Each company’s situation will be different, but next week we discuss one approach to the consumer value component that I have seen work: 

Owning the best knowledge of the consumer as opposed to the consumer relationship itself.