The end of another year is upon us, and in the spirit of reflecting, Matthew and Sarah sat down to talk about what they've learned from a year of investing, fundraising, advising, and podcasting. Our conversation was wide-ranging, but a few snippets seemed particularly relevant to share. If you want the whole thing or would rather listen, check out the full episode here. 

99 questions about the business model of ag retail

Sarah: In the crop protection space, 2022 was a massive year for those companies because fertilizer prices were crazy high because of the war and supply chains, and now we're seeing the shocks of that play out where oversupply in certain areas and destocking means a lot of those public companies are hurting. And given how agriculture works and the concentration of large incumbents– a bunch of big companies being under pressure cascades down to different innovators across the value chain.

For example, maybe it will start to put pressure on the system in terms of adoption of autonomy or other similar capabilities that are starting to emerge.

Matthew: Reactions to fertilizer prices has always been something that we felt was important, but maybe not from the ‘impact of shocks’ point of view.

The thing I wonder about is, how long will the memory of these price shocks last, and how much might that help lead to the second outcome, which is, affecting people's willingness to make investments to lower their emissions profile. It might be an outcome of their increased willingness to spend money to protect themselves from the price shocks, despite where prices are in this quarter and where they think they might be going next quarter.

Sarah: Technology, consolidation, and labor trends are absolutely playing out in ag retail, and we're seeing that overlaid with these cycles of chemical gluts and supply chain shocks– but how fast do these trends move? We've seen some companies cutting their digital strategies, and others investing more in digital. 

I think the question of who owns the customer will start to get really interesting here. As you have see-and-spray technology coming out and more biologicals proving out, plus pressures on environmental outcomes, these new technologies are changing the possible relationships one can have with a customer. And then you overlay all the scope three emissions and supply chain issues, and you have food companies and bulk handlers wanting to have relationships with farmers because they want credit for the climate outcomes. And so everyone's competing for margins in really different ways.

I think that’s going to continue to be true, especially as you overlay adaptation and resilience challenges, because it's not only carbon or sustainability pressures, you also have logistical challenges. If you grow this crop in this area, you have to harvest it faster than you ever have before, so you need different equipment and different service provision, different agronomy, different inputs. And so that requires different capabilities. And so who has that in their human brains or their AI brains? The shake up in that space is gonna continue, especially as the climate physically changes and we see the impacts on production and on supply chains. It's just an absolute confluence of these forces, and all the talent in those companies that are going to be needed to manage those things is going to continue to be at a premium.

Matthew: I’ve still got 99 questions about the business model of ag retail. We accept the reality that volumes of products have to go down, we can't lower emissions without that. So business models that are toll-based seem problematic in that regard.

We accept that how decisions are made are increasingly digitally-informed. AI is being trained to pass a standard agronomy skills test, and that’s interesting, but I don't think that's the right question. The much more interesting question is will an agronomist get better at managing AI models? And how much a part of their business might that become? It just feels inevitable: the incursion of those digital layers into stuff that ag retail and ag advice currently does is inexorable. 

The larger prediction question is: so what does that leave for them? In the kind of AI techno-optimist camp are the people who believe that there are no fewer jobs, there are just different jobs. And I think that almost has to be true in this scenario, not least because the importance of trust is no lower. In fact, it's possibly higher. And so that sounds really exciting. 

And if you were a forward-thinking, value-adder that was close to the farmer, you’ve got to be thinking about that. How is this a business opportunity for me? Because taking the perspective of, ‘I'm going to hang on to my toll margins on volume product’ just feels like it's one foot in the tar pit.

Diverging paths on GHG monitoring, accounting, and offsetting/insetting 

Sarah: There's still rooms where I feel like this is the frothiest, most exciting space, especially around carbon. And then other times, it seems everyone still thinks the challenges are 10 years away, and wonder what we’re even talking about. It’s not real to them. 

I've been in a couple of rooms this year where both perspectives were represented. There would be some ag industry folks in the room- producers and processors- and then a retailer, and the retailer was like, “we've done the work on this and we're going to spend the billions of dollars one way or another to incur the costs of climate impacts on the supply chain, and we would much rather do it proactively on the front foot than through like risks and losses and these kinds of things. And so we're absolutely going to have to change things in our supply chain– set targets and meet targets. And there's a bit of a window for carrots, premiums, and incentives, but the sticks are going to have to come because we've realized we're going to spend this money one way or the other, and we'd rather spend it in ways we control.”

And there were a lot of people in the room like, “Really? Because I didn't think any of this was happening. But we all sell our commodities to you.” 

Another related topic that we've been paying attention to this year is the separation of different greenhouse gasses. For example, should methane be treated differently from carbon or not? Should we measure it differently? 

And different countries are taking different approaches. New Zealand's got taxation and the EU has regulation and Australia is a bit more focused on incentives. But how will that play out when supply chains are really global? Where we've landed is that we absolutely must reduce methane emissions, and there are big economics on the line to do so. But scalable methane inhibition solutions really need productivity benefits-  a bottom line outcome and a sustainability outcome. Solutions to curb methane can’t just be funded through carbon credits.

So we've landed on genetics as a pathway, and made an investment there, which we're really excited about. 

Matthew: I'm going to pervert William Gibson and say that, ‘we're right about that but the level of our rightness is not equally distributed across the market.’ It's a head scratcher – the hurry up and slow down of people thinking about offsets, and others accepting the reality of their situation around insets. It's still confusing to me how there seem to be really quite separate bubbles of conversations going on there, and the lack of awareness of the conversations that are taking place in the other bubble. And the sort of belief in the uncorrelated additional revenue that a farmer can earn from generating offsets and continuing doing that whilst conducting their current business.

The changes are already underway where a proportion of any kind of ecosystem service credit that they might want to claim and get paid for elsewhere, very likely needs to be folded into their regular course of business. It will become a market access question. And that's especially true the more participants participate, right? Like when meat processors will really only accept pounds or kilos of live weight that is traceably close to net zero, then will you have any left over to sell any other way? The same would eventually have to be true of biodiversity impacts and other things. Because the only way the aggregator, miller, or manufacturer downstream is going to accept your product is because you can prove that you've done everything that is reasonable to get that number as low as it can possibly be. 

And I'm not saying that there's a categoric yes or no answer, but it's definitely not two separate worlds. So it's confusing to me how often I read stuff where it feels like they're just two separate conversations going on, and I think that's especially true of methane. 

And that’s another thing I'm really confused about: we just seem to not be moving very quickly on a problem that, for the livestock industries, just seems so existential. And while we’re broadening the set of solutions, the most likely thing is reduction in headcount. It confuses me that people aren't more worried about that.

At least two trends we’ll be watching in 2024

Matthew: I don't know for sure if it's in ‘24, but we’re going to get punched in the face by how little money we're spending on proper adaptation and resilience solutions. And it's not that the focus on emissions intensity and the focus on improved ecological outcomes aren't important. Of course, they're vitally important. But, there are some really hard times already taking place in Australia and a lot of farmers are undergoing a lot of very serious economic and personal stress and these are all going to be more frequent, not less frequent.

So it's scary in a way. But I remain hopeful because of the stuff that we and many other people are focusing on and finding ways to scale up. And hopefully the good outcome of that reality hitting us more directly and viscerally will be just willingness to spend more on bringing these solutions to a larger number of farmers sooner.

Sarah: It used to be, for a while, that if you're talking about impact, you can't talk about adaptation and resilience because there was this sense that you'd given up. Like if we go there, we're accepting that we're not going to mitigate or we're committing to not getting two degrees of warming.

And especially in agriculture, where we feel the reality of there's a fire, there's a flood, there's a drought, whatever, we just can't afford to think like that. It has to be both. So that's absolutely something we'll be spending time on. And I think there are technology solutions there and opportunities.

The other one I'm thinking a lot about is the kind of capital flows into technologies. There's been a lot more climate tech money, we’ve seen a real influx of that type of capital, yet in current market conditions, a pullback from deep tech. And a lot of food and ag solutions aren't just software. 

One world says more money, one world says less money, so how is that going to shake out? What I'm excited about is different kinds of capital to fund these solutions that are more tailored to how you unlock the impact and return. There’s revenue financing, there's different types of project finance, there's venture debt. Everyone can talk about how these are more or less suitable, but the diversification of the types of capital available to fund and scale these solutions, and the kind of players behind those sources of capital, is something I'm really excited about, and I think we'll see more of in the coming year.

‍Catch up on the full conversation on the podcast here.