Last week the Wall Street Journal published an article on the threat of farmers to Cargill and ADM. In many ways this is laughable. These grain merchants scale so far out weighs their customers (the farmers) that there is no foreseeable future in which they will come under threat. This kind of scale is salivated over in boardrooms across the country. Row crop agriculture is in many ways the addressable market ($189,139,447,000 in revenue in 2016) for new companies to attempt to disrupt. However, as has been discussed here before, the market penetration eludes most. Ultimately, rapid, nation-wide scale should not be a primary objective of any row crop agriculture business.*

First, let’s justify the laughable comment above. Archer Daniels Midland handled 22.7 million metric tons of corn and 34.7 million metric tons of oilseeds. So, that is about 894 million bushels of corn and 638 million bushels of soybeans (if half of the oilseeds are soybeans).

Now let’s look at production. A decent guess at total row crop acres in the United States would be 400 million. The largest grower of commodity crops in the United States is 200,000 acres. There are a few others who are around 100,000 acres. For argument’s sake let’s assume the top growers amount to 1,000,000 acres. If these growers produce 50% corn and 50% soybeans at the national average of 178.4 bushels of corn and 51.6 bushels of soybeans, then they produce 89 million bushels of corn total and 25.8 million bushels of soybeans total. This is 9% and 4% of ADM’s handled bushels per year. When you think that ADM shares the market with Bunge, Cargill, Consolidated Grain and Barge, and many other co-ops and direct delivery points like feed mills, their shared production is a minuscule number. By acreage these producers are 0.25% of the total in the US. There is effectively no large scale bargaining power for any producer against grain merchants.

Farmer Scale

So, if farmers do not pose a substantial threat to any grain merchant, then why does the WSJ article matter. Well, farmers can have a local advantage at any given elevator. Each elevator has to have a certain amount of grain flow through it to justify the expense of its existence in a certain area. In other words, the merchants have to cover their costs of operating in an area and large farmers are a way to take large chunks of that total grain flow. Therefore, they get a premium for their large quantities. However, this is a small amount of the total profits they are taking from any elevator. It is hard to even imagine the elevators consider these growers to be “loss leaders.”

However, the better question the article raises is, “does this matter for farmers?” In short, yes. Scale matters for farmers for many reasons. A local advantage with an elevator can mean better pricing for the producer and better margins for him than for his neighbors (aka competitors). He can justify higher rents than others around him, although higher rents should obviously be relative to his costs. Scale helps him here too though. With larger scale he can often bargain for better deals with inputs vendors and even with equipment dealers. Not only are his costs lower on acquiring equipment, but he can often have fewer pieces of equipment per acre. If a farmer needs 2.5 tractors per 5,000 acres, then someone with 10,000 can have 5 tractors while a 5,000 acre farmer may be forced to have 3. Not only does he require fewer pieces of equipment but also he is hurt less with any individual equipment problem. If one of the 3 tractors goes down, farmer 1 loses 33% of his capacity. If farmer 2 has a tractor go down, he loses 20%. This may seem fairly straightforward; however, the implications during peak periods of work are massive. This advantage compounds with size.

With this size advantage comes a higher fixed cost, though. Just for the additional 2.5 tractors farmer 2 has $1,000,00 of additional equipment on his balance sheet. Add on the other costs of operating at double the size of farmer 1 and the numbers escalate quickly. This growth cannot be had overnight.

Row crop agriculture requires lots of expensive assets, and any asset heavy business is difficult to scale. This is the first and most undervalued problem with high growth farming businesses. The problem is not unrecognized, however. Many new entrants hope to remain asset light, aggregate customers, create demand and profits in order to “share” with their customers. Much like Amazon is the perpetual low price machine these companies want to be the perpetual profit machine.

Landowner Scale

For landowners scale matters, but not as directly as with farmers. A landowner with a couple hundred acres can only rent to one farmer. She has severe concentration risk with her tenant and with her weather risk. A tenant could default mid year or a bad storm could knock out a crop. With greater acreage a landowner can rent to multiple tenants, have multiple crops on her land, or even own land in different locations that have completely different climate. When this landowner invests in a fund she diversifies herself even more. For institutional landowners paperwork, land improvements and tenant management can be handled internally allowing for greater oversight and improvement of the properties and likely greater returns. Many of these companies are at a national scale, but they have also been around for decades and have growth their assets slowly. However, as was mentioned in Land Values Justified, even these multi-billion dollar companies have a small footprint when viewed from the national scale.

Seeking Scale

The true masters of scale are the merchants, the equipment manufacturers and the inputs vendors. These companies have built infrastructure, sales pipelines, and supply chains that span the US. This is the scale that matters. It is what allows them to reach a massive customer base and provide high levels of service throughout the country.** Almost every new company in agriculture has tried to either recreate or tap into these pre-existing structures. For small companies tapping into an equipment dealer network or a vendor network can allow for much greater market penetration than would otherwise be possible. Large companies trying to create their own distribution are effectively trying to create the proverbial plane as it goes down the runway – not a promising venture when dealing with real world logistics and large volume products.

Why is this being done?

It is worth taking a minute to discuss the ideas prevalent among the silicon valley set. Often, brilliant people with hoards of money come into an industry in order to disrupt it, knowing little, but armed with a deep knowledge of the way things should work and do work in other industries make deep, influential change. Many even create a new subsection of an industry with new technology and ways of operating. Books like Zero to One chronicle these people and their tenacity. These changes can be impressive and life altering for many people’s everyday life.

Mike Maples in an interview with Tim Ferriss (transcript) gives an incredible metaphor on how he understands these companies and the change they bring about.

But like, I like the metaphor of surfing because you can be a skilled surfer. But you don’t really control surfing. Right? You can sort of control the board-ish, even if you’re good, you can only barely control it. But you can’t control the wave. I look at … To me the magic that animates the technology industry is a combination of Moore’s Law and Metcalf’s Law. I think we all benefit from the magic of Moore’s Law and Metcalf’s Law. It’s like, literally as powerful as the ocean waves below you when you surf. I look at it like the job of a start up founder is to surf a valid wave. The wave is usually bigger than the company. Right?…

We believe that those gathering waves are more powerful than any one company. The job of the tech entrepreneur is to leverage the awesome, massive power of all of the fury of the ocean beneath him of Moore’s Law and Metcalf’s Law. Just surf into the beach. Give Moore’s Law enough time, it will breach the advantage of any incumbent. Give Metcalf’s Law enough time, and it will create an insurmountable mode…. To me, the tech industry is magical. There’s been tulips in the past. There’s been the crash of 29. There’s been the real estate bubble. There’s bubbles all the time. There’s manias all the time. But tech is animated by two valid exponential forces that are super powerful. They are the asymmetric attack vector of the entrepreneur. They are the rock in David’s slingshot. I look for founders who have some type of fundamental contrarian insight about where a wave is about to gather. Then, hopefully they have the stuff to surf it. If they do, I’m like “Hey let’s rock. Unconditional love. Let’s go.”

Metcalf’s Law in this case simply means that the value of a network increases exponentially with each additional user. Moore’s Law, simplified, means that computing power doubles about every two years. So, when a network is created on top of computing power there is a double effect of growth – the ultimate tailwind or, in this case, wave.

The problem in agriculture is these two laws do not have the same foundation on which to build as they do in other industries. They have not had enough time to create the insurmountable mode.

While Moore’s law allows computers to attack complex problems and make connections at a faster rate, it depends upon the base layer of data in order to begin its computation. For a company like Facebook, where massive amounts of data are being uploaded daily, there can be impressive results in ability to understand its users in short order. Further, each user uploads or views a certain amount of items each time he or she logs in. The user is a clear and definite point to which Facebook can trace its data and profile that point against similar points. On a row crop farm there are far more variables and far fewer unique points to which the data can be traced. This is, again, simplified as data can be layered, smoothed and allocated over areas to make broader conclusions. However, what can not be simplified is the end result. In most cases the end result for which these companies get paid is yield. Yield data is poor at best. The harvesters give relative data about what has been harvested, but it is rarely linked back to any absolute data about how much crop has been delivered off any field much less point within a field. Without good production data in season data collection is rarely actionable. Other information like number of land sales, price of sale for land, or even quantity and type of inputs used are scarce throughout row crop agriculture. Without this information the computing power must start much farther back the exponential curve of its usefulness.

Metcalf’s law suffers from an altogether different problem with the same result. Farms are not connected. There are no widely used technologies which connect the businesses of farms. Most payments are made with a checkbook and credit account. So, the problem of getting them connected to something much more complex like an ERP (enterprise resource planning) system is a tall order. It is as if you had to teach someone to use a computer before they could use Facebook. This should not be seen as the farmer’s fault either. There have been few incremental improvements in new technology which have made the farmer’s life easier on which new technology can build. Again, the industry is much further up the curve than other industries; it is not ready for widespread use of systems and connectivity. To borrow from Maple’s analogy the wave is just starting to form; it cannot be surfed…yet.

Things will change. These laws will have an incredible effect on the industry, but these are early days. We are ending the opening and beginning the middle game of technology in agriculture.

If the power laws of technology won’t help the yield, what about making connections between people for services? Uber for X… grain delivery, combines, tractors, labor, parts delivery. This gets much closer to a tractable problem. However, here we run into the problem of scale again. There is a supply problem. Andrew Chen recently wrote about this problem on his website.

Rideshare is special. Acquiring a broad base of labor for driving is expensive, often $300+. But then they can get requests all day. You can work 20 hours and even 50 hours a week if you want. You continually need the driver app to find new customers

Where a lot of “Uber for x” companies fall down – valet parking, car washing, massages, etc – is that demand is often infrequent and there’s spikes at a few points in the day. What’s your supply side supposed to do the rest of the time?

In other words, “Uber for x” cos often have the same cost of acquisition and cost of labor as rideshare, but can’t fill their time with work as smoothly / profitably.

Uber for planting, harvesting and even grain trucking all fall into this category. There are spikes in need and they frequently occur at the same time nation wide. Even when the timing is different, the marketplace companies would have to convince massive amounts of individuals to move across the country in order to handle the supply need. There are individuals who do this now, but not in the quantities needed to justify a two sided marketplace for the service.

Where does scale work?

Massive scale works for companies without a product or service that has to be distributed physically. These products generally break up something complex or expensive. For instance, a Vanguard for grain sales could scale nationally. This product could be marketed to producers to give them the annual average grain price for their crops. This reduces marketing risk and allows farmers to focus on what they do best – grow as much crop as inexpensively as possible. This product would leave the basis open for growers to market, but that may be a tractable problem the company could solve down the road as well. There could be other financial instruments for borrowing money for land or for operating loans. New financial products can scale quickly and will be necessary as farmers outgrow their traditional forms of financing.

Scale for the rest of us

For most companies though the best option is to establish regional scale. Create a network of growers who use a product or service and extend from a solid base of users.

This is the crux of the problem with a nationally focused company, though. It needs to gain traction in one area in order to expand into another. However, in many cases, like that of Uber for X, supply is constrained within a region.

Therefore, for a company to succeed it must be have products and services which can be sold within a region. It must build reputation, assets, distribution, and employee skills and knowledge before venturing out into other regions. Reputation matters in agriculture and rapid change is uncommon. Growth in a sustainable way is key. Below is a little inspiration. It’s a heat map of Walmart’s growth over time. This is what growth should look like.

Uber (the original one) did this at first by concentrating on high population density cities and bridging out from there. However, with many products having just one sales cycle per year the growth can be slow. Any service which is not linked to the growing season will have better luck with its growth trajectory. However, there are simple services which could be offered and are needed. Parts delivery – have on-demand couriers who deliver parts to a field where work is being done. This would literally cut the time of delivery in half as someone would not have to go out to the store and come back. The courier pick up the part and deliver it from the store instead. Labor training – there are companies who train computer programmers and take a portion of their first few year’s salaries as payment. This could be done for high end farm jobs like planting or harvesting, which are more technical and for which good labor is hard to find. There are many problems to be solved.

Ultimately farming is not yet a business to which rapid scale lends itself. There are opportunities to grow a company at an impressive rate, but not by Silicon Valley standards. As Maple’s waves build opportunities the speed of change will accelerate. However, as he points out you have to give it enough time.

*For argument’s sake let’s say this means any business with under 15 years operating experience and more than $5,000,000 in assets.

** Despite a few justified complaints, a farmer can order seed and chemical have it delivered the same day. There are technicians who show up to fix tractor problems on a regular basis. There are many things which could be improved, but the system as it stands is impressive. This is true especially considering the large swaths of area this is done over.

Earlier this year Westchester Group Investment Management (WGIM) bought roughly 50,000 acres from Gaylon Lawrence, Jr. (Lawrence Group – LG). An article by Agri Investor suggests the property was bought for $4,500-$5,000 an acre. Further, it quotes a source saying rents in the area are $150 per acre. Even if WGIM can move rents to $200 an acre that puts cap rates at between 3% and 4.4%. For institutional buyers like WGIM and institutional sized buyers like LG (I’ll refer to both as institutions from here on) these transactions will continue to make sense, but farmers will continue to find deals despite being priced out of other transactions. For those in neither camp hoping to innovate, creating value by chipping away at inefficiency without outrunning the market where it stands will be the key.

Low Returns for everyone?

How can an investment at 3% be justified in a world where typical Venture capital returns are more like 20%? With commodities in a protracted cyclical downturn can rents be sustained at this level? How can farmers compete with funds who are willing to buy at these rates and at this scale?

The Two Land Markets

The row crop industry is highly inefficient – information remains highly localized. Land sales or tenant changes often remain unknown until months afterward. Further, details about leasing or transaction price remain speculative. The best information available for these numbers comes from land auctions and institutional land rent rolls. However, both of these sources are likely to be on the high side of the market.

Institutions deal in this space, the high side. While they may have individual transactions which are better than others, the majority of their purchases will be on the higher side of the market. They are willing to pay a premium for high quality land in large quantities because it works for their business model. Institutions have recently raised massive funds which they have to get deployed. The only way for them to put their capital to work is to purchase land in large quantities. The only way for them to purchase large quantities is at a premium.

With several large institutions all vying for a few big deals a year the underlying structure on the larger side of the land market has changed. A price floor has been created by the flow of money into the market. Instead of rents being the primary driver of price the availability of land has become the primary driver.

However, from an institutional perspective this is not all that unreasonable. A manager must put capital to work in order to have a business. An investor wants a respectable return but is also looking at a land investment in his or her larger portfolio. Investors purchase land not for VC type returns but because they believe it to be like “gold with a dividend” – a safe place to store large quantities of capital which is inversely correlated with other markets. Further, the continued appreciation in land values has made up for the low annual payment from the asset. Many of these institutions have long holding periods which allows them to take advantage of any short term downturns in land and have greater appreciation over time.

Farmers, smaller funds, and local buyers often play in a different market all together. These transactions often happen over coffee in farm offices. Prices are never known and do not show up in any national reporting. Sometimes deals are done through local banks, sometimes owner financed and even occasionally done in cash. In terms of transaction volume these dwarf the larger transactions.

While these land purchases may have better cap rates than those bought by larger institutions, it is unlikely they will be far greater. However, for a farmer there are greater rewards for owning land. By owning the land she farms a farmer will have much greater returns over time by gaining the full upside of returns in good years and not sharing in upside with her landlord. Furthermore, there are times when a landowner may want a farmer to plant a crop that maximizes revenue (and rent to the landowner) instead of profit to the farm. A farmer can ensure the greatest level of profit by owning the land herself.

Aside from farm profitability a farmer’s future income benefits from owning land. Frequently, farmers retirement plan hinges on the land they purchase throughout their careers. They and their families depend on the rent generated from the land after they retire. Tax advantages through 1031 exchanges are available to individuals selling and purchasing new land and farmers take advantage of this frequently. They also have tax benefits such as being able to expense land improvements through their farming operation, thus lowering taxable profit to their farming operation while making capital improvements to the asset. Yet another advantage is being able to use the land as collateral for debt. Country banks are used to dealing with land as collateral and farmers are used to seeing it as a way to leverage their ability to expand their operations.

The size of these two markets is documented in a 2014 report by the USDA. While the data is a little old, it is still informative, and a few of their charts are worth highlighting to illustrate a few points.

While the chart above includes pasture land, it shows the amount of land owned by non-operator landlords. Of the 10% that is owned by corporations, trusts, and other owners, an even smaller fraction is owned by institutions. Corporations and trusts are often used by farmers to hold land intact when passing on to the next generation.

Slightly over half of all farmland is inherited or purchased from a relative. The remaining ~49% (it seems USDA may have some issues adding to 100%) remains for farmers, smaller investors, and institutions who purchase land from nonrelatives. If less than 10% of all land is owned by institutions, odds are low that they are purchasing much more than 20% of new land which comes to market in a given year. The transaction volume purchased by institutions is likely a fraction of that number.

Pricing

Pricing farmland much like most real estate is largely based on comparable transactions. Institutions have the best data on this. While they see a fraction of all transactions in the market they see far more than any individual. This is both advantageous and disadvantageous for the individual in the land market.

A farmer purchasing from an individual may have experience developing property and understand into what an undeveloped piece of land can be transformed. He may be able to get greater value out of the property by purchasing it at what it is today and turning it into something of much greater value to him or to institutions in later years. On the other hand, he may not understand the dynamics of how an institution works internally. If an institution does not believe there is a strong pool of tenants or does not have a strong land management infrastructure in his area, it may not pay top price that it would in other areas.

An institution bases its purchases on what it believes it can get out of the land in the long term. While it may accept low cap rates, it does understand what the potential cap rate and long term value of a property is. Institutions purchase assets where they believe that rent can be raised over time.

A Tricks of the Trade

Frequently a farmer will accept a higher price for his land and rent it back at a high rent. For the institution this locks in a high cap rate for the first few years, a basis for rent going forward, and a comp to value the rest of the portfolio. The farmer can take the profit from his land to be taxed as an investment and lower the profits from his farming operation over the last few years of his career to negate any tax liabilities he may have built up over his career.

Changes are a’comin’

In recent years land funds have grown bigger and bigger. This is great for managers of land funds who are able to collect substantial fees from the arrangement and still provide the services for which their clients pay them. However, investors are becoming more averse to large fees and interested in more investment. The market will likely demand to smaller funds and direct ownership of land for investors through separately managed accounts.

With direct ownership will come a greater interest in financial and operational reporting to investors for the individual asset. Institutions have some internal metrics but are unlikely to have the same quality of data as the investor’s managers of other assets. Larger amounts of data and transparency will be required not only from individual ownership but also as the industry continues to mature with investors and more money flows into the space. This desire for transparency will gradually be requested by individuals who are absentee landlords as well. What remains to be seen is whether the landowner, farmer or land manager will be responsible for the cost of collecting the data which will form the basis of the reports.

Problems Now and Later

Farmland is unlikely to switch to majority institutional ownership in the next 5, 10 or even 15 years. However, as the market transfers greater information about the asset will be required. This means that the inefficiency of the market will change gradually. In the meantime inefficient pricing will continue to be a burden for most participants.

This is true not only for what a property sells but also for what it can produce. There are many companies being formed and funded to try to understand what land has the potential to yield. However, we are a long way from knowing the potential of any individual asset. What may be possible is understanding what a tenant can produce on a given property with certain characteristics. However, farmers often guard their production histories or do not know the exact production on any given field. Getting this data from tenants is both burdensome and not the industry standard.

Land management and oversight by institutions and by third parties for other individuals will need greater transparency. It is impossible for any individual land manager to be on each of his properties every day. He cannot know if a property is being managed as he would expect. While in the majority of cases tenant farmer relationships are honest, there are cases where bushels or pounds of a crop produced by a tenant is reported incorrectly both by mistake and on purpose. This takes rent from landlords. There is no way for a manager to keep track of this.

Farm management in general is murky. There are few facts available to verify and it is highly reliant on farmers to be honest and managers to anticipate where problems may occur. While land manager performance itself is not to blame, the system itself is not up to investment standards in other industries.

Opportunities

Land investment today is one of the greatest opportunities for an institutional investor and a farmer or individual investor, because it is the most widely accepted form of farm investment. For the institution it is where the largest amount of money will be made in the near term. More and more investors are interested in the stability of owning US farmland.

For the smaller investor and farmer the fact that the market is inefficient offers opportunities for finding mispriced assets. A person with experience and connections can find land which will allow for well above average returns.

Even greater opportunity exists to aggregate tracts of property to sell to an institution. As mentioned before, an institution would rather purchase in large quantities to reduce the amount of time and due diligence required to deploy capital. This does require significant amounts of capital, but not as much as many institutions need to deploy. There is a middle ground here for smaller funds or individuals with the ability to aggregate a portfolio of properties.

For the investors or entrepreneurs interested in the industry but not owning land directly opportunities exist to provide transparency in the market. There have been a few groups to try this by creating two sided networks of buyers and sellers or to create platforms to have farmers keep track of data and sell it to others. These solutions are too far from where the market stands currently. The greater opportunities exist around helping with the process as it stands today. There is not only little information on pricing, but also there is very little about the transaction process. There is room to educate sellers on what will be one of the largest transactions of their lives. There is room to help them allocate the funds after having sold the land. There is room to help them understand different methods of selling their assets and what are the benefits of each transaction type and counter party. There is also opportunity to help land managers work with tenants by creating reporting standards and methods around the land and tenant, by providing a way for tenants to be transparent with their managers, and by decreasing the amount of work a manager must do on an individual property so he can manage greater amounts of land.

Farmland investment can seem out of reach for new entrants, but there are plenty of opportunities in which to invest both directly and tangentially.

Investment in Ag tech last year was more than the previous two years combined according to a Financial Times article written earlier this year, but the lack of meaningful exits and the lack of impact on the industry should concern all involved. Many new, ag tech companies claim they want to change the industry but have little idea about how it works from the start. Different business models and financial structures would go a long way towards allowing some of these good ideas to make a real impact on the farms, farmers and investors’ wallets.

Last year $700m was spent on investments in ag tech on deals including data aggregation platforms, robots for scouting fields or spraying weeds, seed microbe treatment, and satellite imagery. After the 2013 purchase of Climate Corporation by Monsanto for $1 billion and high farm profitability had farmers looking for new ways to produce more with record commodity prices, new businesses began popping up left and right. The first notable exits from this pile on have occurred in the last year including Granular for $300 million and Blue River Technology for $305 million. Money has also been flooding into ag land and infrastructure investment. Even with only a few successful investments and exits there continues to be a rush to create new businesses in the industry.

Unfortunately, all of this cash flooding the market has made little difference to how row crop farms actually work. There has been little to compare to the effectiveness of the green revolution or even something more modern like GPS guidance on tractors. Ag tech conferences and accelerators openly discuss the problem of market penetration and adoption. There are few sales channels and fewer customers willing to try something new. The low rate of adoption does not make sense given the amount of money being thrown into new ideas. Why?

The lack of depth of industry knowledge stops many companies before they even get started. This is easiest to see where companies bring solutions in search of a problems. Soil moisture sensors are a clear example of this. These sensors, in theory, allow a farm to use less water by only irrigating when needed. They are incredibly sensitive to readings they take, and they provide insight into how much water is available for the nearby plants to use at any given time. Unfortunately, the readings they provide are not representative of a decision making unit. Only one sensor provides data on a small location in a very large field often representing an entire collection of fields which comprise a decision making unit. In other words, one must decide to irrigate several hundred acres based on the data from a couple square feet. Obviously, this does not create a statistically relevant data. To put out many sensors is both time and capital intensive. If those problems were overcome, there is another the issue with output from the products available. The customer receives a series of line graphs representing moisture in a specialized unit (how much tension is in the soil or how much electric conductivity) on the y-axis and time on the x-axis with various depths represented by different colored lines. To review several of these graphs several times a week and decide when is the right time to water is no small task. Additionally, the company is asking a farmer to acquire new knowledge in data interpretation in order to be able to make the decision. A better product should give the customer two things.

1. A date when irrigation should start (within 3 days)
2. An alert if the available water decreases faster than projected.

This is one example of many where companies fail to understand how their product works for the customer. Understanding what really happens on a row crop farm would go a long way toward creating more revolutionary companies.

New ag-tech companies are asking too much of their customers. In a world where farmers are stretched thin new technologies often ask a farmer to do more work. Work ordering systems are a great example. These systems have the potential to be the most significant improvement in the way businesses work in the last 10 years. They allow the collection of data that has allowed other industries to become far more productive but remained unavailable to farmers. This operational data collection will allow a farm to be managed on benchmarks and metrics on a daily basis. For the first time farms have the ability to understand how well the daily work is executed. These systems are the first step in greater understanding of the business of a farm. Also, they help create a better means of communication and verification across an operation. However, the extra work required to get everything right in such a system is at least an extra 10-15 hours of work on a 5000 acre operation per week. A farmer must not only do this work but understand how the tool will fit into his organization as a whole, use it effectively, and be able to make decisions from it when necessary. That said if he can do this work he will have a greater understanding than 99% of his competitors of when and why his business is or is not successful. Unfortunately, most work ordering systems are incredibly complicated, poorly explained and difficult to maintain. These products need to be easier to use and to understand how they fit into a well functioning business. Great products need to fit the market by reducing the amount complexity in a business. They do this by reducing the actions required to complete a process or by simplifying decision making. A new seed treatment, chemical or spray nozzle has a better opportunity of finding traction than a work order management app because the value proposition is much easier to understand. The more simple the user experience and output the greater the attractiveness to busy people being asked to complete an additional task.

Companies are further impeded from progress by the incentive structure of their capital. Even if a tool had the perfect product-market fit, it would take years for it to achieve even 40% market penetration. Having one sales cycle a year keeps growth at a snail’s pace. On the other hand, the money being raised for these companies is used to holding periods of 5 years or less in a company. It is extremely difficult for a company in agriculture to make significant progress in a 3-5 year time frame. The need to create returns for investors keeps companies from building a product that changes how farming works and focuses them on gaining market share with sales tactics more than creating real value.

There are a few solutions which will go a long way to improving some of these issues. Most of them involve aligning incentives with the farmer or business owner.

The fastest way to speed the learning process is to find someone who understands the industry and its problems. While it may seem that would be easy, finding a guide who can see the forest despite the trees is anything but. This person should have the following qualities.

1. He should have worked for a farm, crop scout or input vendor for 3 years recently and have performed farm labor for at least 5 years at some point in his life.
2. He should have a basic understanding of the cash flows of a farming business.
3. He should have a basic understanding of a typical crop production plan for the prominent crops in a region.
4. He should have a working knowledge of what a farmer and farm hand does every day of each part of a growing season as well as the typical obstacles each is likely to encounter.

From a customer’s and investor’s perspective, making sure a company has this person is a very clear signal that they have a better than average understanding of the problems of their customer. It shows an understanding of the market when the person related to the industry in the company has real, deep knowledge. Also, it shows a founder from outside the industry has enough humility to realize he does not know it all. All too often people receive funding because they have done something impressive in the past that is unrelated to the industry they are trying to enter. An insider at the top of the organization mitigates execution risk.

Making a business model simple will enable a company to more easily demonstrate the value of a product. Too many transactions in farming are complicated. For instance, chemical prices are never clear. Vendors quote prices in different units and vastly different price point. Even when one receives a price, it may have a rebate that is paid to the farmer after the season. It is no wonder that people enjoy driving and working on machinery. There is clear, demonstrable progress. The best business models in farming are like this. There is a clear cost and demonstrable value proposition. If company sells widgets, it should not provide that widget to the market in the form of a service and charge a monthly subscription or per acre fee. The best businesses in the farming industry sell a product for a very clear price, demonstrate value, grow the business, then find another related problem to solve.

Properly arranging a testing phase produces the best results for the development of the product. This will also create customers who will market for you. The best test phase mitigates the risk of time investment in the first year of trials. A farmer buys a new product because he believes it will make his life easier or his business more profitable. He does not buy a product because he needs more to do. If a company sells a product which goes in a field or on a crop, it should do the first year’s trial and monitor the results on the farm. That way a farmer does not have to think about keeping track of the test himself and the company guarantees it gets back good data. Then, the results from the test should prove themselves and make a sale the next year. If one sells a service or a tool, then one should ensure the proper setup and ongoing management and success of the tool on a weekly basis. Replacing any old system is difficult. Implementing a totally new system where there has been none before is nearly impossible. That does not mean that it is not worthwhile. Ensuring product success is vital for any tool. By making it easy for farms to point to the success of a product after the season a company ensures higher customer retention and proves out the company’s progress.

Since no one can have all the knowledge to run the increasingly complex modern farm, more pure service companies performing basic tasks are needed to help farmers get it all done. Farmers need help performing specialized tasks related to their business and should be able to hire services to supplement their own knowledge and workforce. For instance, in the finance industry one can hire various companies to do many back office tasks. Why can’t farmers do the same for basic accounting and regulatory tasks? There are companies which help implement and use tools like Salesforce. Why aren’t there companies that help farmers implement and monitor work order management systems? There are unlimited services like this that a farm could use to improve its operations. There are even tasks that a farmer cannot or does not want to do which service companies should do. Businesses selling to farmers could use other services to monitor the effectiveness of their products or the effectiveness of those to whom they lend money. Create businesses that do work others find boring or tedious.

The funding model for new agriculture companies needs to change if the companies want to impact the industry. Investors’ timelines should match the slow cycle within which agriculture exists. For now companies are raising money, building a brand, selling promises to investors, and passing on companies with customers eagerly awaiting solutions to large incumbents. The businesses that will make it in the long term are those which provide real value to their customers in the first year and expand steadily while providing new and better services. Say what you may about the industry leaders of today, but they have done exactly this and have been enormously successful. Funding for the successful company should be internal and generated from current cash flows or its investors should have an appropriate timeline of 10 years or more. Ag only funds could provide the right kind of infrastructure, investment expectations and timeline for companies wanting to grow in the industry. They will understand appropriate growth rates, timelines and industry quirks. For now, those on a mission to grow and quickly exit will absolutely make money. They may even make changes in the short term. However, few will last to make significant impact unless they are focused on the long term – tens of years not tens of months.

Final Thoughts

Assuming your idea and product already exists and that it solves a real problem:

1. Show with pictures and graphs multiple examples of a product working
2. Make clear what the price is, how much and if it will change, and what is the anticipated ROI from the product
3. Provide clear expectations of what the product will deliver
4. Provide a trial at a reduced cost or with a money-back guarantee if expectations are not met
5. Monitor the progress and outcomes for that trial
6. Collect simple, clear data to show success
7. Repeat

There are many, many opportunities to improve the industry and create value for farmers, landowners and other companies in agriculture. Fully understanding the problem to be solved and how it fits into the bigger picture before going to market is critical to success.