By Carter Williams, CEO and Managing Director of iSelect
Author J.D. Vance made the case for rural America in his 2016 book, “Hillbilly Elegy,” sparking a months-long debate about the role of city vs. country in our economy, our lifestyles and our politics that’s still ongoing.
We learned the full scope of that debate on Election Day 2016.
But the fact remains, rural America is a key part of American society and of the nation’s economy, encompassing the vast majority of our landmass as well as millions of individual people. That role looks to only increase in the coming years.
Why? Because rural America remains primarily focused on one industry: agriculture. And that industry has been getting chopped to pieces in recent years.
Worldwide, farmers are planting more corn and wheat, creating price pressure that’s driving down commodity crop prices here in this country. This will most likely become a permanent trend. Technological advances are automating the field, allowing well-funded operators to leap ahead of their competitors, leaving those unable to afford these new technologies further and further behind.
But, despite all this, there is massive opportunity in agriculture right now as well.
Consider the possibilities. It’s no secret that many shoppers today prefer organic products—for a variety of reasons—and are willing to pay a premium for what they consider to be a premium product. OK, but when a shopper does that, they’re left with less money in their bank account to buy a car, or a house or any of the hundreds of other purchases that we all need to make in our lives. This is particularly acute among the organic-loving Millennial generation. So acute, in fact, that the Federal government has been researching new ways to reduce the cost of organics in order to cut the price premium that consumers have been paying, seeking parity with the rest of the market.
Vertical Farming Stands Up
As a rule, most people today live far from where their food is grown or produced. In the U.S., where we import 15 percent of our food supply, including half of fruits and one fifth of vegetables, produce travels an average of 1,494 miles from farm to consumer. Today, the typical American prepared meal contains, on average, ingredients from at least five countries outside the United States.
Transporting food to people who live far from farms and ranches is increasingly expensive, complex, insecure, and unsustainable. As more of us move to cities and urban areas, the problem is worsening.
Consider the avocado. Since 2000, the average American’s avocado intake has tripled to seven pounds per year. Avocado produces, meanwhile, are struggling to keep up.
To meet demand, we import an estimated 85 percent of our avocado supply. In Mexico, where most of our avocados originate, it takes nearly 32 gallons of irrigated water to produce one pound of avocado. So, for consumers in, say, Chicago, their annual avocado habit consumes 225 gallons of water and, travelling nearly 2,100 miles from Mexico to Chicago, roughly 340 gallons of gas.
And then there’s supply chain security. In recent years, record droughts, organized crime, and outbreaks of foodborne illness have disrupted avocado supply chains, causing wholesale prices to more than double.
No wonder guacamole-lovers in Chicago are complaining about guacamole prices.
And it’s not just the avocado. Recently, lettuce, orange, blueberry, and cilantro prices have jumped due to supply shocks. As the world’s population continues to march toward 9.7 billion by 2050 (or 33 percent more people than we are feeding today), many of whom will be part of the growing global middle class, this much is clear: the food supply chain must evolve.
As it stands today, we produce food too far from the point of consumption, leading to excessive transportation costs as well as complex supply chain logistics that leaves the food supply vulnerable to disruption. Current food production methods are too resource intensive, using up excessive amounts of water and nutrient inputs.
If left unchecked, we will only set ourselves up for more food price volatility and food insecurity going forward.
All of this, taken together, is unsustainable.
As the world’s population continues to grow, so does the importance of building secure and consistent food supplies. The amounts of available arable land and water to support conventional agriculture are dwindling, with land down by one third in the last 40 years due to erosion and pollution damage.
That’s why indoor agriculture is one of the fastest-growing industries in the United States.
As of 2017, there are more than six million indoor farmers worldwide, and vertical operations are multiplying quickly. Unlike conventional agriculture, which is locationally tied to areas with sufficient land and water, indoor farming is decoupled from such needs. Located closer to the urban populations they feed, indoor farms cut down on transportation costs and other logistical complexities. Less susceptible to weather, political and other system shocks, indoor farms help create a more stable and secure food supply chain.
What’s more, using technology to control farm inputs and create artificial growing environments, indoor farms are far more efficient than traditional farms, using 95 percent less water, 50 percent less fertilizer and zero pesticides, herbicides, and fungicides. Able to harvest year round, indoor farms are also far more productive than traditional farms. One Japanese indoor farm, for example, claims it can produce 100 times more heads of lettuce per day than an outdoor counterpart of the same area, and also produces 80 percent less food waste. And because indoor farms are, by definition, controlled indoor environments, they mitigate food safety issues that have plagued traditional agriculture of late.
They’re generating revenues too. Cannabis is the highest revenue generating crop for indoor farmers at about $112 per square foot (or $4.8 million) per acre, followed by salad greens at $64 per square foot ($2.8 million per acre. Strawberries are the lowest revenue crop, but still generate about $22 per square foot ($1.0 million per acre).
This is a high-growth market that is still in its infancy and is expanding quickly. The indoor farming segment has seen a 45x increase in investment in the last six years, with vertical farming on track for a 30.7 percent compound annual growth rate (CAGR) between 2015 and 2020 and smart greenhouse operations growing at 13.1 percent CAGR. The vertical farming market alone is expected to hit nearly $4 billion by 2020, as evidenced by recent large investments in the sector.
Profits are up, demand is rising and the cost of technology has fallen, leading to dramatic growth in this critical agricultural market.
This is the future of food. It is capable of producing more yield with drastically less land, pesticide and fertilizer usage, compared to traditional farming methods, and can be adapted to support a wide variety of different crops.
Investing in the Future
At iSelect, we’re investing in exactly this, supporting companies that are working to drive down the cost of organics while building out powerful new ag technologies.
One example is Kultevat, a company that’s working to create an industrial product, natural rubber, using an easily grown and plentiful strain of dandelions. By delivering a high-value crop to the farmer that’s not a low-priced commodity like corn or wheat, Kultevat is opening up a new income stream to struggling farmers, allowing them to shift from sugar beet farming, let’s say, to dandelions with significant upside. This would allow them to eventually grow and sell complimentary organics alongside at lower cost.
Benson Hill Biosystems is another example. By developing new seed technologies that increase yield and reduce drought loss, they are helping farmers realize savings right out in the field, further helping to reduce costs and overhead. Cheaper, higher quality organics will be the result.
In truth, we believe that agriculture is approaching its “1980” moment.
This is something we in the venture community speak about often, this tipping point when a product goes from a niche to the mainstream seemingly overnight.
In personal computers, this happened around 1980. Prior to that year, PCs were a proprietary product, developed, branded and supported by a small list of companies. When you bought a Wang computer, you ran Wang software on it and connected it to other Wang-branded hardware. That all changed with the creation of the PC platform around 1980 that allowed software and hardware from many different makers to work together. This opened the door to an entirely new industry—universal software—and made millionaires of a new generation of entrepreneurs. Few people saw this shift coming, but Microsoft and others did and were able to make billions.
That’s where we are right now in agriculture, and the opportunity is huge.
The news recently has been focused on infrastructure spending, and overseas trade and Apple’s struggles with potential new China policies. But the real problem facing this country today is creating a more diverse, inclusive U.S. economy.
The solution won’t only be coming from the software, manufacturing or healthcare industries. In fact, the transformation of agriculture into a 21st century economic force, led by agtech companies like Benson Hill and Kultevat, is already underway.
That’s why our attention right now—and our investment capital—is on rural America.
Bio: Carter Williams is the CEO and Managing Director of iSelect, an early-stage venture capital fund based in St. Louis, Missouri.
