Just say no (to marketplaces)
Prime Future 174: the newsletter for innovators in livestock, meat, and dairy
How do I hate (US-focused ag commodity) marketplaces? Let me count the ways... (laughing but not kidding)
It’s been ~25 years since the dot com era got underway, and with it the realization that there was a huge opportunity to move US agricultural commodity markets into the 21st century through online marketplaces. Cha-ching.
At a 30,000 foot view, it makes complete sense that a digital marketplace is the most efficient way to transact for agricultural commodities. But agriculture doesn’t happen at 30,000 feet. It happens at ground level, and that’s where things get messy.
My conservative guess is that since 1998, somewhere between $3 and $5 billion have gone into various attempts at establishing digital marketplaces for agricultural commodities in the US.
There was the initial frenzy of companies followed by many, many attempts since. And not just by startups but also by agribusiness.
Most of that money might as well have been set on fire because I can only point to one example of a digital marketplace that endured.
Before we get to why that 1 ag marketplace was successful and what it tells us about other attempts, I want to highlight why this thing that looks so easy & obvious from the outside is so challenging to execute.
I say all this as a recovering marketplace believer who had to learn these lessons the hard way. Btw this entire edition of Prime Future is available to all subscribers, mainly so that the next time someone reaches out wanting to talk about their marketplace idea, I can just send them a link to this article instead. 🙃
Shoutout to Premium subscribers of Prime Future taking advantage of access to all content.
There are 15 big challenges to navigate when launching a marketplace.
#1, 2, 3, 4, 5, 6, 7, 8, 9, and 10: Liquidity.
Liquidity in a marketplace means that when a buyer comes to the marketplace to do business, there are enough sellers with the right product offering that a transaction can be done. Vice versa.
Uber made rides cheap to get more riders on their platform (buyers) and incentivized drivers (sellers) so that when you open the app to get a ride, you will find a ride. Otherwise, you'd stop opening the app.
Closer to home in ag, Indigo spent big venture dollars trying to get to liquidity in their commodity marketplaces but ultimately was unsuccessful despite the mega cash put into the initiative and the leadership team's experience launching marketplaces in other verticals.
If a marketplace tries to convince you of its traction by using terms like “total listed value” or anything besides the value of transactions completed, it’s a red flag that they do not yet have liquidity.
Getting to liquidity with a new marketplace is no small feat; it is THE question that every marketplace has to sort out.
It is THE hard thing; it is the ONLY thing.
#11: The marketplace has to be 10x better than existing alternatives.
Market transactions can happen in most commodities in most parts of the world in most segments. They may not be optimized, they may not be the most efficient, but they happen. This is one reason digital marketplaces have failed multiple times in almost every segment of US agriculture, from livestock to poultry to red meat to grains.
Where marketplaces are successful is not where transaction processes can be marginally improved; it's where transactions can be done 10x better because otherwise, transactions essentially would not happen.
#12: Oligopoly structures don’t go well with marketplaces.
Success with a digital marketplace is inversely correlated with the degree of concentration of the most consolidated side of the marketplace. If either side of the market is highly concentrated, it will be nearly impossible to thread the needle to get to liquidity in the marketplace.
What is the magic number, the minimum concentration at which a marketplace no longer makes sense? I have no idea, but in the US the top 4 poultry integrators make up ~60% of total production, in beef the top 4 packers process ~80% of all beef, and in pork 3 packers process ~60% of all pork.
Those markets are way too consolidated for a digital marketplace to get off the ground, without a compelling forcing function.
But livestock isn’t alone in it’s oligopoly structure. It’s true also in grains, and elsewhere in ag.
Last year a cattle feeder recommended the book Monopoly, and it’s fascinating because it highlights how almost every segment of our modern economy is dominated by a handful of large players. I’ll leave it to others to debate whether that’s a feature or a bug, but it’s certainly a reality in agriculture.
The more fragmented the market, the harder it is for buyers and sellers to find one another, the more likely a marketplace is to be successful.
#13: People try to keep contextual market intel close hold.
In a commodity market, volume data becomes a huge price signal and therefore its a closely guarded secret. Or at least, attempted to be guarded. Example:
If Tyson Foods typically sells 2 truckloads of boneless breast meat per plant per week in the spot market and suddenly they have 20 truckloads to move, they might as well hang out a neon sign that says DISCOUNT CHICKEN because everybody in the market knows Tyson is long on breast meat and needs to move it and therefore will take the price hit.
What they prefer to do is to quietly shuffle 2 truckloads at a time by picking up the phone and calling the go to contacts who are likely to buy those 2 truckloads. That's how they keep the market from piecing together that they sold 2 truckloads to 10 companies.
What those silly billies forget is that the people who play in this game on the daily spread rumors faster than teenage girls on TikTok.
So while Tyson thinks they are keeping their 20 truckloads on the DL, more often than not, everyone knows, and more often than not, Tyson will pay the price for being long by being forced to accept a much lower price than they would have preferred.
The same dynamic exists when buyers suddenly need to buy significantly more than normal, that information is held closely because otherwise, it will drive up the price.
#14: Customer acquisition cost (CAC) relative to the value of the traded commodity.
This is a funny one because remember how the more fragmented a market is the more likely it is to be successful? The caveat is, if you have a way to get buyers and sellers to the marketplace with a CAC that makes sense relative to the value of what's being traded.
#15: The tradeoff between specificity and total addressable market (TAM).
In order to get to liquidity, the market needs to be very targeted.
“Cattle” is too broad. “Heifers” is likely too broad. “Bred Angus heifers in the Southeast US” might be the right level of specificity. But that may feel like too small of a market, so the temptation is to broaden back out…but then you risk buyers and sellers not being able to execute a transaction, which means they are less likely to return, which makes it much more difficult to reach liquidity.
I suspect Indigo really struggled with this as they were focused on the big 4 commodities but with specialty attributes like organic. There’s a very real tradeoff.
So there you have them, the 15 challenges that have eaten up an estimated $3-5 billion in the US.
It may be tempting to think you can product design, or business model design, your way out of these challenges. Trust me, everyone who has taken on this noble challenge to create more market efficiency in agriculture thought we could do better than the dummies who tried before us and failed!
Alas, while product design and business model design are two wicked powerful levers that definitely influence the likelihood of success, those levers cannot overcome things like an oligopoly structure on one side of the market.
The reason Airbnb and Uber/Lyft work are because they are operating in markets where both sides of the market are super fragmented AND the markets are huge.
Digital marketplaces could have created enormous value in the 1920's or even the 1950's, when all segments of the industry were still highly fragmented. If only the Internet had been a thing!
Digital marketplaces do not create high value in consolidated markets, which is most markets in modern agriculture economies.
As the industry continues consolidating throughout the value chain, fewer buyers and sellers exist. Fewer buyers and sellers make marketplaces less valuable. So there is not a compelling reason to believe the above dynamic is likely to reverse any time soon.
Mark Johnson, CEO of GrainBridge, the JV between Cargill and ADM, wrote a fantastic piece about their challenges in launching and attempting to scale a grain marketplace:
“Marketplaces don’t solve problems for the farmer or the grain buyer.
The farmer only has so many local buyers and the price is mostly determined nationally. The farmer’s biggest problem is making a decision: when’s the right time to sell grain? Picking the right time could be the difference between squeaking by and having a great year.
In fact, that’s exactly why ADM and Cargill decided to form GrainBridge back in 2018. The idea was to pool data about farmer selling behavior into GrainBridge and build a decision support application that would give farmers unbiased advice on when to sell grain. The platform would then attract other grain buyers, creating data gravity, and ultimately being a necessary tool for the farmer to make smart grain marketing decisions.
On the buyer side, marketplaces theoretically give you access to new customers. But, a grain elevator typically knows all of the local farmers. They’re not going to magically discover a massive farm that they didn’t know about. Their challenge is how to stay in touch with farmers and to gain more visibility into when grain is going to arrive at their facility.
So, neither buyer nor sellers want a marketplace.”
So what’s the one example of an enduring marketplace in ag?
Interestingly it’s in one of the most unlikely places because of the added complexity of perishability, but it’s in dairy. Dairy.com was one of the early Internet companies that set out to move transactions for dairy products from analog to digital, and they still exist 20+ years later.
One reason the company was successful was that its early investors were the large dairy processors, which meant those companies were committed to putting a lot of product through the marketplace, which gave buyers confidence that they’d find what they wanted so the buyers kept coming back so sellers kept putting more product on the market. And so on.
Scott Sexton, CEO of Ever Ag (Dairy.com’s new parent co), describes the presence of those early investor processors as a catalyzer to get to liquidity.
He also highlights that the company’s neutrality was vital since it was a 3rd party managing the marketplace and not one of the major processors.
According to Scott, you’ve got to have liquidity and neutrality.
Another catalyzer could be some regulatory influence that drives a market to an online platform. Think of healthcare.gov in the US - a company could never have gotten liquidity with a health insurance marketplace but as part of legislation for a government initiative, it became a thing. Regulation was the forcing mechanism that drove buyers (individuals) and sellers (insurance companies) to the exchange.
Most exchanges don't have a regulatory forcing function so they either have to be better, cheaper, or faster than current ways of doing business...10x better.
However, all of this analysis is North America specific. Around the world there are certainly places where digital marketplaces DO offer a 10x better outcome for producers. Those marketplaces are growing as expected in a highly fragmented local market, such as India, South America, and parts of Africa.
But more broadly, I hypothesize that the more obvious the solution seems, the less likely it is to work.
And most marketplaces get started in places where it *seems* like an obvious solution.
Tempted to start a marketplace in agriculture for physical commodities in a country with a high-functioning ag economy? I’ll say this…friends don’t let friends start digital marketplaces in ag. Unless they have an obvious path to solve the challenges above, sufficient capital, and a good therapist. 😉
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