Regen ag in the absence of an LVMH: why it matters

Prime Future 194: the newsletter for innovators in livestock, meat, and dairy

Ok, I wasn't going to talk about this topic for a while, but this week at the World Agritech Innovation Summit I heard two spicy POVs around value capture for on-farm regenerative practices that caught my mind’s eye.

These contrasting POVs reminded me that I wish there were a mechanism for a retail investor to short carbon markets.

These contrasting POVs also reminded me that there is not an LVMH in meat or dairy, and why that matters in this discussion.

Jess Newman of McCain Foods, the largest global french fry manufacturer, brought a refreshingly pragmatic voice to a panel discussion about regenerative farming efforts in their supply chain:

(1) "For McCain Foods, it’s about supply security in the short run and in the long run. We see volatility in potato yields and profitability, and we need the children of our growers to see potato farming as a good business to be in to have supply security in the long run."

(2) "If a practice requires a premium forever (as an incentive) then it's not a good idea."

Her point was that incentives should be used to help farmers derisk practices that have an upfront transition cost, but if those practices don't pencil out in the long run on their own then a short term premium is meaningless.

(3) "Our role (as a processor) is to amplify PROVEN practices within the supply chain." She talked about focusing on practices with significant data behind them and investing to generate the data necessary on unproven practices.

And my personal favorite:

(4) "If carbon markets are your only Why, or getting a consumer to pay more for your product, good luck to ya."

That quote will live rent-free in my head for a while. 🤓

Maybe when people suggest the consumer will pay for this <gestures around>, it’s a bit of a litmus test for whether or not someone fundamentally understands the global food system. There’s a naivete required to believe that more than a small segment of consumers are willing and able to pay more for food.

Yes, there will always be some consumers in some markets willing to pay a premium, and a nice niche brand can be built around them.

But there's 1) a ceiling to how much that premium segment will pay and 2) a ceiling on how large that premium segment is. Just ask the organic brands.

It's rooted in the same ideas we highlighted in Prime Future 147: What's the LVMH of meat & dairy?

…luxury brands are about a dream. The authors of The Luxury Strategy book say, "Upper-premium brands desire to be chosen rationally for their excellence. Luxury is about elevation. Luxury brands engender emotion and diffuse their values."

Other meat & dairy brands have done a phenomenal job positioning themselves in the market as a signal of quality on some dimension to some segment of consumers:

- Certified Angus Beef has established itself as a strong indicator of a predictable quality beef eating experience.

- Niman Ranch has built its brand around pasture-raised pork and other proteins with ‘better for you’ positioning.

- Clemens Foods has their foodservice brand “Premium Reserve Pork” for steakhouse quality pork.

- Kerrygold has….I mean, have you had their butter?? Enough said.

Not to take anything away from these brands, they are all in the upper range of their respective markets.

But are they luxury?

If we accept the definition above, then no.

I took this 'premium vs luxury' lens to Whole Foods. Even though the retailer has been Amazon'ized in a lot of ways since the acquisition, this is a retailer with the legacy nickname of "Whole Paycheck". Surely there's some luxury brand somewhere in there?

Maybe Mary's Organic Chicken: organic, air chilled, $9.99/lb…pretty bougie brand signals, right? Except the sign on the refrigerated case definitively negates the idea that what's inside that case could be considered luxury: “value you can sink your teeth into”. Hardly the type of messaging that LVMH brand managers would allow; more premium brand behavior.

As I worked my way through the store looking for signals of what could be an actual luxury brand, it occurred to me that if luxury means the brand is positioned around a creative identity and a dream, not comparisons of quality or price, then there really are no luxury brands in food retail given that regardless of the retailers pricing strategy, everywhere you look the signals and signage are about price and quality. Because that’s what matters to food shoppers.

Perhaps this is a distinct feature of mass retail, and there are luxury brands in high-end independent food retail. Or, perhaps there is a fundamental mismatch between the channel of food retail stores and luxury food brands.

Maybe this is a limiting belief I have. But if it's true that consumers are unlikely to bear the cost burden of changing on-farm practices, (or as one person put it this week, "Is it even fair to ask consumers to pay for something they didn't ask for?"), then, there are only 3 options at the extremes:

1. The supply chain bears the costs, e.g. processors, retailers

2. The farmer bears the costs

3. Only ROI-generating practices get adopted

This is why I'm obsessed with the idea that the only enduring solutions around all things climate/sustainability/emissions/soil health/biodiversity/water will be the solutions that have a demonstrable & measurable impact on the operation's bottom line, AND benefit climate/sustainability/emissions/soil health/biodiversity/water.

"They still haven't paid me for ecosystem services I provide."

This statement was made by a producer right after he gave an eloquent description of all the financial & philosophical reasons that his family operation has gone all in on regenerative practices to improve soil health. He talked about financial benefits in the short run, as well as financial benefits in the long run when future generations take over the operation.

And then he kinda indignantly said that no one has paid him for those ecosystem services he's providing.

There's a sense of entitlement here, a "you owe me". And maybe he's right.

But this is the trap of separating the on-farm value drivers of adopting a practice from the societal benefits of a practice.

Is it feasible to have a robust financial instrument for this producer to be paid for increasing the insect population on his operation?

That feels squishy. And not real.

And its the flip side of why I'm obsessed with the idea that the enduring solutions around climate/sustainability/emissions/soil health/biodiversity/water will be the solutions that have a demonstrable and measurable impact on the operation's bottom line AND benefit climate/sustainability/emissions/soil health/biodiversity/water.

This week, I was also reminded that tech fads come and go, and investment bubbles rise and fall. But the art, science, and business of agriculture endures. I was reminded how deeply I believe in the future of agriculture and why I’m bullish on animal protein. Onward.

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