Turn up the volume on livestock market signals
Prime Future 028: The weekly newsletter highlighting trends throughout the animal protein value chain.
Let’s start with a snapshot of the highly fragmented, typical fed cattle supply chain:
One consequence of a fragmented supply chain is that the market signals from the supply chain's final customers (right) get lost before moving upstream (left). Moving left to right, each player in the value chain only sells product to the next participant in the chain, so their incentive is to care about what that customer cares about…and only that.
The result is a complete disconnect from cow-calf producers, where it all starts, to packing plant & beyond, where the product finds its end customer.
We’ve talked about the benefit of shortening feedback loops in beef to improve the product from a genetic standpoint, but that becomes one of many benefits when you think about full alignment of financial incentives within a supply chain.
One of the highest impact potential outcomes of increased supply chain alignment in beef is the opportunity to align incentives from cow-calf producer to stocker to feed yard to packer to customer:
When the market signals demand for quality, producer’s incentives lead to quality.
When the market signals demand for GHG reduction, producer’s incentives lead to GHG reduction.
When the market signals demand for <next new thing>, producer’s incentives lead to <next new thing>.
One reason aligned supply chains makes sense is because they don’t serve The Market in a commodity sense, they serve This Market with a differentiated value proposition and market strategy.
Two insightful observations:
“I’ve been surprised by how little all of us know about the rest of the industry. Most of us just know our customers, the next stop in the supply chain. But the market signal is that quality and consistency is more important than ever. Customers (shoppers) want to make their own decisions. That allows all of us as producers to figure out which niche and which program we want to be with.” - Lamar Steiger, consultant to Walmart in the development of the Prime Pursuits initiative with 44 Farms
“You’re never going to make more money on your cattle until you understand the beef business. Supply chains happen fork to farm, not farm to fork.” - Steve Polski, former Cargill exec & supply chain fanatic
These observations support the notion of aligned supply chain as a way to allow market signals to freely flow through the beef supply chain, in both directions.
So what are the barriers to creating feedback loops from customer to carcass to calf?
Connectivity. This is doable with 1:1 relationships but challenging where direct relationships are absent.
Granularity. Sometimes the only carcass data available is on the lot, not the individual animal.
Where are the costs incurred and where are the benefits accrued? Coordinated supply chains can equalize both the distribution of costs and the dispersion of benefits in a way that a fragmented supply chain fundamentally cannot, whether this is in investments in digital technology, genetics, or traceability.
Perhaps one of the key barriers to virtually aligned supply chain was captured well by an agbusiness exec in Australia, David Farley, “In America, I’m amazed everyone is still so concerned about the privacy of the data and the privacy of the individual instead of the good of the collective.” David’s core hypothesis is that the initial use case for data sharing through a value chain is for disease traceability, and that when this use case is underwritten by federal governments, then the opportunity is created to drive value for multiple other use cases.
The promise of virtually aligned supply chains is in the potential to align incentives of every player by facilitating the flow of relevant data in high impact ways.
Over on the other extreme, look at poultry. One of the obvious benefits of poultry’s vertically integrated model is the short feedback loop in the value chain:
Chick Fil A wants chicken raised without antibiotics? Done.
McDonald’s wants xyz? Done.
The market signals from food co’s reach the integrators directly.
Since each complex has its own business model, whether a big bird complex producing commodity meat for further processing where efficiency is the name of the game, or a small bird complex producing very tight specs for KFC where consistency & low variability are the name of the game, in theory, each business type should have aligned incentives back to contract growers around the specific metrics that drive profitability for the plant based on their sales channel & customer base.
And yet, curiously, contract growers tend to be paid on the same live performance metrics regardless of the plant’s business model.
The point is that even in poultry - the most vertically integrated of animal protein supply chains - there is still an opportunity to drive incentive alignment back to the contract grower. Maybe the barrier is lack of relevant data, maybe its lack of will, maybe its Packers & Stockyards regs….I really don’t know. But my hypothesis is that there’s an opportunity to close the loop. If you’re in the chicken business & have an opinion on this, reach out here.
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Investor’s View on Animal Protein
Y’all, this project has been more fun that I could possibly have anticipated. S/o to all the really smart producers and investors who have generously shared their perspectives on livestock & poultry production and general trends as well as tech gaps and opportunities. Some of my initial assumptions have been flipped on their head through these conversations:
Is India the highest impact market for animal agtech? Mark Kahn, Omnivore, made the case in a compelling way, more to come.
How is it possible to be the global (venture capital) leader in a $1 Trillion animal health market with only 5 investments? Adam Anders of Anterra on the lack of animal health funding despite market size. He shared some good insights on why that is and how we fix it, stay tuned.
“Ag is the other half of the carbon cycle. We don’t have a carbon problem, we have a carbon imbalance. And the best photosynthesizers on the planet are C4 grasses. Grazing C4 grasses are the largest lever we have to pull on planet earth.” - Russ Conser, founder of Blue Nest Beef, who found regenerative ag from his 25+ years career in oil & gas and early stage investing in alternative energy sources.
