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Agro – Note

The sector facing the “new normal”.

April 2020

My good friend Pedro Nonay asked me to write this article about the Agro sector and the changes that the future demands. I told him that my lack of knowledge of these markets does not make me the right person to do so. But he told me that it might be of interest for him to know the opinions of someone who is a “virgin” in the face of the dogmas assumed as true by the specialists. Therefore, I try the exercise and I apologize for the mistakes I am sure I will make in the specific vocabulary of the sector and its current structure.

Previous issues.

When the current covid 19 pandemic passes, the world is going to be very different. What they call the “new normal”, although hardly anyone knows what it will be like. This is what needs to be investigated in order to adapt. Not just in Agro, but in everything.

It is not Covid 19 that is causing the changes that are coming. It is just the accelerator. The real cause is the technological revolution behind the Internet. Many changes were already occurring because of this, but many more are yet to be implemented, and the health, economic, social and structural crisis that Covid 19 has generated is the perfect opportunity to implement many of these changes all at once.

It is essential to have some idea of what the basic characteristics of the world will be in that future. No one can know exactly, because there are many things to be defined, and many uncertainties. But it is possible to focus on some of these characteristics as the most probable. 

Pedro and I have thought a lot about that. We’ve even published a book called “Thinking 2020” and it’s available on Amazon. I summarize below the characteristics that we see there. 

• Geopolitics will be a thing of two blocs of countries with two leaders: USA and China.
  
  
  • One bloc will consist of countries with declining middle classes, very angry, and with many social tensions and a lot of populism (the US bloc). The other, the Chinese bloc, will have rising lower classes and some happiness (by comparison with their previous situation).
    
    
  • Countries that are not block leaders will have puppet states for the most part. Their function will be to control the masses locally and do what the bloc leader says.
    
    
  • The blocs will be fairly autarkic among themselves, but not at the country level. However, there will necessarily be some coordination and trade between the blocs on global issues (e.g. environment).
    
    
  • Once the blocs have been defined, the business and investment structures of companies from one bloc in countries of the other bloc will have to be dismantled. This will be done by hook or by crook, albeit gradually.
    

• The world will be much more technological. The big technology companies will be the real leaders in the dark. They will be above the political leaders of each bloc. They are the ones with the data, and the ones who know how to use it. And, data is the real power.

• Large banks, central banks, oil companies, electricity companies and all the companies that have been exercising power, will lose it. They will either become simple service providers, without the ability to influence their sales and purchase prices, or they will be absorbed or replaced by technology companies.

• Fiat currencies will disappear. They will be replaced by different versions of digital currencies. This will occur after a process of hyperinflation in order to pay off the excess public debt, which may occur in less than 2 years.

• There will be more “state economy” than in the old normal. That means nationalizations, or creation of new public enterprises.

• Democracy will lose value. Either by manipulation of voters (through the knowledge of technological data, and the messages they will spread), or by the creation of dictatorships supported by populism.

• In general, there will be less freedom than before. Curfews, masks, tracking apps, and the like, have educated us that it is worth losing freedom for the common good.

I wanted to tell this before going into the subject because these are the “boundary conditions” that will affect any equation in the future. At least, that’s how I see it. If the above is not true, neither will what I write below.

Of course, even if the above is true, there is a whole timing game involved. Things are not going to happen all at once, nor all at everyplace. It will be a fast but gradual process, and each thing at a different time.

Perhaps, the maximum indicator will be the moment when inflation starts to be hyperinflation. That is when all the changes will be activated.

In the meantime, we will live in an era in which political and business leaders are “out of step”. They don’t understand what’s going on, and they don’t know what they should do. It will be a time of madness and disorganization. 

Gaia – the environment.

I suppose the reader will be familiar with the concept, but I remember that Gaia is a concept very well told in his books by Issac Assimov (great science communicator). He was saying that the whole earth (animals, vegetables, and humans, as well as air, water, etc.) were the true single organism. There was no individuality, but a whole. That was the organism to be defended. Even if parts died along the way.

It is like, thinking of the human being, saying that what is important is the person, and not each of its cells. If we have to kill a cell (as we do in the treatment of cancer) to protect the individual, nothing happens. Well, it is the same thing on a larger scale. If we have to kill people to protect Gaia, nothing happens (sorry for the nonsense).

It is about shifting the center of interest. Something like abandoning Christian humanism and individualism to arrive at the protection of the whole (Marx was not far from this, although he did it with a different objective). Of course, nowadays nobody thinks of protecting the rights of a cell of our hair, nor speaks of genocide when we cut our hair (sorry for the brutal exaggeration, but I want to explain the idea).

From this point of view, if we accept Gaia as the individual, what is important is the protection of the whole, of its balance. 

The balance of Gaia is intimately related to ecology. In fact, all ecology movements are inspired by Assimov. If medicine and biology were important when the center was the individual, ecology will be important when the center is Gaia.

Thinking about ecology, there is a lot of misinformation on the street about how it affects the Agro sector. Some people think that, because it is a plant (or animal) world, it is good for ecology. But this is a profound mistake. Since the Agro sector is intensive (a long time ago), its affection to the ecological balance is very big (more than cities). 

There is a very big underlying conflict in all this. It is a fact that, if we think of man and his interests, his activity does a lot of damage to the ecological balance. And if we think about the balance, man is harmed in his capacity to act. It is a question of relevance for political and economic decisions. We can limit our rights so that the climate does not change, or we can assume that we change the climate and make the necessary investments to live in this changing climate (perhaps ending up in bubbles).

In any case, it is clear that the Agro sector is one of the relevant forces in climate change. Desertification, depletion of aquifers, … are the order of the day, but these are things of local scale. It is less known in the street (but quite well known in the scientific world) that there are also effects on climate on a global scale (the famous warming).

The change of climate implies that the Agro sector will not be able to work with the same crops on the same land. It depends a lot on the particular conditions in each place, but there is a general rule by which, in the northern hemisphere, the versatility of a land for each crop is shifting to the north more than 200 km (the same in the south, but with a shift to the south). These shifts mean change in land value, loss of value of infrastructure investments made there, and need for investment elsewhere.

Disintermediation – new technologies.

The post-internet technological revolution in which we find ourselves has only just begun. What has already happened since the beginning of the Internet so far is only a small part of what is yet to happen.

It is often said that the technological revolution has brought disintermediation. The word is not the right one, because intermediation has not totally disappeared, but it has been minimized and has changed a lot. A clear example is how Amazon is eliminating the intermediary work between the manufacturer and the consumer, taking power away from the high street retailer (who decided what to offer in each place), and from the manufacturer’s sales representatives. Amazon is the new middleman, but it is very different from the old one, cheaper for the consumer, and more efficient. The same is happening in all sectors.

This also affects the Agro sector. At all levels. Some things will happen sooner (or have already happened) and others later, but it is clear that technology will allow that someday:

• The consumer can know for sure where each product comes from, and decide whether to accept the price or change the place of production. They will also be able to know the exact date it was harvested.

• The producer can have much more direct access to the consumer. It will not be total access to direct sales through e-commerce. In some cases it is possible, but, in general, the consumer will not have thousands of web pages to register to buy each product. But there will be a new intermediary, which will be that WEB page where they will have access to almost all products.

• In the case of processed products, the processing company will also have different communication channels, both with its suppliers and with its customers. In this case, it may be convenient for them to avoid the WEBs grouping. Of course, intermediaries in the chain will be avoided. If it is a cookie factory, there may be a WEB that offers direct communication with farmers (or rather with storage silo managers) to make purchases, and another communication with Amazon for sales.

• The small producer will be able to have access to customer financing (eliminating financial intermediaries). This will happen when it builds customer loyalty through quality and asks them to invest their savings (with profitability) in the investments that the producer has to make. Here, cryptocurrencies, tokens, and blockchain have a lot to say. As an example, a friend of mine is doing this with coffee in Mexico (https://www.crowdlending.es/blog/que-es-ethic-hub), he does it on a small scale, but it is a very interesting trend.

• Full traceability is feasible.

When all this happens, the Agro sector will change a lot (it is changing). Before, the power was in whoever was able to gather the merchandise and finance the storage and transportation, as well as to get the political authorization. That is not going to be completely eliminated, but it will be done in other ways.

Power passes to the individual (manipulated) – Data management.

A very important feature of the technological revolution is the shift in power.

In the past, if there was no cookie factory in a region, or no “importer” of cookies, the individual buyer simply did not have access to them. And the factory, or the import license, was a matter of political favor. 

Now, barring major changes in free trade agreements (which there will be some, especially between geopolitical blocs), the consumer has access to everything, and logistics solves shipping (although it can make it more expensive).

In other words, the individual decides. But we should rather say that “he thinks he decides”. This is so because individuals are very manipulated by the information that reaches them. In the past, they were manipulated (it is more elegant to say that they were encouraged) with advertising, or with paid articles in the press (paid in the most varied ways).

Now they are manipulated in more modern ways, but also much more powerful. An example is the height at which your product appears on Amazon, but it can also be the comments of influencers, or blogs and podcasts of supposed experts who convince the individual that he or she has to eat a healthier diet (healthy according to them).

That is to say, the power has passed to this type of “incentivizers”. They have the ability to convince Spaniards to abandon oil and switch to soybeans (I exaggerate, but not that much).

And, those incentivizers may do so without special interests, beyond their quasi-religious beliefs that they are right, but those cases will not be the predominant ones (there are still many of those today). When the industry learns to manage this situation well, it will pay the best incentivizers, and those will have more audience and more success.

For these incentivizers to be successful, they (either themselves or whoever pays them) must have access to the data. It makes no sense for them to convince everyone to switch to soybeans and then have no soybeans available.

In other words, data capture and management will be more fundamental than before (which was already the case).

This does not seem new, but there is a part of it that is. It is one thing to have the data on the sector’s harvests and the contracts in force, but it is another thing to have the data on the effectiveness in the psychological manipulation of the end user. Not just anyone knows how to do that today. 

It is big tech that has the ability to understand and manipulate people’s psychology. That is why they are even accused of manipulating elections.

Other companies, even those in the Agro sector, can learn to do these things, but it’s not easy, and they lag behind big tech.

The bottom line is that you have to reach the end individual, even to sell wheat on a large scale. And that’s a novelty.

Control of the sector.

Based on the above, whoever controls the psychological manipulation of the individual, will control the sector. Before it was done by controlling factories or politicians, now it is the decisions of individuals, manipulated by the information that reaches them, and having the ability to group and manage the data of their foreseeable decisions and turn them into necessary merchandise.

The current Agro sector is perfectly capable of managing the available production data, but it is not (today) capable of knowing and managing the psychology of people.

However, big tech knows us better than we know ourselves. They know all the websites we visit, and all the things we buy. They can profile us perfectly enough to know what kind of incentive to our decisions will work, at what percentage, and by doing what.

For the time being, it does not seem that big tech is interested in investing in crops or in large-tonnage logistics infrastructures. They are interested in “package” logistics, not in trains or 100,000-ton ships. But if they decide to do so, they have the capacity to sink the old sector, because, in addition to money, the important thing is that they control the end consumer.

If the distance between the producer and the final consumer is getting shorter (a lot), all the companies in the Agro sector that are involved in these tasks must find a way to adapt.

Of course, controlling large-tonnage logistics will continue to be essential, and is something that existing companies in the sector can still offer to new players today in whatever pacts. So will harvest and logistics management data.

But, if they let a third party control the power of the end consumer, they will end up having to sell whatever that third party says, and at whatever price they say. They will be something akin to maquilas, mere service providers with no access to the customer and charging little more than costs.

The other alternative is an alliance with big tech (before they want to single-handedly control the sector). There is also the alternative of trying to do what big tech does in user data control, but this is illusory, because they will never have access to psychological behavioral data to the level that big tech has, even if they invest a lot and capture a lot of brains.

An opportunity.

Companies that today control crops and the logistics to transport them can make alliances with big tech to control the end consumer. 

If they succeed, the entire downstream sector will be controlled by them.

And, big tech, without being very interested in that kind of business, will have a fantastic tool in their main problem, which is negotiating with governments so that they don’t have problems to do their main business. To governments they can say something along the lines of: “I make sure that there are no riots due to hunger, lack of supplies, or anger because the supplies that arrive are not what they want, but you, government, don’t make it difficult for me to do my business”.

*****

On this issue, Pedro Nonay also wrote what you can find linking here.