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Basis Set Ventures invests in early-stage technology companies that fundamentally transform the way people work. We believe artificial intelligence delivers core value by improving productivity for all parts of the economy; from factories to offices.

Our fund is dedicated primarily to Seed and Series A startups.

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Workstream

Workstream's hiring platform uses automation, AI, and mobile workflows to provide a simpler, faster way to hire, on-board and maintain hourly workers.

workstream.is

Rasa

Rasa empowers product teams to build conversational AI in-house, shipping into open source libraries and providing tools to developers worldwide from startups to Fortune 500 companies.

rasa.com

Path Robotics

Path Robotics is producing autonomous welding robots based on proprietary artificial intelligence and computer vision algorithms.

path-robotics.com

FarmWise

FarmWise produces autonomous weeding robots that provide growers with a cost-efficient, scalable alternative to herbicides.

farmwise.io

Ike

Ike is building cutting edge automation technology to help improve the trucking industry.

ike.com

DataGrail

DataGrail is a privacy management platform that helps companies become compliant with privacy regulations like GDPR and CCPA quickly.

datagrail.io
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Latest

The history of American agriculture is a story of technology improving the efficiency of production. But the volatile global economy of the last decade is showing the industry that efficiency is not everything. Changing consumer taste coupled with increasing pressures of commoditization are forcing farmers to embrace technology as a lever for much needed differentiation.

In this conversation between Matt Nicoletti, the Head of Business Development and Venture Investing at Penny Newman, one of the largest grain distributors in the western United States, and BSV investor John Mannes, we discuss how the agriculture sector is being affected by Covid-19 and the important role technology will play in keeping farms afloat as industry consolidation accelerates amidst a growing economic recession.

Matt Nicoletti:

... If you're a dairy owner, not only are you seeing a massive hit on your income statement due to the decline in milk prices from the shortfall of demand in food service, but your balance sheet is also taking a hit because you can't process your animals.

John Mannes:

I'm John Mannes, an investor at Basis Set Ventures, an early stage venture capital fund investing in founders, transforming the way people work across all parts of the economy, from factories to offices. This is episode five of Future Proof, today we're talking with Matt Nicoletti, the Head of Business Development and Venture Investing at Penny Newman, one of the largest distributors of grain in the Western United States

John Mannes:

To understand the impact that COVID has had on agriculture. You have to understand the context of what was happening in the industry at the time Americans began sheltering in place. The ongoing trade war has already put pressure on farmers. The loss of the Chinese market made it really hard, if not impossible for many in the industry to even break even. This, coupled with oil prices smashing ethanol demand has produced immense volatility in an industry grasping for stability. And the longer our current economic recession lasts, the more vulnerable the industry will become as consolidation rips through the rich long tail of the agricultural economy. Despite a growing scarcity in capital, innovation is rapidly becoming a prerequisite to survival.

John Mannes:

Thank you so much for joining us, Matt, why don't we start off with a little bit of background on you and Penny Newman?

Matt Nicoletti:

Penny Newman Grain Company is one of the larger distributors of grain and feed ingredients in the Western United States. Our primary markets in which we're focused are the animal feed and pet food ingredient markets, we do handle some grains for human consumption. And again, our model is leveraging our expertise with logistics and supply chains. And then of course the commodity trading side of things, where we are ultimately leveraging volatility to capture margin. My family is actually the majority stake holders in Penny Newman, and I oversee all of our ad tech venture investing endeavors.

John Mannes:

Very cool. Well, this should be a fantastic conversation because we're definitely in volatile times if nothing else. Tell us a bit about what's happening in the agriculture space post COVID and of course, with a number of other macro shops?

Matt Nicoletti:

Right. And there's definitely a ripple effect across between the energies and the ag sector. They're certainly linked there, but the short answer in terms of what's been happening is volatility. Energies going negative. We saw ethanol demand evaporate for corn. So we saw corn making new contract lows, that oversupply led to folks trying to purchase in corn and get out of other contracts, it created some challenges for us, but inversely, one of the most widely consumed protein sources amongst the animal feed sector are a byproduct from ethanol production, DDGs. So that particular supply chain got very tight.

Matt Nicoletti:

And then of course you saw massive risk in the dairy sector. They weren't the only folks affected by this, on the demand side of things. There was certainly a scare at the retail level where it seemed as though shelves were empty and we were running out of food. But the funny thing about that is that we were not at all and the fallout of demand at the food service level, the restaurant level vastly outweighed the gains that were seen at the retail level for a lot of different folks in the supply chains. It has also shed a bit of a light on the risks that come from centralization, meat processing is a big one of those things. And I think that one of the primary headlines with respect to the disruption in the food and ag supply chain were the shut down of these meat processing plants.

Matt Nicoletti:

If you're a dairy owner, not only are you seeing a massive hit on your income statement due to the decline in milk prices from the shortfall of demand in food service, but your balance sheet is also taking a hit because you can't process your animals. There's an oversupply of animals that can actually make it to the processor. Excuse me. It also makes it difficult for supply side corrections, so that's why there were also headlines about people dumping milk. I mean, these are just a few examples of the volatility that ensued when you have such a massive shift in demand. The funny thing is it was a boon to some folks, some folks, especially the smaller, more regenerative type of model direct to consumer. There is a big argument and a big push being made to decentralization supporting food security. And I think that this pandemic was a great example of some of the risks that a centralized model has.

John Mannes:

We've seen a lot of that, even on the technology side. There were a number of companies that were building marketplaces within wholesale food distribution that decided to pivot and basically focus entirely on helping farmers and/or other folks in the food supply chain sell directly to grocery stores instead of having food wasted through the supply chain that ordinarily would have gone to restaurants just being thrown out.

Matt Nicoletti:

Right.

John Mannes:

I think a good question to your point is given that there was so much more demand lost in the restaurant world than was made up for in the grocery world, how longterm is that trend going to be? And is it going to be something that actually sustains with us and disrupts the way people think about food supply chains or is it just a short term shock that will fade away?

Matt Nicoletti:

We are definitely seeing demand come back at the food service level with the reopening of restaurants or dine-in. I ultimately think that that direct to consumer model is something that it would behoove most growers, especially the smaller folks that have a narrative to tell about what they're doing on farm for better environmental stewardship and human health and animal health than husbandry, the things that fall into the more regenerative category. Those are the folks that are producing premium food products for which there is growing demand. They ultimately need to be able to tell the consumer their story in order to capture that premium. So it makes more sense for that type of user to try and access the consumer directly because if you're selling into the wholesale supply chain, that story gets lost. That's all about efficiency and scale, the wholesale supply chain.

Matt Nicoletti:

And we have a very secure food system because of the efficiency. We now spend a smaller percentage of our disposable income on food than any other time in history. Back in the early 1900s, I think the average was about 50% of weekly income spent on food, now it's about 6%. with each younger generation you're seeing a higher likelihood or desire to spend premiums on food that is perceived to be either better for human health or better for the environment. The generation with the least amount of money is the most willing to spend a premium. That's just going to be a growing trend in agriculture, especially in the highly commoditized space, the broad acreage crops, the corn and soybean growers. They have been lucky to break even for the past 10 years.

Matt Nicoletti:

Where does that differentiation come from? There's a great argument to be made for regenerative practices reducing costs on farm and improving crop resilience. Where they're going to see a lot of support is the consumer demand and the willingness to pay premiums, supply chains are going to have to be built around that And I do think that technology is going to be one of the main avenues through which those producers are going to be empowered to reach the consumer and capture that premium by being able to tell that story.

John Mannes:

That's exactly what we've seen from folks in the vertical farming space. You would think that they would be going to market for mass market fruits and vegetables, but actually it's all a play, at least initially around premium products and services and trying to produce things that otherwise the economics wouldn't make sense for. The main question for you with all of that then is the degree to which that market has been affected by the trends we were just discussing with COVID and oil prices, et cetera. Have you seen demand dry up for some of these premium products?

Matt Nicoletti:

Not necessarily from my perspective. We're not actively involved in the marketing post-harvest of these premium products. Other than organic feed ingredients, that demand has dried up a bit, specifically on the organic dairy side, which is where I have the best frame of reference. Those economics have been questionable for the better part of the last several years, and there has been an oversupply of milk. Organic feed prices have just been declining. We've seen a decline of about 20 to 25% over the last six months in the prices for organic feeds.

Matt Nicoletti:

If you're an organic dairyman or an organic poultry producer, and you locked in the price of your feed six, eight months ago for this contract year, you're kind of kicking yourself in the butt. But I've spoken to a number of folks, I sit on the board of a non-profit that's trying to advocate for soil health policy to incentivize growers to improve the health of their soils. One of whom is a regenerative grazer, and this trend was a boon for him because he worked with a small, independent processor to get his beef slaughtered and has a direct to consumer model that he had already developed. It's only going to accelerate that trend of those folks going more independent. Part of the reason is because there's a perceived resilience in that type of a supply chain more so than the centralized supply chain.

John Mannes:

Yeah. I mean, the theme there to me that sticks out is the flexibility piece. And we've seen that across a number of different industries, but just by nature of having the choice to distribute through a different channel, you create more flexibility at which to your point, resilience to your supply chain.

John Mannes:

I'm curious, given that you've been in this industry for a long time, obviously have a really strong family connections to the agriculture industry. Can you speak a bit to what happened in 2008 during the last recession and how this is either similar or different?

Matt Nicoletti:

With any sort of an economic downturn in the agricultural space, you will see it driving a trend of consolidation. And that is something that's just inevitable with supply chains that exist at scale. It's natural for people to try and grow and get larger in order to improve their unit economics, just simply through economies of scale. And in 2008, again, the best frame of reference I have is the dairy economy, in terms of the industry that we support here at Penny Newman. In 2009, there was a dairy crisis just due to an oversupply of milk. It led to a lot of dairies going out of business. You essentially have these distressed assets that become available for sale and other opportunistic larger operations that were able to survive, can acquire those distressed assets in a manner that just accelerates consolidation.

Matt Nicoletti:

I would say that that was one of the biggest things that we saw happening in 2009. We're actually seeing something similar now, and it's not just COVID related. It's also trade war related. It's also just simple supply and demand related. One of the things that California is known for its ability to produce almonds, I believe it's about 80% of the world's almonds are produced here in California. And that market went from about $2.50 a pound down to $1.55 a pound on the heels of COVID and on the heels of the crop report and the expectations of there being a record production this year.

Matt Nicoletti:

But more and more people have been planting almonds, supply side has been falling in an upward trend for a number of years now. We are just now seeing farm bankruptcies starting to pop up, which we haven't seen in the better part of a decade. I think the trend that we're going to see continue here is consolidations. It's really inevitable. And that does to a certain degree run counter to the trend we're seeing take place in the regenerative space, but still, commercial farms out here are king and these sorts of downturns do accelerate consolidation.

John Mannes:

In that sense, it's more about competitive differentiation and how you build a sustainable business maybe differently than a farm had been run historically. And you're saying that you're seeing a significant portion of smaller farms at least considering or starting to think about and take steps towards greater diversification in ways that enable them to remain competitive against some of these larger players that are consolidating?

Matt Nicoletti:

Certainly, yes.

John Mannes:

I want to spend the last couple of minutes here just talking through some of the advice you have, both for folks in the industry and then also on the technology side. We'll start with the industry itself. You have a network of a lot of folks, farmers, distributors, equipment, sellers, et cetera. Can you just give listeners a little bit of an inside look into the advice that you've been giving these folks as they navigate COVID and the trade war and the oil price situation that we were discussing?

Matt Nicoletti:

There's a cultural apprehension in this space to adopt technology. There's a cultural identity associated. This is how we do things. This is where I'm a multi-generational farmer, I'm a multi-generational business selling equipment, whatever it may be, but it's coming. And it's really an inevitable wave that you cannot fight. There's in a nutshell, a simple thing that I can tell people it's pay attention to technology, leverage your resources and your market reach to support entrepreneurs that you believe in, keep an open mind.

Matt Nicoletti:

And then the second thing, if you're not thinking about environmental stewardship and it's human health in what it is that you're doing, you will be forcibly made irrelevant, whether it's by regulatory burden or change in consumer preferences.

Matt Nicoletti:

As mentioned, the younger generations are more likely to want to pay a premium for something that they perceive to be either better for them or better for the environment. Just simply from an opportunistic perspective, folks should be thinking long and hard about that. What am I doing to make a positive impact on the environment? And ag tech is in itself inherently aligned with improving all of that. I mean, just speaking anecdotally, almost every single one of the entrepreneurs that I interact with, they are socially minded. They are trying to increase transparency. They're trying to reduce the environmental burden of ag. In fact, there is even a thought that agriculture could be used as a carbon sink through these regenerative practices to help cool the planet, which is essentially the opposite of the impact it's had to date through the commercial models. So that trend is growing. I believe it's gaining steam on the heels of this pandemic, in terms of building in food resilience and environmental health to reduce the risks that I think a lot of folks didn't take seriously enough.

John Mannes:

Okay. And just as a closing thought, a little bit of advice for founders, particularly given that institutional expertise that you have from the corporate side. What are some really gritty problems that founders need to spend more time thinking about and hopefully solving for farmers?

Matt Nicoletti:

Well, again, speaking from my own direct frame of reference. In California, a piece of legislation was recently passed that's requiring us to divert 75% of the biomass organic matter that's currently going to landfills and we're going to have to figure out something to do with it. Whether it's composting, upcycling it, unique ways of processing that organic matter into something that can be used either on farm or to produce energy. We see a lot of folks attempting to tackle that problem, but it is a gargantuan challenge and I think California is definitely a thought leader in that space.

Matt Nicoletti:

I think that's going to be a growing trend with the growing awareness around just the immense amount of food waste that we create, upwards of 40% of all food we produce is wasted. In addition to that, as far as the crop input side of the business is concerned, we're steering away from synthetic, cheap, efficient, easy to produce crop nutrients and looking more at the biological intermediary between those nutrients and the crop itself.

Matt Nicoletti:

I certainly think that there's a huge biotech component that is still lacking in the production ag space. There are, again, some folks attempting to tackle that problem, yet we are years and years away from really understanding the nuances of that biology that supports crop production. A lot of problems can be solved on that front.

Matt Nicoletti:

And I would say lastly, as I previously mentioned, there is going to be... At least my personal piece is that there's going to be an acceleration of the decentralized model. The smaller operators that are going to be able to exist are going to be those that are diversified, incorporating livestock and a diverse rotation of crop production. Those folks are going to need technological support for both the processing animals being processed into the various meat products and through a decentralized model. I don't think that there is a great deal of resources supporting those folks or empowering them in getting their products processed and getting them to market. There's certainly some voids to be filled there as well.

John Mannes:

All right. Well, awesome, Matt. Thank you so much. I definitely hope we have a number of founders that step up and start to build some of those things. The ag industry definitely needs them, and we're all very grateful for all of the time that you dedicated for this and your unique insights on this space. So thank you so much for joining us.

Matt Nicoletti:

Of course. Thanks as well John.

John Mannes:

Like it's the case in many other industries, the agricultural supply chain may be one of the first industry wide casualties of COVID-19. Farmers are learning fast that they need to differentiate in order to survive fast approaching consolidation in the agriculture sector. Existing middlemen and wholesalers in the ag supply chain make it hard to differentiate what are in many cases, commodity goods. Farmers are looking for new ways to get to market with fewer middlemen and greater differentiation in order to capture more of the value from production. This means growing more premium products and distributing them direct to consumers with a compelling enough story to drive sales. Technology has a role to play in supporting each step in this new chain, from planning to distribution.

John Mannes:

I hope you enjoyed today's episode of Future Proof. We'll be posting episodes on Spotify, iTunes, and SoundCloud so watch out for our next episode. Check out Basis Sets full research on agriculture at basisset.ventures/research. And if you want to chat about any of the themes from this episode, drop me a note at john@basisset.ventures.

For more information on this topic, check out BSV's research:
Agriculture