The Tiger Cub Investing in Technologies Driving the Future of Agriculture

The Tiger Cub Investing in Technologies Driving the Future of Agriculture

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MAX WIETHE: Hello, everyone, and welcome to Real Vision. I'm Max Wiethe, and today, I'm joined by Dwight Anderson of Ospraie Ag Science. Dwight, thank you so much for being with me today.

DWIGHT ANDERSON: Max, I appreciate you having me. MAX WIETHE: Before we get into ag science and agtech, why don't we get a little bit about you and your background and how you got into this business? DWIGHT ANDERSON: If we're going to go all the way back in terms of the origin story-- MAX WIETHE: Yeah, let's go back. DWIGHT ANDERSON: When I came out of college, and my background has always been in basic industries. I went into manufacturing consulting, I took a job with a client to actually become a plant manager for a paper printing and coating plant. Then after passing through Goldman Sachs as chair in the commodity division, in the cocoa and coffee group, and JP Morgan's oil group, very briefly for both, I went to join Julian Robertson's Tiger management, where after a couple months, because of the departure of the senior person in the firm, Julian gave me the opportunity to run the basic industries group, so investing publicly and privately and in commodities, and so did that for four years and nine months.

And that's really where I developed the broader ranging expertise beyond just commodity futures, or how to do it operationally, but actually investing across the space. After having done that for a number of years, you always want to see, can you do this yourself? And I felt that I had paid Julian back for the risk he had taken for giving me the responsibility opportunity I had, and relative to the evolution of the firm and my ability still to really contribute relative to the much broader and more liquid markets they were pursuing at the time. I thought it was the right time to give it a risk, a chance, and so I partnered with Jason Morales to run the trading desk and operational side. We started offering July of 1999, partnered with Tudor Investment Corp.

We had partnership offers from two other firms, Tudor offered the lowest payout, and the lowest assets, but relative to cultural fit and skill set fit, but most importantly in doing our due diligence, every person who would work at Tudor whether they had succeeded or failed, said that Tudor is good to the spirit of a relationship. As you don't know how the path will go and the troubles that might occur, especially growing relationships and you're still building trust and knowledge for each other, that reliability and that culture was one that we thought was the most important to maximize our probability of success. It was actually their lawyer who pushed us in the end with a name that we chose, and that we had looked at a number of different names and had thousands of suggestions from friends, 20 pages on a yellow pad of suggestions from one friend. In the end, we actually hold off publishing our perspectives a couple days, because we didn't have a name, and Tudor's lawyer, Andrew Paul, just in our frustrations, said just take a name you like, change its spelling and go with it.

Osprey is a bird that has the highest hit rate in terms of percentage when it actually chooses to strike. It'll circle for a long period of time hunting, but when it does, it has the highest hit rate of actually coming up with a successful kill or prey. It's also hung up by the beach in waters and protected by the US government.

We thought that would be a good combination. We went with William Shakespeare's down the Old English of osprey is how we came up with the O-S-P-R-A-I-E, which confuses people both in spelling and pronunciation, but one that is one that we're happy to have chosen because of what it's evocative of. MAX WIETHE: Okay, and so is hit rate just part of your ethos? Is that something you guys strive for to have just a really high hit rate, or are you looking for those homeruns that pay for the losers? DWIGHT ANDERSON: Unfortunately, we do have losers, but the way in which we try to overcome that is yes, both with probability and skew. We try to really focus and fixate on getting an --- RAOUL PAL: Hi, I’m Raoul Pal. Sorry to interrupt your video - I know it’s a pain in the ass, but look, I want to tell you something important because I can tell that you really want to learn about what’s going in financial markets and understand the global economy in these complicated times. That’s what we do at Real Vision.

So this YouTube channel is a small fraction of what we actually do. You should really come over to and see the 20 or so videos a week that we produce of this kind of quality of content, the deep analysis and understanding of the world around us. So, if you click on the link below or go to, it costs you $1. I don’t think you can afford to be without it. DWIGHT ANDERSON: we try to overcome that is yes, both with probability and skew.

We try to really focus and fixate on getting an above average number of our investments successful and profitable, but we also especially, in Ospraie Ag Science, have really focused on what the far right tail could be. We've had the good fortune so far that unlike many venture entities, we've had a no failures, nothing that is not at least moving along towards its targets and its milestones. We've been very lucky on that so far. That will give you a good probability, and also relative to the addressable market, and the levels we're getting for some of those companies and what the payout could be, we do believe that some of them could still be homeruns as well. MAX WIETHE: All right.

Let's talk about that addressable market and really investing in agriculture as well as agtech more broadly. It's not a sector that everybody is familiar with or has exposure to and it requires special expertise. What are the things that people should know about investing in that sector before they get in there? DWIGHT ANDERSON: Well, let me give you a little bit of our background in agriculture that gave us comfortable two decades on to add on agtech as a complimentary part of our portfolio.

It began by just doing years of research, especially from the commodity futures, understanding the economics of agricultural production, having started in cocoa and coffee, expanded into row crops, and also having been materially involved in the late 1990s into the next decade, the first part of this century, in the seed companies, and really starting to understand how the economics for a Monsanto work to be the acquisitions of the companies of people like Pioneer Hi Bred or Decal, who were materially involved a company called Delta and Pine Land, which was twice acquired by Monsanto. One time, the DOJ annulled it and the second time went through, and so how you could wrap different features and stack them within the seed and make that complimentary to an ag cam portfolio. We began investing in farmland privately in Argentina in 2002 after the valuation. The hurdle I had set for my analysts in that space was that they had to beat the government bonds, which was a cash return of the low 20%. To be able to buy farmland after the valuation in the mid to high 20% cash return was an exceptional and unique opportunity.

After buying a few farms, we also understood and appreciated the scale needed so we can generate those farms and some cash and combined with George Soros' Adecoagro entity. Then we're involved with that in roughly from 2002 through 2015, to build up one of the largest South American farming companies, both row crops and sugar production. At the same time, Max, is I took a look at the US, seeing the scale of farming down in South America and I couldn't understand why we didn't have the same scale, and also why there was no institutional outlet for investment into farmland of any scale, in that we'd been approached multiple times by our investors, especially endowments to support them for timber investments, because it gave real pricing over time. At the time, commodities as an asset class was something that was exploding as endowment in institutional portfolios. It was a theme that we think commodity investing from the long side is something that's more cyclical and structural. Especially when you look at agricultural crops, there's a horrible negative real yield most of the time in agricultural commodity futures.

To be able to be long farmland, which gives you a positive cash flow and a positive real yield versus the commodity futures seemed to us just a complete homerun, and also haven't seen something like wheat like Plum Creek in timber. Since we couldn't find any entity out there, we decided to build one. We spent 18 months interviewing different management teams and business plans for the space. We selected one led by Richard Halderman and Zarrell Gray, called Teays River right outside of Indianapolis. We spent another 18 month incubating, allowing them to build their management team. In those three years, we're buying farmland as well.

Until finally in roughly 2007, we rolled our farmland another $450 million into the entity that became Teays River, and Teays River have subsequently grown to become one of the biggest farming companies in America with a material footprint in organic dairy and table grapes and carrots, but also, probably one of the biggest seed producers, again for the ag cam companies in the world as well. We remained partnered in the land and advisory with the Adecoagro, Teays River and longtime friends and partners there. That was our connection on the farming side, Max. We talked about the ag cam side.

My analyst, Yogesh Mago, who was the one responsible for the Monsanto related investments, we developed a relationship with a person who was then CFO, Carl Casale, who moved on to become CEO of CHS, which is the biggest farm co-op that's out there. We have a 16-year history with Carl and Monsanto going back then, and the same analyst. Yogesh is now one of our partners focused full time on Ospraie Ag Science and Carl is actually the partner who leads that investment area. It's being able to pull in their decades of expertise on that. We obviously were involved materially in the midstream logistics storage from the acquisition of Gavilon and building those assets out, which was led by Greg Heckman and now the entire management team of Bunge as our former catalog management team, which we sold for a little over 4 billion to Marubeni and NGL earlier last decade and so we've now been involved in the seed companies publicly, the ag cam farming, logistics but in terms of pure agtech and the inputs and then evolution, it was something that as a customer, it remains one of the largest farmers in the world.

On the production side, we've been involved in understanding yield production economics and commodity futures, and yet we really struggled to develop individual investments on our portfolio of critical mass and size in agtech. Because there were a number of variables that we had trouble lining up all at once, is you need to believe in the economics of the individual investment area construction, you need to believe that the individual companies can get your critical mass in terms of products, that they have an economically competitive model that can't be competed away by the large companies like the Deeres, or Monsanto buyers of the world who can bundle them. You need the right valuation, the right management team.

Taking all those boxes is something that we had struggled to find in a company that had been proper scaled and yet understandable valuation. We had literally, for over a decade, searched and interviewed and stayed on top, but hadn't found something that allowed us an attractive enough entry point. As it is, we were one of the larger customers for these products in the farming area. Finally, going back to late 2016, into early 2017, a company that we had met with before that had a volatile path due to a number of exogenous issues around bio led by Pam Marrone came in, and it was obvious to us that they needed to be recapped and restructured.

We finally found something that had a portfolio of products that had a really unique approach to industries that was separate and that we could see how it had economic value. That was really our entry point, Max. That's how we began saying, okay, we finally now have our bellwether and our entry in terms of the space. For us, it's the aspect also of getting the best people and the best team, and that we have a tremendous capital markets background, we have a lot of understanding of the economics and background of the industries, but each industry knows that people much better more knowledgeable than us. In doing the due diligence, and the investment on Marrone, we replanted with Carl Casale, and oddly enough, he was a customer who actually used Marrone products for his blueberries.

While we were doing the-- we were in touch with Brad Griffith on campus. He was a consumer of another Marrone product. Tom Wiltrout is someone that we'd been involved and partnering with back at Remington and Teays River in the seeding. Tom Wiltrout was the head of Dow Agro's strategy and seed division. A gentleman named Bob Woods who was CEO for North and South America Syngenta. We want to package these historic friendships, but also partnerships and knowledge of some of the best in the industry to say, hey, we're going to actually make this a dedicated portfolio and product out there in agtech.

We'll come to what that portfolios became later, but does that give you the history of how we got there? MAX WIETHE: Yeah, it does. It makes sense Marrone being a recap and restructure that there's obviously some opportunity for you to get a good entry point. I'm looking at your website right now in your portfolio of companies, and it's much more than just that one company.

Obviously, something switched in the industry that gave you this opportunity to get into not just Marrone, but all of these other investments. What is it? How did the sector mature in the last, it sounds like five years really, that gave you this opportunity to get into all these other portfolio companies of yours? DWIGHT ANDERSON: We had always approached agricultural investing from the traditional land ownership. That was because we had taken a look at this, Max, back to the start of this decade, and we took a look at land investing versus almost any other fixed income asset class, whether it was timber, mortgages, you name it, on a 1, 3-, 5-, 10-, 30-, 50-year timeframe, it outperformed in real terms. Putting together the scale of opportunity, which other people have since copied, to allow capital to come into arbitrage that created some really great first mover advantages. Unfortunately, generally, until there's some geopolitical disruption or some an economic shock, the ability to play capital at scales or to outperform and share an alpha in terms of returns in pure row crop agriculture, adjusted for the illiquidity and the supply and weather variable risk is somewhat limited.

We believe that right now in terms of private row crop production agriculture, you're in the middle of a two- or three-year window of windfall profits, tremendously cash, very good profitability for the farmers, and you should probably be harvesting those profits because we have real concerns about row crop profitability for the second half of this decade, due to concerns over transportation fuel demand, the productivity growth in the space, demographic issues, change in our diet and interest rates, and farmland is one of the most sensitive areas to interest rates. So, while it will probably outperform most common fixed income investments, we're not sure it'll be a great absolute return investments being more once you get beyond this two- or three-year window of windfall profitability. Having and then harvesting our capital out of traditional agriculture left us with, okay, how do we actually benefit from some of those headwinds for row crops and what's driving that productivity? Also, what's our competitive advantage? When you take a look at the majority of agtech funds out there, they go farm to table and they spread themselves incredibly thin. Like we talked earlier about probability of success investing in individual investments, we struggle to see how we can have a competitive advantage when they're across the entire spectrum.

We thought about what we had done and who we knew and our network and our experience is farming. Max, we've been farmers, our partners are farmers, that's our network. As such, we're in touch with what the farmers need and use and what the real world reality of actually what you're trying to do when you're sitting on your combine in the middle of the field, and what makes sense or not in just a daily basis. MAX WIETHE: I'm trying to picture you on the combine.

DWIGHT ANDERSON: I have photos. That aspect is we decided that we would focus only on investments in agtech tied to productive agriculture. Whether it's outdoor agriculture or indoor agriculture, which is an evolving space for a niche, which plays great to some of the evolving tailwinds for the space. That's how we vote. By focusing our limited capital, because it's internal capital, and resources just in what we knew, we could take advantage of our farming network to truth source the need for a product as well as its efficacy and probability.

Then we began what we called the double network effect. In due diligencing Marrone, we found out that we knew a number of people who are the customers, and so we could actually diligence what's the probability of the product and also that they had not been marketed to anywhere near the number of customers possible out there who want it and could use that. What we have focused on is how do we reduce inputs, and especially chemical and artificial inputs, focused on chemicals to start, but eventually, ideally cutting nutrients and water use as well too, how to do this in a natural way. Then also census diagnostics to drive those decisions in, as we said, a controlled environment. After making the investment in Marrone and putting the team together to allow us to valuate this correctly with Carl and Tom and Bob Woods and Yogesh and a dedicated analyst, this gentleman, Lee Vetsch, who came from North Dakota Farming, got his masters out there. The real question we get into is, where do we go? And so, it's a focus on not just sustainable crop inputs base, but each individual company needs to potentially make our other company better.

We looked at an investment called Terramera up in Vancouver led by a visionary CEO named Karn Manhas. What that product actually allows you to do is cut potentially individual synthetic chemicals used by 90%, but also, apparently in pro forma, we'll see if it works in the fields too, but seem to dramatically increase the advocacy of Marrone's products. Marrone scientists are excited about it. Our farmers are excited by it, and so that's a follow-on investment. We next came across an investment led by two young men down in Charlottesville, called AgroSpheres and tie them in a mirror arm, phenomenally gifted individuals who came up with a liquid coating that allows the chemicals to adhere to the bottom of plants so you can spray less, [?] more, use less dramatic economic benefit, but also one of the problems with biologics which are Marrone's products.

Just a quick aside, biologics have been around for 2000 years. Those are any naturally occurring elements or microorganism that can be used on farming to benefit yields, but that where the crop can still be called organic. When the Romans were putting copper or copper sulfate on their grapes, it was the first biologic.

Marrone's products are all biologic. The issue with that though, is that they're much more temperamental when it comes to extremes of heat or humidity or other aspects, which are common in the field. The areas where you can get 100% consistent use of synthetic chemicals are more [?], atmospheres coding, their micro cell potentially corrects that in terms of it protects them. It allows you to control the porosity and the [?], but also protection from heat and humidity.

The Terramera science, and then we're all people, we're incredibly excited about the possibility and probability of AgroSpheres. AgroSpheres has made those better, and also gave us greater comfort in investment. And so, as you can see that pyramid effect of how hopefully, in terms of more sustainable, less negatively impacts in the environment, just as competitive economic impact to the farmer, we are getting these pyramid of beneficial companies to each other, and to the farmer and sustainable crop inputs. That's what we talked about, the double network effect of working with the farmers, understanding their need, each company, whether it's a relevant product, and then our other companies in terms of due diligence on whether it would be beneficial to them, if that makes sense, Max. MAX WIETHE: Yeah, it does.

I have a few questions there. One would be it sounds like a lot of these companies already have products. What stage in the maturity, I'm sure it differs from company to company, but are they now at the customer acquisition stage? Is there still proving out efficacy? Are you waiting for the trends around sustainable and getting away from synthetic chemicals and towards naturals to catch on? What is the big move that needs to happen for the demand to really take off? DWIGHT ANDERSON: When we were due diligencing these different companies, we spoke to the head of commercial operations in North America for Syngenta and he said, look, we are desperate for these products, the time is now.

The issue isn't the end use, the market pressure, or whatever else. It's the efficacy and economics of the products, the consistency, the reliability, the scale of market that they're actually equally as competitive for. Give me more products, and we'll buy them. The individual companies have commercial products. Terramera did, Marrone did. AgroSpheres is much earlier and has a very broad range of markets that it can be in, plant healthcare is a company using these products.

We usually like to have the lab risk taken out. It's actually been trial in some field shows probability of use. It doesn't actually have to be selling yet, Max, but investing in concept is something that is so risky that again, relative to our ability to be comfortable on the probability of success, it tends not to be there. Very early stage micro investing, we tend not to do. We have a network of other friends and feeders who we invest in who do that and are expert and will incubate the companies, and we'll look to see them after they've lived with them for 1, 3, 7 years, and actually have developed a product where there's some data on is normally the time period where we would invest. MAX WIETHE: Okay, and so what's the blend within your portfolio of companies that have their product, it's commercially ready to go versus more in that proving out the market fit stage? DWIGHT ANDERSON: To give you, somewhere in that 80/20, 90/10 in that the vast majority, let's say 90% plus actually have some a commercial product that is ready to be trialed at a minimum by farmers on a commercial basis.

MAX WIETHE: Okay. It sounds like AgroSpheres really plays into a lot of the other products that you guys have, is it really like a linchpin investment? Is there anything that makes the rest of them all work? DWIGHT ANDERSON: Well, as I said, AgroSpheres would be on the 10, and so it's one of the most exciting, but also one of the most early stage but it is potentially they're coding the agra cell in the agra cell they have that potentially allows delivery of RNAi, which we're now all familiar with from the vaccines that a number of us have, but there's been billions spent to try to get its applicability to agriculture. Finding a way to actually deliver it in a safe and efficacious manner is something that entities have struggled with.

Not only is AgroSpheres potentially beneficial to a biologic company or synthetic company in terms of its delivery mechanism, it potentially is a flexibility in terms of RNAi. Whether you view it as a linchpin and accelerator, something that's all encompassing, if we're successful, and if it's successful. The scale of what its addressable market, what it could do for the world and for agriculture is the biggest of all of our companies. MAX WIETHE: I think at this point, we've been a little bit high level, and I'm sure there are some people who still don't fully grasp like what exactly agtech is. I think it would be helpful to go back and talk about, and we can take a specific company as an example, but some of the things that you were doing with measuring the composition of topsoil, I think that's a great place to go to understand what exactly agtech is and how it can help farmers.

DWIGHT ANDERSON: Let's start with just an underlying definition. For us, agtech is a new technology that potentially helps improve the productivity as you define in multiple different levels for different aspects of agriculture. It could be something that improves yields, and by improving yield, it could be because you eliminate a disease or a pest or because you produce more kernels of corn, or because you do something for another portfolio that cuts down on the waste in transit. Agtech is anything that really improves the total cost, including stakeholder cost and environmental cost for agriculture, to either the producer and or the end consumer. Just as a starting point what we define it as, and so, in terms of topsoil, there's a brilliant gentleman named Friedberg, who helped create Climate Corp, and lead that for a while, selling it to Monsanto, and then left, and created the Production Board, which has a broad range of investments across agricultural and food.

We had been involved via an investment that Carl Casale had led into Trace Genomics, which was early on for something similar that has commercial kits out there to help people assess the pathogens and the like in their soil that's being sold by Wilbur-Ellis, but Pattern for us was that next step up in terms of an easy to use, very bottom line beneficial solution to help actually map what is in your soil? What's the microbial community that you can do that, because you can understand the aggregate of the nutrient and the potential latent disease risk, you can better actually map. Now, that we have much more precisability to apply pesticides, herbicides, fertilizer, water at much more granular level per acre than you had historically, where you just dump it from the sky as much as possible, is more and more farms have the ability to adjust based on squares, even within the same acre within the same farm. Something like Pattern coming in to actually be able to help you figure out what your latent risks are, what are the current problems, in terms of soil, how that's creating issues in the yield and healthier crops is something that has dramatic per year, intrayear benefit for farmers on controlling the problems and improving their crops, but in a way, that's much less damaging to just the round-up, okay, or DDT solutions of decades past. MAX WIETHE: Okay, it sounds almost analogous to what's happening with personalized medicine.

DWIGHT ANDERSON: Oh, yes. The answer is our individual knowledge and unraveling of our DNA and ourselves and our code, and then the body is two decades ahead of where we are in agriculture. We try to learn from the business models of Big Pharma and biotech and the others that are ahead of us in terms of science and applicability, and how you roll that model out. The aspect of those industries to agricultural and agtech is pretty similar, in that you had a really unique set of events.

In the three through five years ago, you had a massive, big ag cam, ag input companies, and also a separate number in terms of fertilizer, nutrients, and they've all merged and combined. Now, you've had mature consolidation into four and a half. That's created some great opportunities for us. Because first off, it made many more incredibly capable people available than you had before, either because divested, or they didn't want to work in the new culture or community that they were in.

Also, it led to an incredible internal focus in terms of those companies on cutting costs, eliminating projects, how do we focus our pipeline. But just like you've seen in consumer goods, like beer, or pharma, those same consolidations lead to a collapse of the growth for future products in the pipelines. That entrepreneurialism in the new products for small capital, we're talking about sub 100 million, sub 150 million investment areas, is something that are completely eliminated in these behemoths. And so now, over the next few years, they're going to be emerging from this internal cost cutting project cutting focus, with dramatically reduced pipelines, but also a real need for growth and at the same point, dramatic pressures on both their historic products, and in the current to give things that are more sustainable, less impact. And so, the aggregate biologic world and what we call sustainable crop inputs is an area where we believe were in that creative entrepreneurial segment that those companies are going to be doing desperate to have the need to acquire or JV or merge with in order to actually create the growth in their revenues companies for the next decades to come.

MAX WIETHE: We've touched on some trends already that you guys are trying to take advantage of, what are some of the other big trends that you think there's opportunity in that we haven't discussed yet? DWIGHT ANDERSON: Well, there's pluses and minuses in trends out there. One of the real different things about investing in agriculture versus something like oil and gas, or metals and mining, is there's a unique positive about farming in that, on average, you grow more per year per acre. If you have an oil well, it declines over time, if you have a mine, it depletes, and you have to go find more and you have all the CapEx to do it.

As long as you manage your water rights and [?] your soil well and intelligently, proper stewardship, you will grow more overtime per acre on average. The real impact in ag in any one year is supply variability due to weather, but obviously, that averages over time. It's a very different mindset of how you approach agriculture than the rest of basic industries. It's also an environment that you tend to get some form of government support versus attack. Agriculture is probably one of the greatest opportunities to reduce carbon throughout the chain in terms of benefiting the world in carbon removal, which the other industries don't have except by going away. Then you also have the issues which have been affected over time where you had a temporary repricing of corn in the decade from 2001 through 2011, where it went from $2 to $8, because ethanol went from 1.5 billion gallons to 11.5 billion gallons.

That surge of the biggest market in the world, which is energy into agriculture, caused a temporary repricing to buy more acres and to create the supply for that. That phenomenal tailwind then, we believe becomes a headwind at the second half of this decade. At the moment, you still have good ethanol demand. You're having a temporary effect from some renewable diesel that's coming in that we think could cause a real two-year window of potentially an explosion of vegetable oil prices, which will be good for the farmers and the intermediaries like Bunge. It's worrisome to me on a human level, because it is one of the main staples for poor people's diets, especially in Asia.

Prices have already risen materially. If they double from here, the impact that has to people's ability to feed themselves calories is a real humanitarian issue. The government programs in place causing that will probably react afterwards, rather than on a forward looking basis. You have this window here, where as I said, row crop profitability is great. Some of that is also created by China is utterly revamping their protein and meat industry. They've had dramatic health issues, a cause of possible halving of their hog and pork herd.

The anomalies within diet, and meat and agriculture around the world are staggering to think about. China obviously is 15% let's save the world's population, keep it simple. They produce and consume more than 50% of all the world's hogs and pork, and also less, okay. You have this anomalies of diet. The way that was done was very different in terms of meat production than the US.

In the US, as of two years ago, four companies produced over 80% of all the pork production. In China, four companies produced a little over 8%. The way in which the hogs were fed was on a much smaller individual farm or moo area, and they'd be fed scraps in a random ration of what's available. The government has said we are going to corporatize and professionalize and commercialize this industry, so they're in a massive expansion. What that's done is it also commercializes their feed ration to standard grains, soy meal, DDGs, those sorts of inputs, and so it's leading to real expansion of their imports. At the same point, they've already had some phenomenal growth in their poultry and aquaculture industries to meet the gap caused by the decimation of their hogs.

There's a geopolitical angle of pollution and the embarrassment over possible disease, from their lack of meat, fresh meat and on noncommercial channels for meat production. And so, as China is corporatizing their ration, it's leading to a material expansion of imports. At the same time, you have some of these other programs like the renewable diesel hitting home. That's what's creating this two-, three-year windfall that we spoke about for row crop agriculture.

However, supply response in agriculture, it's not like a mine that takes 3, 5, 7, 11 years to come on to the permitting and difficulty and financing and death is it is capable of adding acreage and growth in production. At the same point, you're in this complete time period where for most of the developed worlds, populations are hitting their peak in terms of size and also age. As you age and as you get wealthier, you eat more fruit, nuts and vegetables, less meat. China's per capita protein consumption is already higher than South Korea's and Japan's so you're not going to get more protein per capita, unless you have a complete change of diet to Argentina, which we'll expect, especially as they age, because your population is about to turn over. You'll see a change in that composition, we believe more aquaculture, more poultry, more fruit, nuts and vegetables, but the most inefficient converter of grains to M protein is cattle and then pork.

As Japan's already gone over its peak population, as Europe is potentially approaching that and definitely aging, as North America is aging, as China begins to age, that aspect of the composition of diet is going to lead to less red meat consumption, which is going to free up much more grain, which is one of our concerns for the second half of this decade about row crop. At the same point, the kind of protein natural need, the one growthy area in the near term, short term is going to be India, but India is not going to eat beef. They're going to be poultry focused, aquaculture focused, which requires different protein consumption.

How we've set up our agtech portfolio is designed to support farmers' variable costs to make them both environmentally friendly, and lower, but also one that would work in a high and a low profitable environment. High profitability is better to get them to take risks to try out new stuff. Hopefully, that'll be in place by the tail end of this decade. At the same point, in terms of the crops we're focusing on, leafy green fruits, nuts, vegetables, and also controlled environment, indoor production of that is to take advantage of the change of diet, the change of location diet, the environmental pressure, and the evolution of we think, is the food delivery system. MAX WIETHE: Let's get into that evolution of the food delivery system.

What does that mean? DWIGHT ANDERSON: Let me give you two great examples of people who are evolving to deal with that. One is Green Plains, which is a publicly traded historically ethanol company becoming a protein company, and what is controlled environment in general. Green Plains was a company that had a very simplistic product portfolio when it began. It took corn and broke it into distilled dried grains, DDGs, and ethanol.

Worked well in the beginning when the demand for ethanol was exploding, part of the government mandate, but the problem is there was a cap on the amount of room you needed for those calories to make fuel cleaner and also, just engineers are just so darn good that you're able to grow productivity per year, and so it was able to grow faster than the market for demand because of limited transportation fuel demand growth. The management team is visionary. They're a great business people entrepreneurial. They originally tried to use those windfall profits from the early years to increase their capital base and diversify their revenue streams into things like cattle that consumed DDGs, or vinegar, which was also fermentation. When the management team really had an epiphany from looking at a technology that we've looked at due diligence and invested with them, a company called Fluid Quip that allows you to consolidate your capital base, sold off the cattle, sold off the vinegar, using just your existing plants, and now you can crack a kernel of corn the way you can crack a barrel of oil. In between, they've added corn oil, which is going to benefit materially in the next couple of years because of the explosion of vegetable oils.

Now, with Fluid Quip's technology, corn ethanol plants can start producing clean sugar, industrial sugar, because one of the fastest growing areas out there with a very consolidated industry is industrial sugar for fermentation, which is one of the fastest growing areas. You can produce high protein. The one structural area for growth really, this decade next, is aquaculture and that we are still overfishing the world sea population, as it is the Chinese especially with the largest fleet, and also the small fish for fish meal to feed land based aquaculture. You've had a flat wild production in cash for over 30 years now and yet per capita consumption of seafood continues to rise every year.

We think that's going to accelerate as the population ages, especially in China and as India comes on. How do you meet that? It's a land based aquaculture. That requires a very certain specific food, a high protein diet, which corn-based DDGs and protein can actually meet. Some of the most sought after high protein out there for aquaculture, and so Green Plains is converting, using Fluid Quip's technology, all their plants to be able to produce that high protein and market, dramatically improving their margin and getting into a structural growth area as opposed to gasoline that because of EVs, whatever else is going to be full. Now, all of a sudden, they can produce five products. We think eventually, their corn plating using Fluid Quip's will be able to produce 20 products.

In Brazil, Fluid Quip is selling to the sugar plants, who convert into ethanol or sugar to then also process corn so they can run all year round, and also increase the variability. You're turning the simple plans into the equivalent in complexity of petroleum refineries or even downstream chemical companies. What that does have, the ability to take advantage the most expensive calorie, improve your margin, dramatically different end markets, get into markets that have true growth, like aquaculture fermentation industry, clean sugar.

And so, Green Plains moving itself from a decaying gasoline transportation fuel market, and DDGs to get fed to beef and somewhat to pork to now fermentation clean sugar and the structural growth and margins of that. More importantly, high protein, which goes to aquaculture and some protein and some poultry. It's a complete repositioning and flexibility for their plants on a focus limited capital base.

Fluid Quip is the enabling technology, and we're involved with that with Green Plains, and that capitalizes on some of those different wins we spoke about. The next aspect is distributed ag or consolidated agriculture. We watched but didn't participate in investment wise in the development of greenhouses, especially in Europe, as something that is actually competitive with outdoor ag for certain crops like lettuce. We missed those that become in certain regions like the EU competitive with outdoor ag. We never made any money on that. We've been watching controlled environment for two decades, but always is something that was too expensive and also too carbon inefficient because of the amount of electricity used.

Finally, in the last three years, with the dramatic improvement in lighting and LED and efficiency, we were able to evaluate for certain very specific regions, areas that are off the main logistics channel, for certain specific high value products like a basil. Controlled environment was able to compete with outdoor ag and were able to compete in a dramatically more environmentally friendly way. No pesticides, no herbicides, they use 95% to 99% less water, dramatically less waste, generally because of local production. We go through a couple terminology, indoor ag is anything produced indoors, but a greenhouse, you tend not to control the light, because it's glass, okay, you don't really control the heat, the humidity, the CO2.

True controlled environment is actually a closed-off room and walls, where you control every variable. That's controlled environment versus indoor agriculture. The majority of companies that are now public and that you're familiar with are not actually anything that is going to completely disrupt agriculture. They're the same model, but brought to indoors, and some brilliant people there, some brilliant components, but all of them have a massive capital cost. On an operating basis, because they've been funded by equity, they can potentially compete, but not in terms of a return.

They want to take every risk possible in the book. They want the science tech, agtech risk of developing the technology, they want to own the farms and farming is low return and capital intensive. They want to build brands for their end products. Holy cow, that's a lot to get right and a lot to get wrong. We've pursued a distributed model that we think can actually truly transform agriculture. By going after an investing in focus in supporting companies in the end container market, where we will only invest in hardware or software for indoor agriculture, we will try to actually enable the world to feed itself and enable companies to grow and evolve, we will not actually compete with our customers and be the end customers.

We also want to create something that is an affordable option. Part of the thing I think that people have missed in a controlled environment is if you think about your room, the bigger the room is, the harder it is to control the temperature or a draft humidity in the center of that room. We're trying to do that on a warehouse specific basis, which you can only do with an inordinate amount of capital and automation. By making it a uniform box, uniform size, something like a container, is we can change the level of automation, we can do it at an affordable level. Does it cost you $140,000 for a frayed farm fund, or 200? Or do you want to go up to a million for something for local urban vegetables? We can customize, but what it allows us to do is arbitrage logistical inefficiencies. If you want to be in Aberdeen, South Dakota with a population of 30,000, they can't support the mass of warehouses for those companies going for it.

The other companies going for mass generic production, they're trying to get the lowest cost possible, but of the lowest value products, and they're dealing with the most difficult customers. Whole Foods, Kroger, Food Lamb, Walmart, those people are horrendous to negotiate with their [?] and you have to compete directly with Bruce Taylor and outdoor ag. The great thing about indoor ag but especially controlled environment, is if you want me to create a tomato that tastes exactly in the same conditions as you would a Tuscan tomato from Italy, I can do that every day of the year, everywhere around the world.

The only way to get a return for that is in turn, those tomatoes are expensive, or basil. You have this logistics channel that goes basically from the bottom left to top right of the US, and everything along that is competitive. That's also population centric.

That's where these large control environment companies are going for it. Our companies are going everything off of that. At the same point, we're also trying to do something about the food deserts, and also the food inequity that exists in the United States. Too much of the United States has bad diet. You look at the inner cities, what we can do by working with a number of different social and service organizations in the cities, our farms are being used by a battered women's shelter Miami, the Boys and Girls Club of Houston will be doing this soon.

They can own these farms, the local people can own the farms or the entity can, get equity, they get the cash flow, they get jobs, they get environmentally friendly, nutritious blend of food. We can finally do something about nutritional inequity, at an affordable level. No one else has a solution that allows you to do that in those areas, both remote and urban. That distributed ag, we're the last mile.

And so, at some combination, we're trying to be Uber, and that these small farms can grow what you want. You can grow a couple of different products, you grow what you needed in your area, you're flexible, you're not monolithic production, like the other large entities. Also try to do something like what SAP has done, develop a uniform operating system that works for all controlled environment. We'll support our companies, we're going for hardware and software occurring revenue, what recipes, and at the same point, rather than having one large, central solution area, like if you look at freight farms, by the end of this year, they're going to have over 500 farms operating in 49 states of the United States, we're missing North Dakota, we hope to solve that, over 24 countries. All of these farms are collaborating, and you're getting the data on who's doing what, how better.

These best practices of having 500 different labs, which will soon be 1500 labs, would be 3000, will allow us to dramatically move along the productivity curve and support them to make environmentally friendly, energy, carbon, nutritional affordable, and keep the equity in the profit in the communities. For us to be supporting that, that is truly agricultural disruptive. It's at the last mile, right there, no national trucking, no the waste that comes from all of that, and where the profit stays with the owners of the farms. That for us is what's going to be really evolutionary and disruptive for agriculture. MAX WIETHE: I can see how excited you are about this trend, and there's a lot of positives to discuss. You opened the door to something that I think is important for us to discuss, especially because I'm sure there are some viewers who are excited to go look at agtech opportunities.

I want to talk about the business models that you don't like. What are the things that are out there that maybe are getting some buzz that you just think it doesn't work? Because we should protect investors here a little bit from putting good money after bad,. You don't have to name any names or anything like that but just things that you think just doesn't make sense. DWIGHT ANDERSON: The answer that we've already touched on is I think the large scale concentrated, high volume, single product facilities and controlled environment will not earn a sustainable return on capital, especially as the valuations are applying in the public market.

I don't think they'll accomplish what we want to in terms of waste or carbon, and I think they're dealing with the most competitive customer base and the most competitive products. I would raise questions or concerns about those business model approaches. One of the things that would make people highly questionable about is the biggest source of dollars out there that companies are desperate to allocate, to go out and promote NPR and check the box is that they're doing something about carbon. Some of the biggest agtech companies out there, some of the biggest names and valuations are wrapping themselves in the we're going to provide a carbon solution, and so they'll go to the companies out there like the FedExes of the world, and FedEx is desperate to say, hey, we're putting a billion dollars to work each year to balance out our carbon footprint.

And so, the real fixation I would urge people to do is, are the solutions that they do actually fullcycle doing anything to actually change the food waste in the carbon footprint? Carbon is something that everyone is saying within the ESG mantra, and that very few people are actually accomplishing. Max, as you and I spoke prior. I take a look at what's going on in the electrical vehicle world. It's to me a disgrace how the government incentives are creating bad outcomes. You have nickel that's mined and melted down and process to create the batteries from Indonesia to China, in a massively carbon polluting and energy intensive way, that go into a Tesla car.

The Tesla car is sold to in Germany, and because there's only automotive carbon credits, when that Tesla is sold, they get that credit, which again, can sell to another car company or monetize, but Germany close all their nukes. Their backup power source that runs a good amount of those cars is they dug new lignite, low calorie, hello, coal mines and greater coal power plants. By our math, those Teslas in Germany, from fullcycle, from the nickel to the car to emissions are two to four times as carbon emitting as a VW diesel in Germany currently. That's a government mandate, where all they do is say, hey, let's look at the tailpipe.

They don't look at the total cycle. We look at a number of the other more specific companies like what Green Plains is doing in terms of converting corn that takes in two out of the year, and then a carbon sequestering pipeline and sequestering carbon that's actually completely removing carbon from the environment and yet they don't get carbon credits today. I think that the government system and the different incentives will evolve and the really underappreciated part of the potential profitability for Green Plains and other agtech companies is the enablement of getting credit for true carbon sequestration, elimination and conversion from the environment versus false, like Tesla in Germany, but we're not there yet.

I would really urge investors to pay attention not just to the business models, but to the fullcycle environmental effect. MAX WIETHE: Are there big lobbying efforts going on to get that changed? DWIGHT ANDERSON: Yes. Well, lobbying, negotiating, relieving, we go through all the list of what's going on. The EU has created a more than trillion dollar incentives for agricultural carbon and their stimulus program, but that hasn't been actually divvied up and allocated yet. They're even in the alternative vehicle space. You're watching people react.

There's a company called Freyr, F-R-E-Y-R, that's going to make a carbon neutral battery for the EV up in Norway. That's something that's reacting to try and get the better allocation of credit. In agriculture, in the current stimulus bill that's being contemplated going forward in infrastructure, and then the EU one, there is aggressive work by different parties, not all of them altruistic, to try and get those carbon credits allocated out.

I hope that they're done in a way that's less directed such as the government says, look at the tailpipe, and one that actually says, hey, let's use an independent party like the OMB does in terms of scoring the budget to say, does this give total cycle carbon effect? MAX WIETHE: We're coming down to the end. There's one question that we haven't gotten to I wanted to touch on, which is the difference in opportunity sets between private and public markets and how you approach private investment versus public investment. DWIGHT ANDERSON: Public investing, it allows you to at least choose the size of your investment and manage and create your portfolio based on some constraint of liquidity, but generally what you view the risk return of each individual investment. If you're wrong, you can get out, or if a better other opportunity comes along, you can get out. When you're in privately, the size of your investment, at least initially, is more based upon the liquidity needs of the company, versus your assessment of the risk return, but because of the illiquid nature, the opportunity cost created by tying your capital up when in certain exit, the opportunity cost is almost as big as the actual risk. Because if you're wrong, you're stuck.

If something better comes along, you're stuck. Automatically, the return or less were even so much higher investing privately. The difference, although in privately is public, you're limited to what is public and what you can do. In the private, you can either build a solution, which we've done often, or you can go and find a solution for what you want. There's a much greater breadth of investment opportunity, albeit higher risk and partially illiquidity in the private markets.

That ability to build a business and build a solution is something that is a phenomenal opportunity. Then when it hits a certain scale, a certain capital needs, you have the public markets as an option potentially to go there. Especially with now SPACs, and all of these growth companies to get a certain future valuation. There's been a massive evolution of liquidity in the private markets, too. You can take companies to a trillion dollar size, and not have to take them to the public markets earlier, and so much greater flexibility privately now than you had 10 and 20 years ago. MAX WIETHE: When you look at the opportunity set, and each area is one clearly more opportunity in private versus public? DWIGHT ANDERSON: At the moment, relative again to the breadth of opportunities that you can find, invest in and help grow and develop.

I would say that the private is still more prolific than the public. People are moving more of those private opportunities into the public arena, and so those options are growing, but you're still talking a fraction of the ways to be able to express a view publicly than there are privately. MAX WIETHE: Okay. Well, Dwight, thank you so much for taking the time to speak with me today. I know I learned a lot about agtech and the agricultural sector in general.

Thank you to all the viewers at home. DWIGHT ANDERSON: Max, very much appreciate the time and look forward to speaking to you going forward. NICK CORREA: I hope you enjoyed this special episode of the Interview, the premier business and finance series in the world. However, this is just the tip of the iceberg.

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2021-06-16 17:11

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