A Contrast of Market Driven versus Speculator Driven Vertical Agri Economy rev 1 3

[MARKET AND PRECEDENT PRESSURES SET STAGE FOR TECHNOLOGY-DRIVEN
AGRICULTURAL VERTICAL CHANGE] February 10, 2017
1 | Grainster Ecosphere
MARKET AND PRECEDENT PRESSURES SET STAGE FOR TECHNOLOGY-
DRIVEN AGRICULTURAL VERTICAL CHANGE
GRAINSTER ECOSPHERE
Whitepaper by
Roger B Cunningham
February 10, 2017

ABSTRACT
Since 2005, United States production has fallen inside its four major food crops: wheat, corn
and coarse grains, soybeans and rice. This decline in production has been precipitated by a
decrease in global demand for US produced crops, and the incumbent 20 to 40% reduction in
prices sustainable by current famer-to-speculator verticalized fixed sourcing practices. This
study white paper contends that a cycle of deflated demand-pricing will continue, as a
symptom of archaic industry vertical practices called ‘monopsony’, and despite gains in yield
and efficiency from US field production technology. A trend which will continue until a tipping
point is reached wherein the current US market vertical must be disruptively restructured to
allow more flexibility in addressing global demand, in lieu of existing speculator and cartel-
like entity directive influences. This paper contends further that a specific technology and
practice stack will play a key role in this disruption, igniting replacement of the role of
speculator with decision sets to be enacted by small to medium-sized farms, mimicking the
free market transitions undertaken by several precedent industry verticals. Moreover, this
market change will not be voluntary, rather eruptive in nature. It will behoove market vertical
participants to adopt advantageous technologies and vertical practices which harness this
economic eruptive potential, or face the stark reality of becoming a victim of its overall impact.
CURRENT STATE OF AGRI-VERTICAL
US wheat stocks at the end of January 2017 are at their highest level since the late 1980’s, while pricing
has fallen on a season-average basis to be the lowest level since 2005; part of a sustained decade-long
downward trend in grain prices.1
Concurrently, while the US produces over 40% of the world’s corn supply,
it only exports 12% of its entire production to meet world demand.2
This lack of demand for US corn on
the part of the world community is offset by legislated and deliberate-reactive increases in allocations
directed to ethanol production.1 2
In similar fashion, overall stocks of US coarse grain, rice and oil seed
have risen as a result of a sustained fall in worldwide demand for US production.3
Thus, production plans for these top four grain classes indicate a fall in the overall market value of each
group; a result of pricing pressures and oversupply conditions inside US agricultural markets.2 3 4
To wit:
 Wheat: Current Price $3.80/bu - lowest since 2005 3
 Coarse Grains and Corn: Current Crop Value $49.9 B down from 2011 $76.9 B 2 3
 Soybeans: Current Price $373/mt – down from $619/mt in 2012 4
 Rice: Current Price $367/mt – down from $612/mt in 2012 4
Expanding these indices to a 10-year horizon and dampening the influence of the 2012 drought, only
serves to reinforce the validity of this long term sustained downward trend in US crop value. Indeed, all
crop values have fallen for the four major US production food-crops, as part of a sustained downtrend in
value of overall US crops on the international market.4
Despite cessation of the drought and increased
yields per acre during this same period, demand for US production has consistently fallen across the world

markets.2 3 4
Exhibit 1 below is extracted from the National Corn Growers Association: World of Corn, 2016
Annual Report and depicts an example slice of this sustained downward trend in value of US crops.2
Exhibit 1
Expanding this horizon to 10 years, we show below in Exhibit 2, a combined index for three of the major
US food crops which depicts the (drought adjusted) fall in demand and price for US grains:4
Exhibit 2

Both the Exhibit 1 Corn Growers Data as well as our own index calculations depicted
here in Exhibit 2, demonstrate a stark portrayal in decade-long sustained 9% annual
drop in both demand and price for US Grain based food stocks. This serves to harm
small to medium-sized farmers first, but in the end, will serve to negatively impact
both the US Agricultural markets as well as global resilience under the strain of
climate change induced drought/rot and famine conditions.
This oversupply and drop in value as the case may warrant, of US agri-product stands in stark contrast
with the current trends in world food demand. Worldwide consumer demand for grains grows each year
by a sustained 3.25% per annum.1
Indeed demand for feed grains in particular is expected to double by
2040, even independent of emergent famine and unanticipated drought or shortfall in production
conditions.5
India for example, despite entering a famine condition in 2012 and being ranked 66th in the Global Hunger
Index compiled by the IFPRI (International Food Policy Research Institute)6
, wherein the level of hunger is
deemed ‘alarming’, has resisted import of US food crops, selecting only to import US feed grade and
ethanol products instead.6
As well, rather than focusing on yield statistics per hectare, India has elected instead a strategic focus on
‘overall sustainable soil fertility’ – in particular as it relates to water/irrigation sustainability and
prevalence of organic farming practices.7
Much in contrast to the US, India defines sustainable soil fertility
as comprising three features, and not simply one:7
 The ability to supply essential human and plant nutrients from soil, along with water in adequate
amounts and proportions for repeated seasonal plant growth and sustained nutrient content
 The absence of toxic substances which may inhibit plant growth or impact human health
 Total sustainable annual yield per hectare.
This contrast in goals, goals which could be otherwise communicated and priced into risk-return-cost
planning inside a free market (non-monopsony) system, stand at the heart of the set of objections held
by members of the Indian agricultural community over US agri-food practices and product imports. Similar
resistance can be found in states such as Russia, Brazil, China, Pakistan and parts of Europe, comprising
fully 60% of the world’s population and even greater representation in terms of food security risk.6
Much of this resistance sentiment arises from social hype around various production
technologies; however, it is apparent inside ten-year market sustained data that a
mismatch in US export effectiveness and worldwide demand exists, regardless of the
validity or not of such contentious issues.

PROBLEM STATEMENT
Extant vertical speculator fixed relationship practices (monopsony), combined with cartel-like activity on
the part of large players inside the current US agri-foods industry are contributing to an inability of small
and medium sized farms to sense and respond to worldwide demand and price fluctuation in commodity
food types. This condition serves to introduce risk which threatens the future of current and future global
food security, risk which cannot be overcome by new field technologies nor logistics alone.
PROBLEM DESCRIPTION
The 9% consistent deflation in
worldwide demand for US
Agricultural food products will
continue to place pricing pressure
on small and medium sized farms,
consistent with an observed decline
in acres of active farmland since
2007 as depicted in the chart to the
right.2 8
This increased pace of elimination of the small and medium sized farm, will result in increased industry
decline and consolidation, inside a response to defensively seek ‘efficiency’ gains. However, these gains
in efficiency, both have not historically, nor will they increase the acceptability of US agricultural food
products on the part of the global community. The gains will simply come at the price of loss in flexibility,
resilience and industry dominance on the part of the United States.
Further, the global cost of both the speculator (cartel-like) practices, as well as this anti-competitive
deflationary state of the US Agri-Foods vertical, both bear negative implications inside the world markets:
 Cost Efficient but not effective
 Dilutes value on world market
 Unable to respond to
o Oversupply
o Emergent demand
 Customer input is squelched
 Farmer input is minimal/blind
 Mistakes amplify catastrophically
 Opportunity for abuse/cartel increases
 Illiquid assets and cashflow
 High risk/Low profits
 Market pseudo-dynamics & monopsony failure
 Resists innovation & development
Speculator Driven Vertical (Cartel)

THE PRECEDENT: MARKET VERTICAL EVOLUTION
Several world market verticals have undergone similar types of transition from cartel-driven and middle
entity or speculator driven sourcing – into market driven and supplier and buyer synergy-empowered
versions of their previous state. Some market verticals made this transition smoothly over time, and some
were more chaotic and catastrophic in change. This process began with chaotic transitions of the equities
and commodities markets in the 30’s and 50’s, through to the most recent changes in the consumer goods
and painful changes to derivatives markets in the 90’s and 00’s.
A Market Driven Vertical in contrast bears significant advantage, not simply for the small to medium-sized
US farm, but to the global markets in general.
GLOBAL FOOD SECURITY RISK IMPLICATIONS
Once one examines the risk profile entailed inside an over-verticalized US agri-foods vertical, two
implications and one derived side benefit become clear with respect to global food security and climate
change.
Market Driven Vertical

1. Unless the Agri-Market (logistics and market info) is just as resilient as is our crop genetic &
farming technologies, we may fail to address the climate and famine challenges of the coming
century - despite having prepared at the farm/technology level.
2. Agri-food post-harvest practices can be improved to reduce perishment and handle famine
more effectively - but without a fully communicating and pricing-demand-market, these
improved logistics entities and processes will be driving excellent equipment, in darkness.
Free communicating and de-verticalized markets are vital to the future strategy on global food security.
Grainster Ecosphere technology and market practice is the basis by which US small and medium sized
farms can seek to crack-back-open US agri-food import resistant countries like China, India and Brazil, so
that they see the value of the crop pedigree, not simply its hype.
SOLUTION: MITIGATING RISK THROUGH FREE MARKET RESILIENCE
Between two assets with the same expected risk of loss an investor will choose the asset with the highest
expected return.9
In the speculator industry this is known as the ‘Mean-Variance Rule’.9
Mean-variance
analysis is a component of modern portfolio theory, which assumes investors make rational decisions and
expect a higher return for increase in undertaken risk. An example follows:
Crop A: investment = $100,000 and expected return of 25%
Crop B: investment = $200,000 and expected return of 40%
Considering a total portfolio investment of $300,000, the weight of each asset is:
Investment A weight = $100,000 / $300,000 = 33%
Investment B weight = $200,000 / $300,000 = 67%
Thus, the total expected return of food production is:
Portfolio expected return = (33% x 25%) + (67% x 40%) = 35%
The condition which exists today involves a confounding or obscuring of this risk variance, or set of
alternative risk variances on behalf of the independent famer. The ‘expectation’ and variance of risk is
critical in any assessment of return. However, today’s farmer can neither see true current demand data,
nor can he or she determine the anticipated value of their alternative crop on the future market. A
speculator might be able to observe or measure this, but the speculator does not bring this advantage to
bear on behalf of the farmer. The farmer is only a defacto employee of the speculator or a few speculators.
This condition serves to establish two market weaknesses:

A. The entity deriving the profits from the information, is not undertaking but a slight portion of the
risk entailed in that profit generation, and
B. The risk bearing entity (farmer) is not informed as the Mean-Variance based optimal plan for
utilization of his acreage, and as well cannot make decisions as to market-driven alternatives to
crop A and B, which might serve to increase profitability, if indeed they were able to derive a
Mean-Variance optimal portfolio in the first place.
The net outcome of such market factors result in the condition observed in the United States Department
of Agriculture 2012 Census.8
An excerpt from that publication is seen below in Figure 3, with our added
annotations highlighting the evaluated term period’s net impact of imperfect competition pressures.
From her book Mastering the Grain Markets, grain trader Elain Kub, founder of Kub Asset Advisory laments
accordingly:
“Real proficiency at [agri-vertical pricing and risk] is rare. Expertise in the grain
industry – like the grain itself – is usually stored in vertical silos of specialization.
Separated by thick concrete walls, any one type of expertise is usually kept form co-
mingling with other types in other silos. Futures brokers don’t always know much
about crop production. Ethanol plant managers don’t always have time to keep track
of how geopolitical events affect grain prices.”10

And in the end, the risk taker under this ample set of uncertainty, is the least informed of all the
stakeholders in the value chain. These conditions are proving fatal to the small and medium-sized US
farmer. But US markets are not the only place this principle is proving out to be valid.
Charles F. Nicholson in his California Polytechnic State University study on the effectiveness of Technology
Transfer inside Indonesia’s farming economy, outlined the approach which the Indonesian government
took regarding small farm competitiveness and what he called a condition of ‘imperfect competition’
inside that market. Specifically, what Indonesia observed with regard to small to medium-sized farm
health included the following:11
a. policies that encourage competitiveness for small farms serve to create food security welfare
improvements for the overall community,
b. the creation of new processing enterprises which house and disseminate information to the
farmers serves to increase competition, and
c. the establishment of processing facilities and former speculator entities that are now owned and
operated by farmer cooperatives; along with the utilization of centralized government
information resources to assess crop and technology selection, fosters overall industry health.
What was observed in the case of Indonesia’s decade-long study, was that in environments where
imperfect competition exists in the farmers’ output market, the farmers’ share of marketed value
decreases relative to the competitive outcome. This deflation of the small farmer market is analogous to
the deflation of the small farmer market in the US. A pipelining not only of information, but also the ability
to sell, into a set of few hands – serves to kill small to medium sized markets, and more importantly
negatively impact overall market welfare. This is a condition called monopsony, wherein marginal profit
decisions are unable to be made by the party which bears the burden of cost or the risk in uncertainty,
because the market is controlled by either a single pipeline of information, or a single pipeline of sales
(both in combination are considered to be ‘market power’).12
Monopsony is a market structure in which only one buyer interacts with many would-
be sellers of a product. In microeconomic theory of monopsony, a single entity is
assumed to have market power over terms of offer to its sellers, as the only or one of
very few purchasers of a good or service, much in the same manner that a monopolist
can influence the price for its buyers in a monopoly.12
Monopsony Market Power Characteristics
 Critical market intelligence is channeled to intermediate trading partners only
 Buying is constrained to one or a few trade entities per source
 Prices deflate as (and despite) production or supply scales down (Pc to Pm below)
 Marginal realized profit is unattainable as supply drops (Q below)
 Demand and supply entities can never communicate marginal realized profit influencing factors
 Emergent conditions remain unresolved or at risk

 Risk and reward are not matched – value is diluted
 Producers must continually seek efficiencies or consolidation in order to avoid bankruptcy
 Mono-practices are mandated in order to defensively derive economies of scale
 Industry consolidates to weaker positions, not stronger ones.
In short, our current US version of vertical
speculator driven agri-vertical imbues a form of
imperfect competition – a condition wherein
single sell resources are increasingly linked to
single demand and price deflation (much akin to
our current US speculator driven market). In the
graphic to the right, one can see the net effect
which pricing (Pc) under a competitive market
driven dynamic (increasing supply and demand)
has versus pricing under the pressure of an
imperfect competition driven vertical (Pm). This
latter price-deflative condition is called
‘monopsony’. The prevailing theory, confirmed
in the Indonesia study and with critical implication to the rollout of the US vertical yield technology,
finance and information technology and logistics model stack to third world nations is this:
Monopsony practices led to disempowerment of small to medium-sized farms in the
US and an overall decline in the economic welfare of its farming community. A
condition which served to introduce existing market deflation and food security risk
to the US, and more importantly, potentially to the global community in the future.
FINAL COMMENTARY ON THE ERUPTIVE VS. DISRUPTIVE NATURE OF MARKET RESILIENCE
Yes, there are those who will argue that such pressures do not exist. Those who will see the status quo as
perfectly acceptable and explainable. But these voices increasingly stem from organizations who stand to
benefit or already have benefitted from the collapse of competitive markets into a more social power and
imperfect competition model.
The competitive argument will leverage effectively off four facets of global market reality:
 This argument is based on Value Chain theory. Value Chain economics runs counter to classic
Robert Mundell and Alexander Field 'supply and productivity' economics. These classic theories
assert that an abundance of goods in supply and worker productivity increases - alone can foster
robust economic growth. Value Chain theory cites that in the past, this was simply coincidence,
that these factors do not actually stimulate economic growth and are rather symptoms of it.
Instead, Value Chain theory cites oversupply as akin to product dumping based economic

decline and efficiency based uber-consolidation as resulting in eventual collapse into socialist
oligarchy (monopsony and monopoly combined with elimination of a middle class).
Value Chain theory is turning out to be correct. In addition, the following factors should also be
considered:
 60% of the world population and more critically, 75% of the world's Food Security risk resides in
countries where they agree (for a variety of reasons) with the arguments presented here.6
The
author of this study has presented agricultural and economic strategies to the highest levels of
government in both China and India, over a decade of work. The receptivity for such strategic
approaches on grain trade in particular has been high, up and to the Vice Premier and Premier
levels of both governments.
 Small to medium sized farms are under pressure from monopsony practices, and these
stakeholders compose 70% of the US farmer population.8
Grainster Ecosphere is already
regarded as a rebellious statement among ‘under-pressure’ small farmers.
 Those who oppose the Glyphosate-GMO axis will ally with this movement, for right or for wrong,
even though they might not fully grasp its tenets. This because the message will appear to
disempower those who they see as driving this technology axis. The Grainster Ecosphere
remains ignostic about specific field production technologies, choosing to focus instead on
market agility and post-harvest perishment impacts in relation to global food security.
But in the end, this last point of perception is incorrect. Grainster Ecosphere practice and technology stack
implementations will serve to benefit everyone. All stakeholders, small to medium-sized farm, and
conglomerate alike – will benefit from the robust attributes of such Value Chain based agri-economy
principles.
These are the groups which will precipitate change in global food trade, and not the large western
conglomerates. So, this message will quickly engender support from a variety of allies. This is part of the
reason why an 'eruptive', and not simply disruptive, nature will characterize our fin-tech and info-tech
ecosphere stack as it impacts the market.

SUMMARY
Let’s be clear, these market conditions will stand as precedent for the global
community of operations as multi-national agri-business begins to take on the
daunting task of addressing global food security under population growth and
climate change. The ongoing disempowerment of the small to medium-sized
farmer will only serve to exacerbate food insecurity, the impact of global
warming and global hype and resistance towards US developed field/growth
technologies.
It is imperative therefore, that US stakeholders burst the existing speculator
driven vertical and derive the benefits entailed for the US small and medium-
sized farmer before rolling out this field/technology/logistics/market solution
stack to a hungry world.
We believe that Grainster Ecosphere involves the stack of finance, ethic,
practice, mechanism and information technology which can serve to transform
this otherwise chaotic vertical burst – into something which is beneficial for all
stakeholders.

RESOURCES
1. Unites States Department of Agriculture, World Agriculture Supply and Demand Estimates;
https://www.usda.gov/oce/commodity/wasde/latest.pdf; February 7, 2017.
2. National Corn Growers Association: World of Corn, 2016 Annual Report; NCGA, Washington, DC
20001.
3. USDA, FAS Grain: World Markets and Trade, Jan. 12, 2016 *Marketing Year Oct. 1, 2015 – Sept.
30, 2016
4. Mundi Indices: Coarse Grain, Soybean, Wheat, Rice Prices, 5 and 10 Year Trends;
http://www.indexmundi.com/commodities/?commodity=rice&months=60; February 7, 2017.
5. International Food Policy Research Institute (IFPRI) – Global Hunger Index: India;
http://www.ifpri.org/country/india.
6. U.S. Feed and Grain Equivalent Exports: India; USA Export Data; February 7, 2017;
https://www.grains.org/market-data/feed-grain-exports-in-all-forms#jsoncontent.
7. Department of Agriculture, Cooperation & Farmers’ Welfare, Government of India, Annual
Report 2015-16;
http://agricoop.nic.in/sites/default/files/Final%20Annual%20Report%20English.pdf.
8. United States Department of Agriculture, NASS – 2012 Census of Agriculture.
https://www.agcensus.usda.gov/Publications/2012/Full_Report/Volume_1,_Chapter_1_US/usv
1.pdf
9. Mean-Variance Analysis http://www.investopedia.com/terms/m/meanvariance-
analysis.asp#ixzz4Y25bkvjE; February 7, 2017.
10. Mastering the Grain Markets: How profits are really made, Second Edition, Kub Asset Advisory;
Kub, Elaine, Omaha, Nebraska; 2014.
11. Nicholson, Charles F.; The Impact of Market Structure on Agricultural Technology Transfer,
California Polytechnic State University, APEC Training Workshop, 2004.
12. Wikipedia: Monopsony; https://en.wikipedia.org/wiki/Monopsony; retrieved February 7, 2017.

CONFIDENTIALITY
CONFIDENTIALITY NOTICE: Privileged or confidential information is contained in this document (and any
attachments accompanying it). This information is intended only for the use of the individual(s) or entity
to which it is intended and distributed. If you are not the intended recipient, you are hereby notified that
any disclosure, copying, distribution of any or all the elements and contents herein and attached, are
protected under Non-Disclosure Agreements, Intellectual Property Laws and specific US and foreign
Patents and Patents Pending.

A Contrast of Market Driven versus Speculator Driven Vertical Agri Economy rev 1 3

Empfohlen

Empfohlen

Weitere ähnliche Inhalte

Was ist angesagt?

Was ist angesagt? (20)

Andere mochten auch

Andere mochten auch (20)

Ähnlich wie A Contrast of Market Driven versus Speculator Driven Vertical Agri Economy rev 1 3

Ähnlich wie A Contrast of Market Driven versus Speculator Driven Vertical Agri Economy rev 1 3 (20)

A Contrast of Market Driven versus Speculator Driven Vertical Agri Economy rev 1 3