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/usv1.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.




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

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