A few weeks ago, I was asked by a leader at one of the world's largest grain companies to share my thoughts on what grain marketing would look like in the future. I thought it would be a good idea to share my views more broadly.
Below is what I sent him:
My opinion is that digital contracting is inevitable given time. It is a more scalable, flexible way to do business with the customers that prefer it that way (and this population is only growing). I can't imagine a world where this doesn't become the norm for a good deal of contracting volume. How many people today still call in stock trades to their broker? Some I'm sure, but the majority undoubtedly switched to doing it online and in apps.
The real question is: how will the market for digital contracting and hedging develop and what is the timing of this transition? I think it could play out a couple of different ways that I will describe below.
The first way works much like digital payments did. Every company will need to have some way for customers to do business directly with them electronically and the smart ones will also accept third party systems. Think paypal and credit cards. You can use your credit card and set up an account directly with the vendor to pay, or you can use your paypal and work with many vendors.
Another prediction of what could happen is that a new third party system could actually disrupt the traditional model of grain handling and elevation entirely. Instead of interfacing with the existing grain merchandisers, one could create a virtual elevator that offers advice, financing, logistics, and structured hedging products bundled into a digital service that helps the farmer become their own elevator. In this model, the only thing the virtual elevator doesn't provide is physical space. In a recent FarmLogs survey 2/3 of farmers responded Yes to the question: "do you want to be your own elevator". I'm not arguing that they should feel this way, just relaying that they do.
The bold move would be for a traditional grain company to accept what the farmer wants and reinvent itself to that new model. On the surface, it seems riskier because it is so different and new (grain companies love their physical assets), but it actually is the least risky option because they would have both a first mover and first scaler advantage. It takes a lot of capital and expertise to execute this business. Those are barriers to entry that today keep some disruptors at bay or fumbling, but that a traditional grain business could easily overcome if they acquired the right talent to build the digital experience.
To sum it up: I believe that either the majority of traditional grain companies all move to a digital model, OR a disruptor will eventually come along and force the traditional players to change their business by giving farmers what they want without needing physical assets.
A few days later, Cullen Wilson published a post titled: “Grain Marketing, It's Physical”. The summary was that because production farming involves physical storage and movement there will always be a large need for merchants to add value to the farm that a digital or virtual elevator can’t. That sparked my attention and led to a fun bit of back and forth sharing our perspectives over email. I pointed out how I agree that while you can’t ignore the physical aspects of moving grain, a virtual elevator is far from impossible.
Here is what I had to say:
Imagine if a digital tool were to help the farmer truly understand and value the cost of carry for their operation, dynamically price against spreads, and plan out logistics based on FOB farm shipment. At that point, the farmer might actually be able to become their own elevator by simply investing in physical space for storage, drying, blending, and shipping capabilities that they currently outsource to the elevator and using the app to help them merchandise. I'm not saying that this is better or worse, just pointing out that that status quo isn't as protected as your post seems to imply.
My point was that I believe that a digital tool could possibly embed many of the value add capabilities that today the farmer gets from working with a grain merchandiser. Storage and handling are areas where farms are already investing. What they lack (in many cases) is the skill and the time to do effective merchandising (side note: Cullen published a follow up post explaining the difference between grain marketing and grain merchandising that is worth a read too). Today this is a true skill and art that a small community of professionals are truly great at. In the future, it will not be immune to digitalization.