The Next, Episode #29

A brewing food crisis, vertical farming, and why it's time to build

 Hi there, and welcome to The Next - my take on health, wellness, and brand building.

In the last 4 years, I’ve founded 3 health brands (Kettle & Fire, Perfect Keto, Surely), that each do tens of millions in revenue. I’ve raised ~$20mm to build Kettle & Fire, gotten into 10k+ retail stores, bootstrapped Perfect Keto, launched 90+ SKUs… and have a small portfolio of Shopify apps I run on the side. Previously, I worked in tech and had no experience in CPG, DTC, or any other 3-letter industries.

If you missed past episodes, you can catch up here (Episode 26, 27, 28). Otherwise, let’s dive in! 

🆕 What’s new

This month’s topic is a bit of a departure from the standard cheery topics about vegetable oils killing you, rampant infertility, and sunscreen maybe not being all that great. 

This month, I’m going to sound the alarm on something I think has a 50%+ chance of happening in 2022… a global famine affecting hundreds of millions of people. 

Quick background: crops need nitrogen, phosphorous, and potassium (along with water and sunlight) in order to grow. Our World in Data estimates that 40-50% of the global population is supported by crops grown with synthetic fertilizers (1). Though I’m all for a regenerative food system, we’re so very far from that today. Today, people the world over rely on calories from synthetic fertilizers. And the price of these fertilizers is absolutely exploding. 

The three inputs I mentioned above - nitrogen/ammonia (via the Haber-Bosch process), phosphorus, and potassium - are required to make fertilizer. If the cost of these inputs goes up, the price of food goes up. It’s as simple as that. 

And boy have these input costs gone up. 95% of ammonia is made of converted natural gas: the same natural gas that’s at prices in Europe and driving high prices at American pumps. 

The price of potassium/potash is also exploding as sanctions and increased energy prices take hold. Russia recently banned the export of potash, of which they account for 25% of the world’s supply. And Belarus, the world’s 3rd largest supplier of potash, recently stopped exports after US/EU sanctions. 

There’s also pricing pressure on phosphorous/phosphate after recent Russian export bans (they account for 10% of global phosphate supply). And last fall, China also banned phosphate exports due to concerns that they wouldn’t have enough to supply their domestic needs. Throw in the fact that high oil prices drive up the cost to mine phosphate - which means less mining happens - and you have a global supply shock driving phosphate prices way up. 

All of these factors have created a perfect storm scenario: as the cost of natural gas (ammonia’s core input), potash and phosphate skyrocket at the same time, we’re seeing 300%+ increases in fertilizer prices over the last 14 months (2). 

It’s not just fertilizer prices that are exploding. As Doomberg (not a typo) discussed in a recent episode, glyphosate (aka RoundUp, one of the most common herbicides in production today) is seeing similar 300%+ price increases. While ultimately I’m no fan of glyphosate, the fact is that millions of acres of crops rely on this herbicide. If farmers can’t get their hands on herbicides, weeds and pests will harm yields both this year AND in years to come. After all, it only takes a year of weeds to do many years’ damage to a field. 

Unfortunately, it doesn’t stop there:

1. Diesel is a major fuel for farming equipment, and it too is facing a global supply crunch. Global diesel consumption reached an all-time high in Q4 2021 (ie pre-invasion): thanks to record natural gas prices, the cost of refining diesel has gone up, slashing diesel output (3). The price of diesel is now up 2x since 2021. 

2. The global chip shortage is making high-tech farm equipment next to impossible to fix or replace. 

3. Vaccine mandates for international laborers (that the agricultural system relies on for planting and harvests) are contributing to labor shortages on farms (4).

4. 80% of grain drying in the US runs on propane, and propane stores are running at near-record supply lows (5). It’s very possible there’s a propane crisis and farmers cannot get the propane they need to dry and store their grain crops. 

5. Speaking of grains, there’s also a pending wheat crisis. 15% of the world’s calories come from wheat, and ~33% of that wheat comes from Russia and Ukraine. Russia has banned wheat exports, creating the highest wheat prices in 40 years (6)... and this crisis is just getting started. 

And all of this is on top of inflation we’re already seeing in food prices (7). Because most of these input costs are happening far up the supply chain, my guess is the above problems are not fully priced in and things could get much worse from here. 

Unfortunately, the primary cause of all this is not the Ukraine-Russia conflict. A peaceful, fast resolution will help, but won’t solve the core issues. More from Doomberg:

“The coming crash in global food supply will be driven by a similar phenomenon across virtually every input into farming – they are all spiking to historic highs simultaneously, supply availability is diminishing across the spectrum, and the time to reverse the worst of the upcoming consequences is rapidly running short.”

Here’s what I think is likely to happen: 

1. As input costs for fertilizers, labor, fuel, etc explode, farmers are going to pull back on growing and planting (as growing becomes uneconomical). 

2. This creates a supply shock as supply is taken off the market, driving food prices up. 

3. As food prices go up and strategic crop reserves go down, companies, countries, and individuals begin to stockpile food and commodities to ride out any potential shortfall. 

4. As more and more people start to stockpile, prices explode as there’s now more demand for the same scarce food reserves. Simple supply/demand: when supply rapidly decreases and demand rapidly increases, prices go parabolic. 

5. Countries will stockpile as much as they can for their own populations, meaning fewer exports. 

6. Poorer countries, and those countries that rely heavily on food imports, will be disproportionately affected. This will lead to famine in poorer nations and hugely increased food prices in wealthier ones. 

So, how might one prepare? 

One thought is to buy CSAs and support your local farmer and local food system. As Chris Masterjohn said: because the emerging food crisis is being driven primarily by low supplies of fuel, fertilizer, glyphosate, and international labor, it follows that the farms most dependent on these factors will suffer the most… while farms least dependent on these factors (ie local, regenerative farms) will be the most resilient. Check out Shire to find local producers. 

You can also build up a food stockpile in case things get really crazy, or prices explode. I’m planning to build up a 3-6 month stockpile myself, just in case. 

And lastly, be prepared to spend more on food. If I’m even partially right, the above will have a huge impact on food prices, possibly for multiple years. And as food prices go up, the chance of food-related riots, civil unrest, and the like also increases… I’m speculating here, but there’s a (small) chance that things get really hairy in late 2022. 

None of this is advice and I hope to God I’m wrong about most of this. However, I think the probability of a global food crisis is real enough that thinking and doing some light preparation could make a lot of sense. 

💪 Health stuff

The more I learn about the food system, the clearer it is to me that humanity needs a better one. In challenging times, it’s an extremely fragile system that leads to potentially horrible outcomes like the one I outlined above. In the best of times, it primarily grows 3 varieties of crops (corn, soy, wheat) and heavily relies on chemical inputs (fertilizers, herbicides) to function. 

The way industrial agriculture is done today – heavy tilling, lots of chemical fertilizers, focus on growing monocrops, etc – is incredibly harmful to the planet. Some statistics to drive home this point:

• Around the mouth of the Mississippi, a “dead zone” area roughly the size of Connecticut has so little oxygen (due to algae blooms caused by fertilizer runoff) that fish and shrimp cannot survive.

• Soil erosion and the loss of carbon in soil lead to the massive global problem of desertification: farmland/rangeland literally turning into deserts. Today, over a billion people are affected by water scarcity.

• We lose almost 2 billion tons of topsoil a year. The cost of soil erosion from industrial agriculture is $44 billion a year. 

• Nearly 300 million pounds of the herbicide glyphosate are sprayed on US farms each year.

Not only does industrial agriculture have a LOT of negative externalities (like those above), but it’s not even working that well. Animal welfare under industrial agriculture is notoriously awful, cropland is drying out (and losing the ability to retain water), and the food we’re growing is less nutritious than 50 years ago.

We lose species diversity (both plants and animals) in a monocropping system. We lose billions of pounds of topsoil each year and flood our rivers, oceans, and drinking water with pesticides and herbicides. We eat food that’s less nutrient-dense, sold to us by farmers who are losing more and more of their land to desertification and forced to use more pesticides and fertilizers than ever. 

This system is also incredibly fragile: both to climate-related disruption and to global supply chain risks (as we’re now seeing with Russia). I suspect the next decade we’ll see an increasing focus on re-shoring our food supply and growing what we need to eat in the US. Does it really make sense that we incentivize farmers to grow soy, of which 48% is exported and much of the rest of it is turned into (toxic) soybean oil? 

One area that’s received a lot of attention (and investment - over $3B since 2020) is Controlled Environmental Agriculture (CEA): greenhouses, vertical farms, indoor farms, aquaponics, aeroponics, and the like. Many investors and policymakers are betting on this wave of companies to build the future of American agriculture. 

The ability to deliver local food that’s not as exposed to climate or global supply chain issues is a big one, especially from producers that can grow year-round in a controlled setting. CEA approaches also can be more efficient (1) in terms of higher yield, lower spoilage, less water usage, and less demand for transport. 

Though there are benefits, I suspect the impact of CEA will be far more limited than its proponents claim. Today, controlled systems have a higher environmental footprint than even conventional agriculture (2) due to their reliance on electricity use. They’re also incredibly expensive to stand up, as vertical farms often require $10M+ per acre in capital investment (3), and cost 1.5-2x more than a greenhouse to operate. These high operational and up-front costs make it unprofitable for vertical farms to grow anything but premium retail crops (microgreens, kale, etc). 

There are data points that CEA has a lot of room to grow (heh): after all, the tiny Netherlands is the 2nd largest exporter of agricultural goods in the world, thanks mostly to their highly optimized geothermal + hydroponic greenhouse setups. 

My hope is that we’ll see an increasing focus on regenerative agriculture for staple crops and animal agriculture, and CEA approaches for premium, year-round niche crops. I’m fascinated by what the future holds for our food system, and will continue exploring how we can build one that is better for people and better for the environment. 

🤑 Biz stuff

Everyone is becoming an investor. 

There’s been a huge rise in the number of solo capitalists: individuals raising (hundreds of) millions of dollars to invest on their own, without a firm. We’re also seeing an explosion of rolling funds, syndicates, and 1-off angel investors raising funds to invest in the next class of unicorn startups. 

It’s not just individuals getting in on the investing game. In 2021, US venture funds raised a record $128.3 billion, a 47.5% year-over-year increase compared to the previous record of $86.9 billion… set just a year earlier. US startups also raised a record $329 billion in 2021, nearly doubling the previous record of $166 billion set in 2020 (1). And finally, venture has a TON of cash: over $220 billion dry powder, including the ~$130 billion raised last year and $13 billion already raised through January 8th this year. 

In short, venture has seen explosive growth of its own: more funds, more fund managers, more investment structures, and more startups to invest in. 

With so much money in venture, there will be many more talented people becoming investors. Fees (and carry) are good, there’s money to be made, and it’s never been so easy to start building a track record. Heck, I’ve even done it: since starting to talk publicly about investing back in 2017, I’ve made 30+ angel investments of my own. 

As exciting as all this is for investors, it’s even better for startup founders. It’s just supply and demand: as the supply of venture dollars goes up, it will increase the price of the thing it demands (startup equity in this case). As good as things are right now for venture, I’m convinced that for the next decade you want to be on the founder/operator side of the table as much as possible. 

Balaji Srinivasan @balajis

Everyone is becoming an investor. And so investors are declining in power. You have countless options to raise money today, from full crypto to traditional VC to republic.co to HNWs. The point of tech is to self disrupt, and Sand Hill has less power than ever.

J◎e McCann @joemccann

If you own any tokens in any network you are a VC. Congratulations on your promotion.

As secondary transactions become more common, and as things like CartaX bring liquidity to private market shares, it’ll be more and more common for founders, employees, and early investors to monetize their shares before an IPO or liquidity event. For founders, this means that the days of waiting 10 years for a successful outcome (and earning $80k/yr until then) are mostly gone. As a founder or operator building a company, it’s now more likely than ever that you can build personal wealth inside of 10 years. 

In my case, I feel pretty certain that I want to spend most of the next decade building vs investing. If you’re a talented individual thinking of starting something, let me know! I’d love to set up calls with some (or a group) of you and jam on next steps, talk about how to validate an idea, or whatever. 

Along similar lines as the above, I found Erik Torenberg’s post on How to Grow the Startup Economy quite interesting this month, as was this piece on venture’s Minsky Moment. 

😌 Dope stuff on the internet

Some of my favorite things since the last newsletter (note: I don’t get paid to recommend anything here):

• 📰  Article - A nation is only as good as its laws, and laws are only as valid as the will to enforce them. To the extent that the above is true, The Takeover of America’s Legal System is absolutely chilling. It outlines a legal system where bar associates are opposed to “innocent until proven guilty”, judges dole out punishment on the basis of critical race theory, and law firms no longer willing to represent controversial clients. No matter your political persuasion, this should scare everyone. When the law becomes subjective, it’s no longer the law: it becomes instead an instrument of political power, to be enforced according to the whims of whoever is currently in power.
  

• 📚 Book rec - I recently finished The Company, a historical account of the corporation as a basic organizing unit of society. As new coordination tools like DAOs gain popularity, I’ve found the history of the corporation - how it arose, what problems it solved, what it does well vs doesn’t - a surprisingly compelling read.
  

• ⌚ Cool product - This newsletter comes to you from Cape Town, South Africa. One of my favorite products down here is a South African air-dried jerky called biltong (and its cousin, droewors). Most of the biltong in the states just isn’t as good as the stuff down here, with the exception of recent find Biltong Depot. The site leaves much to be desired, but their stuff is quite good (especially the spiced sticks) - highly recommended if you’re looking to add a high-protein snack to your day.

• 🎵 Music - More Tim Green for you this month, as I’ve been digging his On the Record set (though the 90s radio-esque interruptions are annoying). If you’ve got any new music for me, fire away! 
  

• 🏀 Random - I’ll be syndicating out 2-3 startup deals I’m planning to do in the near future. If you’d like to invest in some of the best startups I see + invest in, be sure to join my syndicate here. You’ll be able to see what I see and decide to invest (or not) on a deal-by-deal basis. 

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That’s all I got this month - thanks for reading, and I’ll catch you in May! 

• Justin