Episode 39: Why is Grain Merchandising Not a Zero-Sum Game?

Welcome Aline Pezente, new co-host of Grainwaves, who talks with Rodney on how the business of grain merchandising is not a zero-sum game between growers and buyers. Both sides stand to be more profitable with an efficient, digital, and data-driven system.

TRANSCRIPT.

Rodney: Hey, super excited to have Aline Pezente on the show today. So Aline, if you could, how about you tell us a little bit about yourself and how you found yourself at Indigo.

Aline: You see from my accent, I'm Brazilian. I worked in the agriculture industry for all of my career, started in the investment banking industry, covering the agriculture sector. Then I found I loved the agriculture sector, I found it was amazing. Investment banking also wasn't my thing. So I shifted to work for one of the largest annual protein companies and food processes in the world, BRF Foods. There, I started my career going more in the business development side of the business, where I basically have had an amazing opportunity to have a very deep dive into the food production supply chain.

2008 came and that company, which I was working, entered in a very financially stressed situation, which in the end, the company merged with its largest competitor, and was one of the largest IPO follow-ons, because both companies were publicly traded.

So after I have participated in that transaction and that deal of merging the company, and making the IPO follow-on, I decided to come back to the financial industry again. And happens to be that the agricultural sector was always calling me back, because one of my customers, I was advising one of the largest global companies in the agriculture trading business, Louis Dreyfus Commodities.

They liked my work. And then they hired me to join Dreyfus. And I stayed at Dreyfus for nine years. I was their Head of Business Development and M&A for Latin America. And ended up past the two years, I was also CEO of a farming company that Dreyfus had in investment.

So that really expanded my role and my opportunity to get to know better how it is managing farms and what is to become a farmer. Of course, this does not compare. My experience doesn't compare with someone that is doing that for many years, and has it as a core, but it opened my perspective a lot on how to see the problems of this industry.

And that's a lot of my inspiration in the end, because I've seen the problems of how to manage a farming operation, as well as my previous experience on understanding how to manage a trading operation. I decided that it was time for me to study technology. So I basically interrupted my career to do my masters in technology. I had a very deep dive into data science, building my skills around that. And so it was very natural to me, based on my previous experience and career, to see the problems that happens in the agriculture supply chain.

And one of the problems, especially in Brazil, was around agricultural financing, and how the whole credit process is executed, the lack of data, which is fermented, that prevents banks to make a proper risk assessment of farmers. They are, of course, because of that, and all the other challenges associated with the risk of agricultural activity, make farmers to have more limited access to credit and over collateralize it normally.

So to solve this problem, what started as our research at my school, became the core technology of Thrive, which is a FinTech, which operates in the agriculture sector in Brazil. It is a lending platform that uses artificial intelligence as the main core technology that gives a better credit risk assessment for farmers, as well as lenders. And we connect them on that platform in order to make and financing transactions between them.

In this process, although it was a startup, I was invited by Cargill, to join them as their Global Digital Economy Strategy Lead for cask, for the agriculture supply chain. And I was basically working on trying to solve a lot of the problems on actually thinking how Cargill could really use technology to help farmers, as well as the supply chain industry, to have better transactions, and a better experience. I was in this process, and then I felt that Minnesota was too cold for me. And then I intercepted.

Rodney: So yeah, Minnesota was too cold so you went where?

Aline: I went back to Boston.

Rodney: Boston. Yeah, I suppose it's a little warmer.

Aline: So jokes apart, but basically I was intercepted in the middle of this process by Indigo, which I felt was Indigo... I was monitoring Indigo, of course, for a long time, since the creation of Indigo. It was very appealing to me, the opportunity, also because of the team. I felt that Indigo was understanding and seeing this world and how technology and data can really improve the experience, and solve the problems of the agriculture sector in a way that was very aligned with what I was expecting to do.

Actually, it was my motivation to abandon my career, and come back to school to study, to equip my skills in order to be able to come back to the sector and make some impactful difference. And Indigo was, of course, a great opportunity for me in that regard as well.

Rodney: Yeah.

Aline: So to sum it.

Rodney: No, that's great. I appreciate the description. That's the first time I've been walked through that with you, actually, so I appreciate that. You mentioned, so we both spent some time at Cargill. Not at the same time. I didn't meet you until you came to the office here. I left Cargill, I think, in... Oh no, I left Cargill in '12. So what year did you go onto Cargill?

Aline: 2018.

Rodney: '19, so I missed you by a few years.

Aline: '18.

Rodney: '18.

Aline: Yes.

Rodney: Okay, gotcha. Good.

Aline: You were much older than me, Rodney.

Rodney: Apparently, yeah. Apparently. So I think mostly farmers listen to this podcast, Aline. And I think they would be surprised to hear you say that you were helping Cargill with technology. I think they'd be surprised to see that Cargill doesn't have a huge technology arm or anything like that.

Wondering if you could speak to that. So you spent some time at Louis Dreyfus, some time at Cargill. I don't want to pick on any one particular place, but if you could, talk to me about what your perception is of technology at these grain companies.

Aline: I think like any... It's not only exclusive to Cargill, if you think about it's every company in this industry. Technology was never treated as a strategic component, or never considered as the core of the business. Actually, it has been considered as a core to drive efficiency, better accounting, better accounting. All right, because trading houses deal with a lot of risks, and they need to have very strong and good technology systems, right? To be able to transact safely and make the registry of that.

But apart of that, nobody ever thought that they could use technology and data services. In fact, to offer to their customers as another product, another service in their portfolio of the things that they do, right?

Companies, they normally... They always treat that in the great merchandising industry, we are going to sell, and we're going to buy. And they always felt that what is the most and what is the biggest value for those companies has been only... Or actually, not only, right? But the core of their mold and strategic capabilities has been around who owns assets, reports, country elevators, integration to railways, water ways. And so the mentality of those companies has been over the century around that.

Rodney: Yep.

Aline: Now, it happens that when you observe, they also started to observe what is happening outside them, right? With other industries. Like if you think on what is happening in the financial industry, insurance industry, consumers market industry, all those sectors, they have been evolving and reshaping how they do business because of the information and technology.

And I guess, those companies, they are now in the last... I observed that in the past three years the large merchandisers, co-ops, also integrated food companies, like let's say companies like Anheuser Busch, for example, who's one of our greatest customers at Indigo. They're all now paying attention and incorporating technology and data strategy as the core of their services to their customers.

Rodney: Yep. Yeah, I agree. It's been interesting now, as I was coming up, it's such a capital intensive business, right? So, I mean the overhead, I know farmers don't understand the percent of profit a grain elevator makes versus the capital they lay out. I mean, they'd be shocked by that. But I always felt like anytime I was working on some sort of tech solution that I really thought would make us more efficient or make us more money. As I was heading up an origination team, I was battling, "Hey, I want a 100,000 dollars for this tech solution that may or may not pan out. We have to train our employees on it. We have to do all these things or we could go spend a million bucks on a bin that we were going to get a 30% return on." Right? It's tough to compete there.

Aline: Well, it is tough to see that is tough to quantify, right? It's not a question of competition. And if you think about the ROE of investments in technology, they normally are beyond physical assets, especially in our sector, right? The grain merchandising industry is a thin margin, right? And we'll be right because in the end, end consumers in the supermarket they can't afford, or they don't want to pay like people because of inflations and et cetera. They don't want to pay a lot of money in the product. So everything is cascading down to the farmer. So actually all those sector view is still had to maneuver a very complex, expensive physical asset, footprint to do that and try to capture the margins in the scale. Technology, it is something that could make the process of managing those assets and moving faster on capturing those opportunities much faster, better. As you can see, I don't think technology and investments in let's say information technology and data will never substitute the assets, but absolutely the right investment on how you define your data and information is strategy.

He could even optimize those investments even to enable buyers and merchants, to really understand if they are running their assets, optimizing their assets at the best of their capacity. It's very often, it's very common that sometimes buyers do an investment in a silo or in a country elevator, basically just to find an expected volume role based on historical data or in an abnormal year. And taking that, projecting to the next of five years, 10 years saying, okay, the markets will operate in that way. Then after they put all those investments in this capital asset, they didn't see that another competitor put another innovator besides them, or perhaps the demand like the Chinese. They're not, they don't want to eat more, let's say more carbs. They want to eat more sugar. I'm not saying that, a stupid example, right?

Aline: That in fact of those signals of demands that that information, if they were coming earlier to the hands of that buyer who are making this investment decision, if should I put my silo here? Should I put, I don't know... Should I invest in a port or shouldn't I, in fact, should I divest in assets, right? I guess that's is the power of the power of that information in the modern technology, especially machine learning, to enable those buyers to better run their operations and be more efficient as well as bring transparency, right? You should have parties.

Rodney: Yeah. So, you mentioned that you did your masters and I know a big part of that master's work was understanding the industry, right? So I'm always impressed anytime you bring data about the ag industry to me that I just don't have access to. I don't... I never know where you find that stuff, but it feels like the ag sector... So when I look at it from a local standpoint, right? So if I'm a co-op sitting somewhere, I don't have access to that kind of data. I don't know, I know that a competitor put up a bin and I roughly know how big that bin is, but I don't get this aggregate research that I think other industries do, right? Like you mentioned in your financial background, those guys have access to 10 times the data about their competitors than we do in the ag sector. Is that right?

Aline: Oh yeah. Oh yeah. In fact, information is the oil here.

Rodney: So, I'm going to switch gears here a little bit. I think... So I started about two years ago, almost to the day actually, at Indigo. And I know on Facebook, I think I was on my flight to Boston. My first flight to Boston, I posted on Facebook that I was, this is like my announcement to the industry, I was really excited to join Indigo because I wanted the opportunity to make farmers more money and make buyers more money using our platform, right? So I should look that up. It should have been around December 3rd, two years ago. And it was immediately met with some industry friends that said, "Hey, you're naive, Rodney. This industry is a zero sum game. Every farmer taken, or every farmer in the merchandisers pocket comes from the farmer," that I remember that clear as day. I'm curious your thoughts on that, right? Was I being naive there?

Aline: I don't think you'd be naive, right? I feel that... I heard the same. I don't necessarily agree with that statement about the zero sum game. I do believe that, in fact, the most of the times for this industry to survive and grow, it cannot be a zero sum game between the parties, right? It's farmers, they need to become profitable for the inputs industry, as well as the merchandising industry in supermarket, retail, food industry to survive. If you think about trading houses also needs to be profitable for farmers to do the money and get liquidity, as well as inputs companies, they need to be profitable.

Aline: As well as like inputs companies, they need to be profitable to continue to invest in R&D and catching up with crop science, technology research that's going to create like crop science technology to enable farmers to plant at the lower cost and feeding their role but don't harm the environment. If you think about this zero-sum game that... Okay, we have one of the sides of that multi-sided dynamic that happens in this industry, that one of the parties we will always dominate and take most of the values. I think that by default, this is not sustainable and this company wouldn't survive.

Aline: I feel some people believe that some traders... And I feel that some traders believe on that. They always try to work in operating the edge off YETI arbitrage information that they can get those cents. Like a little bit more from that farmer, because they saw something before. But in the end, if you think about, this is not happening all the time, right? Because he doesn't know what is the other game of the other buyer, who is their competitor with that farm, and what this farmer is seeing with others. So, I don't think it's being naive and otherwise, I wouldn't be here, right?

Rodney: Yeah, I get that.

Aline: Again, I believe that this industry has so much opportunity to be optimized. And I strongly believe, Rod, that the technology, the product that we are building, and you see from what we hear from our customers, right? And to be customers.

Rodney: Yup.

Aline: They truly believe that our approach is going to make all the sides profitable.

Rodney: Who believes that, Aline? Who are you talking to?

Aline: Well, buyers, farmers, ag retailers, inputs companies.

Rodney: Yeah. I agree. So, I spent a good chunk of my career working for a co-op. And I'll tell you, when you're working for a co-op, you, for sure, don't feel like a zero-sum game, right? Those customers are your owners. They take pride in a good facility, right? They sure didn't want me paying more to them at the expense of a nice facility that'll dump them fast or be safe, right?. So, I agree. I think people in the industry understand that the health of the industry really is super important.

Aline: Correct. What do you think-

Rodney: Oh, man.

Aline: ... in terms of...

Rodney: Yeah, good night. Go ahead. Sorry.

Aline: Yeah. My question is, do you believe that really data and information is going to make this industry realize how they can run them instead of trying to pursue zero-sum games strategy? Do you believe that they can understand how they can optimize their system? And my second question is what do you believe is, like the merchandising, the Eaton-Turbans perception about data and information impact to their business?

Rodney: Yeah. That's great. So, first off, I'd say the farmer side of things is actually the thing I struggle with the most and you and I have talked about this quite a bit, right? So, the way I view the futures market, which we should talk about this, is almost completely random, right?

Rodney: So, I feel like the futures market just kind of comes and goes as it pleases and any day that I wake up, it's likely to be a wildly different price. So, I would say as I'm talking to farmers, I'm talking mostly fundamentals, right? Mostly [SNDs 00:22:26]. Like, "Hey, big carry out, small carry out." I augment that with some more technical stuff, right? So if I know SNDs have me wanting some price, I'm going to use something like RSI to decide when I call the trigger.

Rodney: So, I know I want to pull the trigger about here, but then what day am I going to pull the trigger? That's going to be kind of RSI or technical stuff. But actually the more access I've had to data science here at Indigo, the more I've leaned into, "Hey, just tell me what the likelihood that I'm ever going to see a price like this in my whole entire life is, and encouraged me to pull the trigger when it's unlikely." But here's where that goes wrong: soybeans this year. But to me, the farmers, since they're cash driven, it's just about like, "Hey, pull the trigger when it makes sense, and God love you." I'm more comfortable on the buyer side. I think the buyer is the one that really has the opportunity to squeeze out pennies, right?

Aline: Yes.

Rodney: A penny means a whole lot more to the buyer than it means to the farmer. And it doesn't have to come at the expense of a farmer because the farmers interested in cash, the buyer's interested in bases. A buyer doesn't care about futures, right? So, usually 50 cent rally and futures puts 49 cents into the farmer's pocket and maybe an extra penny in the buyers end bases. And then when you add spreads on top of that, right? So the buyer, having the ability to say, "Hey, I'm going to buy 40 million bushels of corn next year. I've got 20 million bushels of space. Right now, the market's paying me 30 cents carry." That doesn't come out of the farmer's pocket. I know the farmer's going to deliver me grain in the fall. We think we can net the buyer 10, 15 cents a bushel.

Aline: Yes.

Rodney: Right? And you truly believe that, right?

Aline: Yes.

Rodney: I truly believe that as well. I'm not sure every buyer in the world is going to believe that. And I'm afraid that people that don't understand the symbiotic relationship between both sides are going to think that 15 cents is going to come out of the farmer's pocket, right? That's what I always worry about.

Aline: No, you are right. But every company and actually anything that it is new to the world, new to people, right? People they always tend to box and think on that based on their priors. This industry has... Their prior knowledge is getting the margins out of a better negotiation after logistics optimization of the assets. And also arbitrage information between signals that buyers can identify coming from the demand versus the supply, right?

Rodney: Yup.

Aline: Now, our product and our technology is really coming to show that, in fact, we can use the same technology in effect, have a different approach to data that you're not necessarily trying to make the optimization through a transform of margin, but an optimization of the processes and the costs around that transaction. It is extremely costly, right? For all those parties to transact. It's extremely costly for farmers also to find the data, or even getting any, or even spending time to understand, "Okay, should I take any different merchandising strategy?" Right? And following the markets every day. They would have to pay somebody to do these.

Rodney: Yup.

Aline: The GMA helps a lot, but it is costly even to do that. I guess, my point being is... First of all, I do believe that technology, the approaches, not disrupting the relationship in between the growers and the buyers of when they're transacting, but changing and evolving how they are doing this in a much faster, cheaper, better with much more data available for both sides that they can optimize this process, according to whatever is their strategy, assets, footprint, and target profitability versus liquidity needs. The second thing is that I feel that we need to be cognizant that it is a journey that very few... We also have to help the industry as us people in the markets to educate themselves about what this concept means about supply chain value creation driven instead of just growers side. We create, I'm not saying that in the expense of or that we are not going to deliver value to the growers, it's not that, right?

But that approach that many of our competitors and startups, right? We have either companies that say, "I am farmers first. I want to just do things for farmers and I want to empower farmers to fight against the bias, against the other industry." Right? Or companies that do the other way around, let me bill to you, buyer or ag retailer, this tool and this machine that will help you to get more profits out of this transaction from that grower, right?

Rodney: Yep.

Aline: While the correct approach, which the way that we were thinking is that, okay guys, let us just help to optimize and make more sustainable practices, sustainable interactions and transactions between you. Right? Instead of approaching our technology and our product design to the point of view that necessarily just one of the sides we're making margins in this.

Rodney: Yep.

Aline: I'm going to stop here. Am I speaking too much?

Rodney: No. No, that's exactly right. I know we only have a few minutes left here. I want to talk a little bit about... So I have a habit of not showing my bosses my resume when I work for people. I joke mostly, but I didn't go to a big 10 school. Right? I went to school for interactive multimedia. I'm a computer guy. I wanted to make video games for a living. I grew up on a farmer. So I look more like the industry today than I did 15 years ago. Right? But my resume doesn't really look like the industry. So should we be concerned that we are kind of outsiders? I feel like we both have this kind of outsider mentality of the grain industry.

Aline: Yeah.

Rodney: And we're perfectly aligned on our vision for Marketplace. Should we be concerned that maybe we're misaligned there?

Aline: One thing we try and learn a lot over these years, Rodney, against facts and reason, there are no arguments. What do I say with that is the first, right? When if people just hearing you and I talking about this and if I wasn't perhaps the way that I am, people or perhaps if I said, okay, I used to be a farmer coming from a farming family, all my life. It would facilitate people's to have less bias and be less suspicious, right? Because they're not used to have somebody like... Because the sector is, if you think about the profile, especially in the agtech space, you have a lot of people that... They put in their peach, right? I come from... My family is a farm. I am a farmer, right?

Rodney: That's right.

Aline: But that doesn't mean that you and I, we do not understand deeply what this sector means. I mean, see my curriculum. Right? And also I spend a lot of time with farmers as you, right? Actually your family, your dad is a farmer, right?

Rodney: We do farm. Yeah. I grew up on a farm. Yeah. Yeah.

Aline: Yeah, you do. I am worse than you on that. So the second thing is that always we have to break this pattern and in fact, to demonstrate to people that we know what we are talking, right? And we spend a lot of time, in fact, listening then to come with that. And it's the same prejudice, right? That when you go to the tech community, oh no, I am too ag.

Rodney: Yeah. That's right. Yeah.

Aline: When I was sitting with some developers or talking to some people, they normally, they get very impressed and with my technical approach, they say, "Oh my God, it comes to us with a surprise." Right? That most of my career has been around ag, nothing tech.

Rodney: Yeah.

Aline: I don't know. It's, I think this is something which we always have to fight for and eventually, I feel that we are doing... We have a lot of passion, Rodney, you and I. We really believe, we see purpose, right? It has been extremely hard journey and we are doing this because we truly believe and we love the fact that we're going to cause any impact to this industry and redesign the agriculture supply chain in a way that I don't feel that very few people truly understand how to do that. I think that once we show that, I guess, we're going to start to, how do they say? Open up more the industry I hope in people to also be more welcome about outliers and more outliers to join the agriculture industry because this industry needs outliers to innovate and to rethink and think different in the way that agriculture merchandising has been performed the past 150 years has been the same, right?

Rodney: That's right.

Aline: Only outliers perspectives and outside perspectives can help this industry, who is used to operate in the same way, to think different.

Rodney: Yep. Think different. Man, I don't know about you, but I've had a ton of fun here talking. I appreciate you taking the time. I know you're a busy woman and thanks for being on the show. I suspect we'll do this again. I hope we'll do this again. So anyway, I want to thank everybody for listening to the GrainWaves podcast. If you're new to the podcast, leave us a five-star rating and as always, contact us in the comments and we're happy to answer any questions. Thanks.