Biological Scarcity

In the USA crops are one of the only things we might be better at printing than dollars. 💸

It seems to me that there is a near infinite ability for us to increase crop production to levels much higher than now given the right economic incentives and regulations in place. Modern large scale agriculture, and the production knowledge ingrained in our organizations, is one of the amazing accomplishments of humanity. Big ag is actually pretty awesome despite what the woke say. Definitely work to be done to make sure we don't kill our current planet, but again, that can be solved with proper incentives and regulation.

So back to the printing press.

Or in this case crop production.

One of the side effects of the ability to grow as much of a crop as prices promote is a natural tendency towards boom and bust cycles. Since most farmers that I know are not sophisticated hedgers things can get messy fast. In addition, there are lots of crops that are a mix of illiquid and perishable. Meaning their may not be actually public tools to hedge price for the crop in question and only direct contract can provide this risk coverage. Basically when the printing press for a certain crop goes brrrrr a lot of people without direct ownership of production facilities or distribution are likely to get rekt.

Let's take hemp for example.

Hemp was soooo hype!

I had random city people stopping out at the farm asking to buy or rent supplies to put in their own little patch of hemp. Get rich quick was in the air and growing things is easy right? Well, growing things is fairly easy for farmers, not so easy for other people. I would expect a large majority of the casual hempers did not win any monetary games.

You can read this chart two ways.

Wow! Hemp is taking over the world 455% growth! We are going to be rich!

or ( more correctly )

Ahhhhhh shit. We just got 1,000's of competitors. Whats our tactical advantage again?

Simple supply and demand. Prices erode as supply surpasses demand.

This is not the trend you seek!

This doesn't mean that it is wholeheartedly foolish to enter this market. You just need to be awake to the realities. Having a steady hand and a good margin capture strategy could set you up to be a dominant player in a persistent market for generations.

I think the main story to be told here with hemp is that it has low barriers to entry and a short time horizon. This is the same with most annual row crops that have been mechanized.

Essentially if you can get asset light lending + crop insurance + seed + stable government you can get about as much of an annual crop as you want.

So what if we want to protect ourselves from this?

What we are looking for is scarcity.

Mona Lisa vs Greenbacks.

Bitcoin vs Dogecoin.

Tree crops vs row crops.

There's a very famous piece written about the future price of bitcoin that relies almost completely on the idea of "stock to flow".

It's fairly simple idea really.

Stock = Size of existing stockpiles. Think corn in bins.
Flow = Yearly production. Think total possible production of corn.

Gold, a scarce asset, has a stock to flow of 62.

What this means is it takes 62 years of gold production to double current stockpiles.

Even if someone with "fuck you money" and a fetish with mining wanted to increase this rate they couldn't make a very big dent in the price of gold. Gold is fairly scarce.

Bitcoin reduces the reward to miners every few years in an event called a "halving" which essentially cuts flow in half, increasing scarcity.

In corn and other industrialized row crops we have the opposite. It's super normal for the stock to flow of corn to be < 1 meaning each year we can create a larger amount of corn than last year. (roughly)

Stock to flow has a very strong relationship with price.

Hemp was a crazy example of this.

The opposite, in agriculture, is playing the long game with trees.

The important aspect of trees as it relates to scarcity is the inability to expediently ramp up production of the crops.

If the entire heft of the Chinese government decided it wanted to own the almond market it would still take 5 years for them to produce a single incremental nut.

That's biological scarcity.

Time to revenue ,or, the number of years between planting, and a possible crop is what creates the brunt of the scarcity in crops like trees. Many other examples exist.

Even if we create a hemp like hype cycle around some new biologically scarce crop and align it with new found societal goals to fight climate change you can rest assured to have a much stronger buffer against price decline over the course of 5 - 10 years. Biological scarcity, sans CRISPR black swans, is an inescapable reality for you and your competition.

This is highly favorable!

Scarcity is price protection.

Like brand and scale its just another lever that can be pulled to create a profitable future for your business.

I think it's getting easier too. If government funding and consumer demand follows zeitgeist and insurance, and lending are tightly coupled to government it is likely you will see continually improving access to tools that increase a farms ability to participate in these long term markets without having to front all the cash.

Biological scarcity could be exactly the tool you need to set yourself up for the next 100 years.

Thinking about scarcity in general is wise as you plot the path to your future.

Maybe check out trees. Maybe HODL some Bitcoin. 🚀

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Practical thoughts.

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OK. So the part about this that sucks is planting trees is super expensive. They are scarce but your negative cash for maybe 10 years. So it's very hard. Again this is why I brought up the improving landscape around flexible funding options since it's hard to make this type of investment if currently your a mid to small row cropper or non land rich farmer.

The other parts that suck is specialized harvesting infrastructure maybe doesn't exist or is not available for hire in non dense regions. I would recommend when making any bets in the space to not plan on cheap seasonal labor as a known future at the timespans we are considering.

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Some links to people playing with scarce crops. Mostly trees.

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Propagate Ventures

"A Simplified approach to agroforestry.. An analytics & Project development Platform with economic insights making it easy to profit with agroforestry."

Savanna Institute

"Scaling up agroforestry for Carbon Drawdown."
Non Profit.

Terraformation

"Solving Climate Change with forest Restoration"

Association for Temperate Agroforestry

"Promote the wider adoption of agroforestry by landowners in temperate regions."

World Agroforestry

"To harness the multiple benefits trees provide for agriculture, livelihoods, resilience and the future of our planet from farmers fields through to continental scales."