Key agricultural industry drivers for the years ahead.

"Agriculture is entering an 'Accelerated Momentum Phase', a period in which it will experience new levels of growth and productivity," says Context Network Partner Mike Borel, Alamo, CA.

"While the cultures and practices of agriculture have evolved since the beginning of time," he continues, "they have exponentially changed the last few decades through the influence of transportation, logistics, mechanization, and science. Big productivity gains of the past have come from fertilizer, hybridization and chemicals."

But Borel says, "The next big shift is upon us and is driven by biotechnology and information technology. Through our unique vantage point as a global consulting network, the Context Network contends that combined, those two factors will more significantly and more rapidly influence our industry than any other changes experienced to date."

While it is impossible to recognize or fairly address all the influencers affecting change in the industry, the partners of the Context Network believe the following trends promise to significantly impact the industry during its Accelerated Momentum Phase.

FEWER, BIGGER FARMS

Context Network Founding Partner, Tray Thomas, Des Moines, IA, says, "It's not news, but a reality, that farm size and numbers will continue to impact the number of customers available in the market, as well as their buying power."

Thomas expects farm size to continue to trend toward bigger operations and smaller, specialized operations, with attrition in the mid-sized sector.

"In recent years, farms with sales of $500,000 or more annually accounted for 44% of all production, nearly doubling output in just 15 years," he says. "The large operation trend is occurring in crops, livestock and poultry.

Acreage projections will continue to be influenced by price, logistics and supply and demand. Thomas says, "Strength in commodity markets will create some near-term planted acreage disruptions (with noteworthy increases) as reports from EU repealing their 10% set aside requirements and 10 million acres of Conservation Reserve Program set to expire in 2007."

MASS ADOPTION OF TRAITS

"Solid, significant pervasion of biotech traits is expected in the next 10-15 years," says Blake Sieker, Context Partner, Littleton, CO.

He points out, "Understanding the value, drivers and implications of the seed and trait business is a Context Network forte."

Sieker says the global proprietary seed marketplace value approached $20B in 2006. "That represents an increase of nearly 40% over 2001 marketplace estimates."

Sieker says to look for: Rapid adoption of new technologies that will strongly influence production and the seed industry between now and 2020.

Commercialization of seed traits that is forecast to expand by $11.3 billion accounting for 65% of the global major field crop seed market projected growth.

North American corn and soybean markets accounted for 75% of global trait premiums in 2007. Context estimates these markets will maintain predominance, accounting for 65% to 70% of forecast trait premiums in 2020.

Commercial North American major field crop seed markets will be largely transitioned into seeds with enhanced traits, which are forecast to nearly triple 2006 sales of over $6 billion by 2020.

Sieker says, "The era of trait fees is expected to end as biotechnology transitions to modifying plant metabolism instead of inserting single genes."

Specific tolerances will be offered by 2018. Sieker says, "High yield, drought/cold tolerance will likely become combined into 'Stress Tolerant, High Yield per Acre' and rapid adoption is anticipated. By 2020, he predicts over 90% of corn acres will have at least one new trait, many will have multiple traits, all stacked with input traits.

Context says biotech solutions for soybean cyst nematode and Asian soybean rust will likely initially secure trait premiums for the 'first to market' company.

DISTRIBUTION CHALLENGES

"Ag product distribution will change more the next decade than it has in the past 25 years," says Context Partner Steve Hawkins, Marble Falls, TX. "Changes in distribution systems will impact how the system is compensated, and will limit who can truly qualify for distribution of agricultural supplies." He points to five key drivers of change in distribution systems:

Ownership--60% of U.S. farm and ranch land is operated by non-owners, a trend USDA projects will grow. That creates a new layer of purchase decision influencers who effect decisions directly, via professional farm management firms or through short-term cash rent agreements demanding stewardship and higher returns.

Performance objectives--In a $2.00 corn market, farmers' success is driven by cost control and consistency of yields. In $3.00 corn market, yield drives investments, so farmers must invest in the crop--a high yielding crop--to maximize their return per acre.

Purchasing alliances--New alliances being formed lend themselves to buying groups. Such groups will experience increased purchasing power, rewarding the individual.

Purchase decisions--Market penetration of seed traits and treatments will increase, reducing the number of decisions farmers must make, and pushing those decisions earlier--along with related input decisions including equipment and plant nutrients.

Influence, Service and Logistics--These value points are rolled together both upstream and downstream from the retailer today. Suppliers use program incentives to get the actions they want, but in many ways the incentives homogenize the compensation to the retailer.

Hawkins says, "In the next decade, the marketplace will contain fewer distribution points, players and locations, and see an easing logistics and consolidating influence. Service will be provided more by manufacturers, and distribution compensation will be segmented, with distributors being paid for what they provide.

"Farmer crop investment decisions that are made earlier will create avenues for a more direct producer-manufacturer relationship," Hawkins concludes..

BIOFUELS

"Biofuels bring some of the most far-reaching and permanent changes in American agriculture since the introduction of biotech crops," says Jim Murphy, Context Consultant, Des Moines, IA.

He expects the impact of this new source of demand for crops will be felt in numerous ways--some as one-time events, others taking years to unfold. He adds, "The most significant are increases in crop prices and major changes in cropping patterns, but there are many others, and all hold potential to permanently change agriculture."

"Biofuels will become the second largest domestic corn consumer and a major consumer of soybeans as well," Murphy says. "A stronger ag-to-energy linkage will result in the decade ahead, closely tying agriculture to U.S. energy and environmental policy.

Murphy says large corn and soybean price and demand swings are expected for at least five years as the market determines the practical limits of food crops' use for biofuels in lieu of food and feed.

With biofuels' market entry, animal producers and export customers face increased competition for crops. "The use of lower-cost alternatives will become crucial to meat production," Murphy concludes. "Ultimately, animal production, particularly poultry and swine are expected to decline as the economics of U.S. production decline. Distribution system stress, such as trucking and grain storage will likely mount as does biofuel production."

PRECISION AGRICULTURE

"Greater automation, farming by the foot (rather than the field), and broad application are the three precision agriculture advancements expected for the next decade," says Borel. "From remote sensing to auto steering to geographic information systems (GIS), precision agriculture encompasses multiple technologies that use global positioning (GPS) or geo-referenced information--all of which will see rapid adoption this coming decade."

Borel reports the Auto Steering/GPS Guidance market has enjoyed the highest growth during the past five years. Penetration will continue to expand over the next decade. He expects high precision Real Time Kinematic systems will become the norm, and local tower and satellite correction systems will eliminate the need for user moving of tripod-based ground stations.

"Expect Remote Sensing, primarily from satellite multi-spectral cameras and radar units, to dramatically increase in penetration during the next ten years," Borel adds. "Increases in the number of satellites and advancements in the technology for processing remotely sensed imagery are poised to dramatically improve the value equation--resulting in accelerated growth. Higher grain prices will help too!"

He says, "Radar is also a significant technology as it enables consistent, quality images/data regardless of cloud cover.

"These technologies will find multiple applications for agribusiness, growers and advisors including seed, fertilizer and chemical evaluations for vigor, biomass, maturity date, yield, crop moisture, etc.: and soil zone mapping; measuring and monitoring agreement compliance, tracking crop acreage, predicting yields and land valuation to name just a few."

ADDITIONAL DRIVERS

Borel says, "As we race toward a new calendar year and the next 50 years for NAMA these are key drivers that will accelerate the ag industry's momentum.

"But there are other issues that will also greatly impact the next 1015 years. Consumer preferences (e.g. natural and organic foods), additive income-generating uses for land such as hunting leases and/or agrotourism, and the fast growing market segment called 'ruralpolitans' are additional categories to watch as significant drivers of change."

Thomas, concludes "As a world-leading agro and bioscience consulting firm, we are often posed with questions including: What will the trends be? How can our company compete, capture value and succeed for the future?

"In an age of fast-paced science and information technology, success will come to those who learn their industry segment drivers, understand the resulting ramifications, and rapidly implement required changes."

The Context Network provides business management and strategy consulting services to the world's leading agriculture, biotechnology and food companies and government agencies and institutions. For more information, go to www.Contextnet.com.

Kathleen Erickson, Demeter Communications