An Informal Guide to Finding Value in the Ag Economy
By Nick Schroer, Principal
As venture capital investors in the "food / ag systems" space, we know that food and agriculture represent an undeniably massive opportunity for upside. The agricultural sector and related industries contribute approximately 5.5% of US GDP and employ about 10% of the US labor pool, equating to roughly 22 million jobs. Furthermore, agricultural production utilizes over half of the country's land base. The US farm economy is a diverse and robust system, comprised of specialty crops, livestock, and commodity row crops across various regions. Given this scale and total addressable market (TAM), it seems logical for venture investors to focus on innovation and technology that solve upstream, “big TAM” problems in these areas.
Let's define upstream agriculture and quantify the opportunity a bit more. The US boasts approximately 2 million farms, covering around 900 million acres, with an annual economic output from farming and ranching of about +$200B (direct) and $1.3T (indirect). In developed nations like the US, where labor and capital inputs eventually plateau, technological advancements increasingly drive total output (do you remember “total factor productivity” and the Cobb-Douglas production function from Econ 1101?). This is clearly evident in the US farm economy.
The data reveal a compelling trend: total farm inputs have remained essentially constant, while agricultural output has significantly increased over the years. You can draw a lot of conclusions from this - TBD on their validity. For example, one might expect a substantial increase in farming margins - especially if demand keeps up with output. This would boost operator purchasing power and lead to higher spending on new or additional technologies, reinforcing the cycle.
Unfortunately, this expectation is largely unwarranted. Despite the impressive gains in output driven by technology, grower margins have not meaningfully improved for 20 years. Technologies like autosteer, seed genetics, "see and spray" systems, and novel chemical inputs have all contributed to massive gains in productivity but are now simply a costly buy-in for farmers, enabling them to essentially maintain the same single-digit net margins they’ve always had and compete on marginal volume rather than cost. This environment necessitates leverage and scale for survival.
So, why isn't net farm income (and margin) increasing? A primary reason is the rise in input prices for essentials like seed, fertilizer, and crop protection. Additionally, increases in interest rates have driven up borrowing costs for equipment and other real assets, further depressing profits. In many cases, sustained economic profits would be even worse if not for various forms of subsidies including crop insurance, tax incentives, and grants – and yes, these should all be viewed as subsidies. This need to "grow or die" explains why the average farm size continues to expand and the number of American farms continues to decrease. Achieving economies of scale becomes critical and sub-scale operations go out of business.
As an aside, some other time I’ll argue that production agriculture would have blown up and rebased 20 years ago if not for government interventions like direct transfer payments and price support via ethanol
mandates in the early 2000s, but that’s a battle for another day. That would have created geopolitical unrest and eroded America’s global power, which is my main thesis as to why we stay addicted to subsidies at the congressional level. Also, I haven’t experienced a famine in recent memory, so take the time to thank a farmer and think first about incentives and second about outcomes.
To those with a finance background, would you invest in and operate a challenging, low-margin business that requires a large balance sheet and offers stunted growth? That sounds materially unappealing when there are easier ways to make money. A macro explanation for farming challenges is that row crop farms operate in a near-perfectly competitive market. In such a market, characterized by many buyers and sellers, homogeneous products, and participants acting as "price takers," the gains from production, driven by technology, do not translate into long-run profit gains (exactly what we see when accounting for rising costs, as discussed).
This raises a critical question for venture investors: if strong historic and fundamental evidence points to sustained low / no margins for farmers and ranchers, how can we expect them to continue adopting and paying for the very technologies we aim to bankroll? And, how can we expect the acquirers of these tech companies to pay 10x-return prices for tech they will have trouble commercializing?
Companies like Deere offer a glimpse into a successful model. They have scale, are global, have robust lending divisions, and have effectively "monetized the acre" by locking in farmers through recurring subscription fees for services like satellite navigation and operations center access. Good for shareholders, frustrating for customers. This strategy has clearly resonated with investors, as evidenced by Deere's stock price history.
However, very few AgTech startups can directly compete with behemoths like Deere, so they infight, commercialize marginal products, burn through cash, and often fail. This necessitates a different strategy for capturing the remaining margin within the broader food system.
So, where is the margin in the food system if not primarily on-farm? The largest share by far is in food service, followed by processing, retail and wholesale trade, transportation, and advertising. The farm share of the food dollar has consistently been a small percentage, around 15.9 cents at last count.
This analysis might lead one to conclude that directing investment dollars on-farm isn't viable, suggesting we all go home. But hold on—all hope is not lost.
First, we do think there are both viable and attractive opportunities “upstream” (more on this later). And, since real margins do exist elsewhere in the food system, the key lies in identifying overlooked opportunities outside of the farmgate. Certain players along the capital stack already capture significant value:
Input suppliers (seed/trait IP, crop protection, equipment companies, fertilizer businesses) enjoy some margin as they have low demand elasticity and can lock in customers with contracts for special genetics, differentiation, etc.
Landowners benefit from decent returns through long-term asset appreciation and cash flows. But remember, farming is hard.
Traders, processors, and brands can also generate significant profits.
This explains why private equity firms often target processing businesses and brand roll-ups (operator alpha), and institutional capital acquires land (inflation hedge w/ cash flow), while venture capitalists exclusively chasing farmer P&Ls tend to struggle.
Winning venture-backed companies in this space often don't rely on every farmer paying directly. Instead, they aim to control the "rails"—whether it's hardware, data, inputs, or financing—and generate revenue along the full value chain. It's a platform play, not solely a margin play, where the farmer serves as a node in the system, but not always the primary customer.
At Trailhead, we have strategically built a portfolio that accounts for upstream risks. Our focus is on companies with broad applicability across the entire supply chain. When we do invest upstream, we target companies with bulletproof business models that are fairly priced and offer clear "no-brainer" exit potential. Fair pricing is critical because these upstream companies frequently exit early, often to OEMs like Deere, at low-to-mid nine figures and, to meet venture capital underwriting targets, overpaying is not an option.
For fear of “over-talking our book” see below for a graphic of how our thinking about portfolio orientation and supply chain diversification has played out in our investments. Maybe in another post we can explore portfolio construction, stage risk, and follow-on strategy.
Regenerative agriculture is in our firm’s DNA and it’s through that lens we view opportunities, many riding generational mega trends like: regen inputs, automation, animal welfare, and land use (read: viable ways to get off the price-taker treadmill). We expand the definition of “regenerative” to also target downstream opportunities such as novel finance/insurance plays, transparency/traceability, food waste/safety, and Digital Infrastructure. And yes, AI will continue to play an increasing role in all of these areas.
By understanding why AgTech investments often underperform and strategically targeting sound business / market fundamentals along the entire value chain, we believe strong returns can be achieved without concessions. Maintain optimism and expect the food / ag system to be healthier, more resilient, and way cooler in the next 10 years.
-Nick