About this Episode
Bowery Farming CEO Irving Fain, Five Acre Farms CEO Dan Horan, and S&P Global Market Intelligence reporter Alex Bitter join the Essential Podcast to talk about food supply chains and the challenges of getting food to market during a pandemic.
The Essential Podcast from S&P Global is dedicated to sharing essential intelligence with those working in and affected by financial markets. Host Nathan Hunt focuses on those issues of immediate importance to global financial markets – macroeconomic trends, the credit cycle, climate risk, energy transition, and global trade – in interviews with subject matter experts from around the world.
- Listen to our previous Essential Podcast episode on food supply chains, the restaurant industry, and the damage wrought by a global pandemic with Alex Bitter.
- Read our special report on how COVID-19 is impacting food supply chains to learn more about how the pandemic and the economic shutdown are revealing systemic weaknesses in the supply chains, pointing the way towards trouble ahead despite initial assurances by authorities that food supply chains would remain robust during the outbreak.
Nathan Hunt: This is the Essential Podcast from S&P Global. My name is Nathan Hunt.
Dan Horan: The coronavirus pandemic has been enormously disruptive for almost everybody in food.
Irving Fain: The challenge with the food supply chain really starts with the fact that agriculture for eternity essentially has been about responding to a set of external variables that we ourselves can't control.
Alex Bitter: What would a less-centralized food supply chain look like? Even if it's less efficient from a bottom-line financial standpoint, are there advantages?
Nathan Hunt: In the early days of lockdowns, in response to the coronavirus pandemic, there were concerns that food shortages would soon limit access staples in badly affected areas. In an excess of caution, I bought three dozen eggs in early March that I have yet to finish. While the worst-case scenarios have not come to pass, the crisis has impacted food supply chains. Industrial efficiency and consolidation have not served us well. Today, I will be talking to two CEOs from companies offering different food supply chain models: Dan Horan, CEO of Five Acre Farms, and Irving Fain, founder and CEO of Bowery Farming. I will also be welcoming back Alex Bitter of S&P Global Market Intelligence to get his thoughts. Dan, welcome to the podcast.
Dan Horan: Thanks for having me, Nathan.
Nathan Hunt: So, let's start off with the with the basics. Tell me about Five Acre Farms. Is there a farm? Is it five acres?
Dan Horan: 10 years ago, I launched Five Acre Farms and the basic idea is to bring local food to more people to tap into regional agricultural strengths, all of this under a brand. And so now, you know, Five Acre Farms is really about trying to keep farmers farming, connect people with their food source, and to start, our first 10 years, we've focused on dairy eggs and in the Northeast, apple cider. Is there a five-acre farm? There is not. The original idea was that, particularly in the vegetable world, you really just don't need that much land to produce an incredible amount of food. But more broadly, the notion of five acres, really connotes accessibility and puts things on a human scale, which I think is really a rising trend and desire of people in the United States. We have a massive system, but I think there's a real desire to understand and know the farmer. And so, Five Acre Farms is trying to get across that message.
Nathan Hunt: So, Dan, can you tell me a little bit about where are you available? Where are you located?
Dan Horan: Pre-COVID, we were probably in about 900 locations. That's been cut quite a bit because we did places like museums and if you went to Citi Field and got a milkshake at Shake Shack, that was Five Acre Farms milk, but we're really focused in the Northeast from D.C. To Boston. We do both retail and food service. We focus on dairy and what we do is we find local farms, we really use the general public's common sense to define local, we say within 275 or 300 miles of where you're standing. But the idea of Five Acre Farms is when you see us on the shelf, you know that the product came from a local farm to where you are standing. And so, for New York, generally our milk comes from a couple of farms in New York State, one in Connecticut, same with our eggs, some Vermont, some Pennsylvania, some New York, and very specifically we identify the farm on the package. So rather than say, generally this milk comes from this farm, we say precisely, exactly, all the milk in this bottle comes from this farm. So, we work with about 25 or so farmers and processors, that's slowly expanding. And as we move South and West, we'll add farms so that we can always be local to where you are.
Nathan Hunt: Tell me a bit about the standard supply chain for dairy and eggs looks like in the United States.
Dan Horan: We'll start with dairy because dairy and eggs are actually very different. In the United States, the dairy business is very, very closely monitored and controlled by the federal government. What's that it happened over the years is that rather than having lots of little farms package on the farm, the dairy business has set up where herds, which now are getting large and larger, they milk cows, so the tanker stops by the farm, picks up all the milk that's been milked for the last day and a half brings it to a processing facility which then bottles it and the processor then has various customers, whether it's Walmart or Target or in New York City say Key Food, those places have contracted with the processor whose various customers include various milk brands and so the milk then comes out in containers from the processing plant and goes to a warehouse which then gets divided up by customer and onto trucks. It's actually a little bit of a process from the farm to the end consumer, where in my view, the farm is really lost. All the milk is pooled together, price is set and controlled by the federal government in various regions, they try to create balance across the country in terms of pricing, but empirically at this price control, which is meant to try to keep farmers in business and make milk readily available to all people, really has not worked. And so the price paid to farmers has been too low. And so that's why we see farm, after farm, after farm close. The answer was supposed to be, we'll just get bigger and we will all get more efficient, but with Dean Foods and Borden and going bust, I think we can also agree that that model hasn't worked either. So Five Acre Farms says, "Well, hold on a second. What if we started at the farm and rather than pooling everything together, what if we stopped the milk from leaving the farm, paid the farmer a reasonable rate, and then assured the end consumer that we knew where the milk was from. And we got it to the end consumer." And so that's what Five Acre Farms has done is focused on pricing the farm rather than using the federal order and really taking control of the supply chain rather than being dependent on these large cooling facilities. If you fast forward to a couple of months ago, what you saw was that the places that processed milk has shrunk to the point that when a lot of the outlets that needed milk closed, there was way too much milk to go into the system and because processors have continued to get bigger and bigger and bigger and shrink in number, we had these tremendous bottlenecks. Contrast that with eggs where there's no government involvement. So the label on an egg carton, for example, can say anything you want, anyone can ship eggs and they come from farms of all sizes, generally, very large farms. And they go to these processing houses, take them off with big racks of, of eggs and placed them into various containers. And those are generally distributed around the United States and four or five states, Pennsylvania is very big in sorting eggs and so the businesses are quite different.
Nathan Hunt: Let me just dig into something you just said, you can print whatever you like on the package containing eggs. Obviously, when I go to the supermarket, I see "cage free" and "free range" and "organic" and any number of other things. Are you telling me there's no regulation on that?
Dan Horan: No, I mean, the word organic is protected, but outside of that, essentially, and I'm going to be hyperbolic here, but everything that you read on an egg container is barely true. It almost doesn't even have to list its provenance. So they'll say this egg comes from and they'll list 15 States that it could possibly come from. The system is designed that if there's an outbreak in a problem, we're good at tracing that, but the packaging itself, the government has decided really, it's just marketing and they're not going to get involved.
Nathan Hunt: I want to return to the dairy industry. So how big is, say, the market for milk in the United States?
Dan Horan: Milk as we know, it is not really the way the market looks at milk. You know, when we pour a glass of milk, we drink it and think this is delicious. The market looks at it as a series of components: butterfat, whey, protein, milk, solids, calcium. I mean, there's all sorts of things that you can extract. And then these things are then sold on the global commodity market. Some part of milk is in short supply somewhere, and it can send a spike and it's generally driven by butterfat, which is you can make a lot of things with it, you make butter, cheese is sort of where the value is, but whey protein has come along and you can also, you can dry milk because milk is very heavy so it's very expensive to ship, but dried milk and concentrated milk all have markets. Cows generally like cold weather so that's why in the United States we find them in Wisconsin and Vermont and upstate New York and not as much in the deep South. So it's a very, very big business. We generally are familiar with the consumer-packaged side of this business, but there are lots of other uses.
Nathan Hunt: I'm wondering for you guys, have you experienced disruptions in your business as a result of the coronavirus pandemic?
Dan Horan: Yeah the coronavirus pandemic has been enormously disruptive for almost everybody in food and you can see it with empty shelves, you can see it, even with businesses often we think of disruptive in this context in a negative light, but in the positive light, home delivery and small farm stands and, you know, direct-to-consumer have all grown a lot. The supermarket business was, was noticeably up. We have been disrupted in particular because the restaurant trade, the coffee business all likes a higher quality milk with more butterfat, which is what we have. And with all of those outlets being closed, it's not as though the cows began to stop producing milk. The supply, you know, we read about dumping, we have an amazing amount of food in this country, but we depended on many, many outlets. And when say 60% of those outlets shut and really sort of 50% of the food consumed prior to COVID was consumed outside of the house, there was an enormous disruption there. For us, our milk business suffered and then another thing early on, the warehouses that carried our product, had to suddenly limit the number of workers inside the warehouses and so there was a general slow down because the number of people that it takes to move food was reduced. We work with a multibillion-dollar business in New Jersey where a lot of their workers in their warehouse got to work in vans, COVID strikes, now there, those vans are not running. So suddenly the workforce wasn't able to get there. So it's been highly disruptive. We happen to deal in core commodities where, the whole world, all cultures like eggs. Most people know how to cook an egg. So egg sales, as one would expect, would continue. You know, food also takes up different amount of space on trucks. And so particularly early on in the crisis, there was a lot of disruption because people started hoarding certain things and certain things take up more space on a truck than others. You know, toilet paper and paper towels are very big bulky items. And if everyone's ordering that, there's not as much room on the truck for other things. This pandemic has pointed out the fragility of our distribution system and I think it's also be slightly changing people's understanding of what does efficient truly mean. We have assumed that lowest price means most efficient. You can charge the lowest amount and you can pay people involved in this system the lowest amount until they're suddenly essential. And what we've seen with food, whether it's a cashier or whether it's someone working in a factory, you know, packing chicken or bottling milk, the food distribution system is dependent on people. It's dependent on people showing up every single day. And more and more, people are wondering, where is all this stuff coming in?
Nathan Hunt: You guys have been dealing with disruptions on your fairly short supply chain. Do you see larger disruptions affecting longer supply chains?
Dan Horan: The answer is yes. It's been talked about in my world for a long time, and now it's been put out there for the public to see. When you make food, most of our food is processed in some way. So if we just think about that verb, you have the provider of the raw material, and then we send it somewhere to be made into what we ultimately consume. There are very few items that are really just straight from animal to plate. It's a huge supermarket filled with all sorts of things that are made and the distribution system has concentrated at the processing point. It subsequently has put a lot of pressure on farms to get bigger and bigger and bigger because the gathering of the food requires money. That has really just sort of exposed us to portfolio risk and the lack of diversification has exposed us to greater risk.
Nathan Hunt: Dan, one thing that has become clear through the crisis is that industrialized farming and consolidation mean that a single point of failure in the food supply chain can have a massive impact. Smaller family owned farms seem to offer a more resilient model, but small farms have more redundancy and less efficiency. How do you think we balance efficiency and resilience?
Dan Horan: It's a great question. So it's not really one size fits all. I know that we all love oranges, but growing oranges in New York State is not a great idea. So when we think about making sure that we have a diversity and a range of suppliers and you can sort of then move that onto a small farm level, having a lot of smaller operators across every item and therefore every region, doesn't really make sense. But if we just took apples, apples grow very well in lots of parts of the United States. We've seen that in the Pacific Northwest where there's very low humidity, they grow even better. We are probably going to confront- do we really want to grow apples on the East Coast, which are big in Maine and New York and Pennsylvania, and a little bit further South, or do we just want to concentrate these items in the Pacific Northwest? And I think from not only an economic standpoint, from an employment standpoint, from a diversification standpoint, I think we need to figure out how to keep both and we need to understand that cheapest produced in one place has a lot of unintended consequences that we actually don't want.
Nathan Hunt: Dan, I've been thinking lately about labels like "organic" or "all natural" or "cage-free, sand I think that a lot of the reason we are drawn to those things as consumers is because we are trying to develop some sort of traceability, some sort of relationship to where our food came from. It's reassuring to know that this came from a farm that this was raised in a way that is in some way, recognizable to our cultural memory. How does your model solve for traceability? What do you think you're offering people from that perspective?
Dan Horan: So that's really what Five Acre Farms is all about. Is it offers complete transparency and traceability to the farm from where their food came. Being able to know your food source, I believe is a trend that is going to get bigger. Food source is connected to nutrition as well, as is your overall environment. So Five Acre Farms is about bringing the consumer that choice and letting them make that choice. I think that there's a push towards knowing our source, knowing the people and developing more trust with our food source. I see a lot of opportunity with it.
Nathan Hunt: My next guest is Irving Fain, founder and CEO of Bowery Farming, an indoor farming company with financial backing from a veritable who's who of venture capital investors, including Temasek, Google Ventures, General Catalyst, GGV Capital, First Round Capital and Henry Kravis, as well as thought leaders in food, including David Barber of Blue Hill, Tom Colicchio, and José Andrés. Irving, thank you for joining me today.
Irving Fain: Thanks so much for having me, Nathan.
Nathan Hunt: Now Irving, I am informed by the journalists on my staff that I need to do one of those full disclosure things when interviewing someone I know. So full disclosure, Irving is a close friend who I have known for a long time. He has in the past, advised me on various entrepreneurial ventures, advice, which in all cases, I failed to follow very much to my detriment. Give me the elevator pitch for Bowery Farming. There's a lot of lettuce on the market. Why should I buy from you?
Irving Fain: At Bowery, we build warehouse scale indoor farms. And in our farms, we grow in a totally controlled, totally contained environment. We actually stack our crops from the floor all the way up to the ceiling and we grow under lights that actually mimic the spectrum of the sun. So, first of all, what we can do is we can grow 365 days of the year, completely independent of weather and seasonality. So it's reliable, consistent supply of high-quality produce year-round. But on top of that, we grew up completely pesticide free. So there's no herbicides, no fungicides, insecticides, no pesticides. And the challenge is if you were to do that in the field, you would both see your quality suffer and you would also see your yield drop precipitously. In our case, and if you live in the New York and in New Jersey area, or the Maryland area, you can try it for yourself, but our food is as good as you would possibly find. On top of it, we grow more than twice as fast as the field for a number of our crops. We get more crop cycles per year than the field does, and we get more yield per crop cycle itself. So we end up a hundred times plus more productive, then a square foot of farmland and all the, while we save over 95% of the water, when we grow. What makes this all possible, Nathan, is a combination of robotics and automation, which we build and develop and software, computer vision, and artificial intelligence, which we also develop, which ensure that our crops are getting everything that they need when they need it. And then the last piece of this puzzle that I think makes it particularly compelling is because we've changed the way that we're actually farming. We can build our farms very close to the communities that we actually serve. And so that means you're getting a product delivered to you a day or two from when we harvest it, versus weeks, or even months of time in that traditional agricultural value chain.
Nathan Hunt: To that point, how is this food supply chain that you have developed, are developing, different from the industry standard?
Irving Fain: There's a lot of different answers to that. The most simple answer is a few key areas. We are able to simplify drastically the fresh food supply chain. The second piece of it is that we are able to provide surety of supply. And the third piece is that we can really guarantee and provide safety in the products that we're actually growing in a way that's really difficult outdoors. So if you pull back a little, the challenge with the food supply chain really starts with the fact that agriculture for eternity essentially has been about responding to a set of external variables that we ourselves can't control. And so that's why we grow different crops at different parts of the world at different times of year, because that's when the climate allows and then we augment that with chemicals like pesticides or other chemicals, like fertilizers, or even going down to changing the genetics of the crops themselves. What we do at Bowery is we flip that entire equation on its head and because we can actually control the externalities that affect crops, and because we can protect the crops themselves from a lot of those externalities outdoors, we can farm and build our farms anywhere around the world year, round, reliably, and safely. And when you do that, the entire fundamental of how a supply chain functions completely changes.
Nathan Hunt: You're going to have to forgive me here, but greens grown in warehouses, in New Jersey and Maryland under lights. Don't sound as warm and fuzzy is green is grown on a family farm in Vermont.
Irving Fain: The first thing that's really important for us at Bowery is to acknowledge that we are not in the business of cannibalizing the existing farmers out there, but rather we are an important part and partner to the local and regional food systems that exist around every city, in every community, in the country and for that matter around the world. And I think one of the big challenges you have in a lot of these communities is there's more demand ultimately for locally grown food than there is supply of that food itself. And so take the example of Vermont. Right now, you can get some fantastic food coming out of Vermont. Fast forward six months from now, and you can imagine there's very little a growing in Vermont that time. So at that point, the delta between the demand for local grown food that hasn't gone away, but the ability to supply it has, and that's one of the real advantages that we could offer at Bowery is that year round consistent, reliable supply of protected produce, pesticide-free and local all year. The other answer to your question is farming has a real kind of pastoral component to it and understanding of it and it has been a part of the fabric of our society from, you know, even before we had the society we have today. The reality though is our farming system has it adapted substantially, particularly in the last 50 or 60 years to provide mass amounts of cheap food. But the truth of it is that that food has actually come at a real cost. And a lot of that cost was in arrears for some time, but it's now coming due. Agriculture is the largest consumer of resources globally by an enormous margin. 70% of our world's water every year goes to agriculture. We put down about 6 billion pounds of pesticides every year across the globe, in the U.S. alone, it's about a billion pounds. And that's in our soil, hurting the nutrients we rely, on it's in the water, it's actually on the food that we're eating. And because of the way we farm in just the last 40 years, we've lost 30% of all of our arable farmland globally. So you've got a real resource drain from the way we farm already. When you compare that now against the fact that the world changing, nine to 10 billion people in the next 30 years, we need somewhere between 50-70% more food to feed that population, according to the UN, and all the while 70-80% of people are going to be living in and around cities, where that leads you is, we have to find a better way. We have just to find a way to provide fresh food, urban environments that's both more efficient and more sustainable, and that's exactly what we're doing about it.
Nathan Hunt: Are food supply chains too long right now? After all each link in the chain, each road, each depot, each contract, each distributor is a possible point of failure.
Irving Fain: I was doing a podcast, and you mentioned that we work with Tom Colicchio, I was doing a podcast with him recently, and someone said the food supply chain is broken, and Tom's response was, "it's not broken, it's actually functioning exactly as it was intended to." And so I would say the same thing here. Is it too long? It isn't too long, it's just been designed around a set of parameters and variables, which we've established many, many years ago. And I think if anything is being highlighted through the global pandemic and what we're going through right now, it's that we are heavily reliant on long haul transportation, either nationally in many cases, internationally, for the food that we require every single day, every single week, every single month, and of course that extends far beyond food it expands to medical supplies and a lot of other areas as well. And I think what happened in the time of COVID is a supply chain, which has been functioning in this manner for decades, all of a sudden had strong light shined on it and people woke up and said, wow, our food travels a long way and we as an individual locality are very susceptible to disruptions. We are only heading towards a place where there's going to be more disruptions, not less. And we've seen that in the last few years, whether it was flooding of fields that happened this spring, which caused a huge shortage in arugula, food safety and incidences on the rise, and so finding a way to build a more resilient and regional food system is only going to become more important as time goes on.
Nathan Hunt: Have you experienced disruptions in your business as a result of the coronavirus pandemic?
Irving Fain: Interestingly, Nathan, this is been a moment for us where the value that Bowery provides has been always important to retailers and always important to consumers since we founded the company, but I think it is only more so today, comparatively even six months ago. So, we saw not surprisingly in the later March and April timeframe when things were very difficult across the country, certainly in New York, huge spikes in demand, both in online retail, as well as in brick and mortar. So we were up over three times in that period, both online and brick and mortar. And that was despite over a 35% drop in foot traffic and retailers in New York. And even as retail began to bounce back, we continued to see that growth maintain in online, we continue to see that growth, maintain in brick and mortar. And actually, we're on track to over to six times increase in the store accounts that we serve at Bowery by the end of September, so by the end of September, we'll be an over 650 stores. And of course, part of that is fueled by our general expansion because we opened the new farm in Maryland, but there's no question that what's happening during COVID has been an accelerant to that as well.
Nathan Hunt: One reason food supply chains experienced disruption during the crisis was a focus on the efficiency of economies of scale over a diversity of sources. Was that the wrong approach, or did we perhaps focus on the wrong kind of efficiency?
Irving Fain: I think in some ways, Nathan, this goes back to what we talked about earlier, you know, right or wrong, it was in some ways, it was a shortsighted approach, or at least as time marched on, we weren't picking up our heads necessarily and looking at the impact and the cost of the supply chain and the system that we'd built. I mean, just as an example, you know, the USDA estimate that up to 45% of the nutrients in fresh produce are lost just in transportation. When you think about how important the nutritional content and the produce that we eat is, our ability to deliver a product that Bowery a day or two later versus weeks or months, and therefore a more nutritious and a fresher product. You're delivering a more nutritional product and you're reducing food waste because the product last longer on the store shelves and it lasts longer in a consumer's refrigerator, that's a good thing. At the same time as well, you look at the environmental impact of the supply chain and the way we're functioning right now, whether it's the emissions that are coming from all the trucking and transportation or the chemical intensity in the way that we're farming, that also is not a long-term sustainable way for us to function. Were we wrong in what we did? I understand why we set the supply chain up, that we did coming out of World War II when the population was booming, and we just wanted to make sure we had a lot of food for everybody. But as the world changed in our society, not only in the U.S, but around the world changed, it is definitely time to rethink and change how we think about our fresh food supply chain and how we think about our food supply chains in general.
Nathan Hunt: There is currently a lack of traceability in food supply chains, famously epitomized in mislabeled fish and supermarkets. In the absence of traceability, consumers tend to rely on proxies for information on where their food came from, like "organic" or "non-GMO." But I notice you don't label your food organic. Why is that?
Irving Fain: You're exactly right. I think in what you're highlighting actually is one of the problems that we're solving at Bowery and one of the real problems in the existing food supply chain now, which is the total lack of transparency. So, if you think about why do we rely on these proxies it's because if you ask a simple question, like where does my food come from? Or where was it grown? Who grew it? What was on that food or not on that food or in the food I bought? Those are questions that are extremely hard to answer in fresh food and in many parts of broader food, still difficult to answer. And at the same point, these are questions that consumers are now looking for answers more and more strongly than ever before. You know, there was actually a study recently that said over 80% of shoppers are saying transparency is important or extremely important to them now more than ever. At Bowery, we have this capacity to provide that transparency from seed to store because we control our entire process from seed to store and we know everything that happens to our product from the moment we plant that seed, the moment that product is harvested, it's packed, and then it's delivered to our customers. And so, we know what's happened to it, we can ensure the quality of it, we can show the safety of it. That for consumers is incredibly important and when you pair that transparency with the ability to grow pesticide-free with the ability to grow locally and the ability to do that year round, we've found that to deliver an enormous amount of value to our consumers and that's why we focus on those values versus pursuing something that could organic certification.
Nathan Hunt: This may be the type of question you'd more commonly hear from a venture capitalist, but will it scale? The U.S. fruit and vegetable market demand is expected to exceed 243.2 million tons by 2025 and be worth over a trillion dollars. Can your model handle that kind of volume?
Irving Fain: I like hearing those numbers because it highlights just the enormity of the opportunity that we're chasing here at Bowery. But of course, we're not going to be the single source of produce in this country. That said Nathan, from the very start of Bowery, scalability has been at the core of what we're doing, and scalability means a few things. First of all, scalability means economic scalability. Can you build this in an economically viable way? Secondly scalability means just the actual scalability and the construction component. Like can you build farms, and can you build them in a way that guarantees a reliable, consistent high-quality product at a price point that works, and can you do that over and over again? And the answer for us there is absolutely. And we've spent an enormous this amount of our time, developing both the hardware, the robotics, the automation, the growing system, the farms themselves. In a way that they're highly scalable and highly replicable, but also built that alongside the companion that we call the Bowery operating system. The Bowery operating system is like the brains of our farm, it's it's the central nervous system, tying into our agriculture, tying into controlling all of our systems, even down to the work management and the work our farmers do. And so what that means is we're building a distributed network of farms. Every new farm we build leverages the network and the data and the understanding of everything we've done before it and then once that farm comes online, it too contributes data to that network and only makes the network that much stronger. So absolutely this is a scalable model and the focus from us from the very beginning has been Bowery farms, not only in cities around the United States, but cities around the world, because this is a problem that's global in nature.
Nathan Hunt: My final guest today is Alex Bitter retail reporter at S&P Global Market Intelligence and a previous guest on the podcast. Alex, welcome back.
Alex Bitter: Thanks for having me back, Nathan.
Nathan Hunt: Alex, you have written on food supply chains in the past, listening to my two previous guests, Dan and Irving. Did you find anything new or surprising in their approaches?
Alex Bitter: So, in one sense, no, in some sense, what they talked about and the issues they brought part of their pitch, really, seem to be something we've been hearing a lot, even before the pandemic. We know that a lot of consumers and a lot of retailers by extension are interested in developing and offering more products that are better for you, that are fresh. Kroger recently rebranded and part of their new slogan and part of their new strategy is emphasizing how they are a destination for fresh foods, right, produce and things that aren't preserved or in cans necessarily, so they haven't given up on that, obviously. So listening to both of your interviews, I think what they're trying to do, offer more fresh foods, cut down on the transit time that things like milk and eggs and lettuce take to get to stores, therefore increasing a lot of the nutritional content and the nutritional value and the freshness and the connection to a specific place and the traceability, all of that forms a sort of interest that a lot of retailers and a lot of consumers have been trying to further recently. I think it was Irving mentioned this idea that what they're trying to do is increase the amount of food that is cultivated near cities and that is of course, traceable for people who live in cities. And, you know, he talked about how the global population is supposed to increase by billions of people in the coming decades, he talked about the trend for urbanization, which began hundreds of years ago and shows no signs of slowing globally, and what struck me about that is that is same sort of set of dynamics that we hear from Tyson. I don't know if Irving would like me saying that but when we think about a lot of the big food companies, a lot of the big meat processors, a lot of the big canned food makers, a lot of the big packaged food makers in general, they're all focused on the same dynamic. Tyson talks a lot about meeting the global need for protein however, that may come, whether it's chicken or beef or some of these plant-based alternatives, which they're also investing in. So I think they're all very different approaches obviously, but I think both the major food companies and your guests really showed how globally this need for more food generally, but also in certain markets, the demand to understand where food comes from, make sure it's as nutritious as possible. That's something we've definitely seen from companies of all sizes and stripes.
Nathan Hunt: Both approaches, introduce local sources of food supply. Given the challenges we have seen during the COVID-19 crisis. Does this make sense to you?
Alex Bitter: I think there are definitely advantages for consumers and retailers in offering more of these products from small scale farmers, from small scale greenhouse operations, your guests talked about traceability and having some advantages there. I think in the context of COVID-19 though, there are some other things we need to consider. Last time you had me on, we talked a lot about meat supply chains, for example, and how those were being affected in large measure, because of basically the collapse in demand at restaurants and food service establishments. And one of the things I think your guests it's alluded to was the idea that they were subject to a lot of the same pressures. Whether it was coffee shops or restaurants that prefer higher fat milk or something else, those same dynamics are at play for a lot of these smaller establishments. Because even if you're a local producer, even if you function primarily locally, you still have to market your product to a specific audience or a specific buyer. And so that means in this context, deciding how much am I going to sell to grocery stores? And how much am I going to sell to restaurants, Starbucks or any other chains of that kind? And in each case, the current supply chain is very bifurcated in that way and that was a big problem we saw the spring, is it wasn't that there wasn't enough food at the grocery store, it was that there was enough food generally, it wasn't being distributed correctly. And so I think one of the problems that even these smaller, more local operations are having are the same problems that a lot of the big players had, which is your food has to go somewhere and depending on where you want to sell it, you need to package it a certain way, you need to meet certain legal requirements. And so, I think until we get to a point where more people are talking about making those supply chains more flexible, I see a lot of the same dynamics affecting local producers as affects you know, some of the larger producers, honestly.
Nathan Hunt: It occurs to me that both of them are making in a sense, an anti-consolidation play. They're looking to source things locally, closer to the end consumer, they're looking to introduce multiple sources of supply. I think the argument there would be that that kind of system has perhaps less efficiency, but more resilience than the food supply chains that we all depend on right now. Would you agree that resilience is a goal we should be seeking or have food supply chains generally performed well through the crisis?
Alex Bitter: I think there were definitely some faults in the supply chains as we saw this spring, but it's also, as you point out, interesting to think about what would a less centralized food supply chain look like? So if we don't have, for instance, huge meat processing plants, that are responsible for our disproportionately large share of the meat or for that matter, the cheese or you name it that we buy here in the United States. What does that look like? And even if it's less efficient from a bottom line, financial standpoint, are there advantages? And of course it's not hard to imagine how operations like Dan's or Irving's would probably fare better operationally in some ways. In the current environment, you know, if you don't have a thousand people coming to work, the same fields are in the same plant it's more diffuse than that, or you're sourcing everything from small local farms, it's probably easier to social distance and so then we don't have to worry as much about some of the plant closures that we have seen reported at some of the big meat manufacturers, for example. But of course in the long run, I think, you know, what we're going to see is that balanced against price and the cost. Here in the United States, before the pandemic, we were very used to cheap food and food prices were at historic lows actually in the years leading up to the pandemic, that's obviously changed dramatically now. And so one question I have for the future is certainly if meat prices have gone up by in the teens or the 20% range since the pandemic began, and if certain other staples like milk or eggs have also increased, maybe that narrows the gap for some of these local players who aren't as efficient, right? If the goal is to compete on price, they probably can't do that. But if they are willing to convince people to pay a little more for something that's traceable and more nutritious, or has one of those advantages we talked about, and we're in this environment where people are paying more for food, no matter what, that's maybe an easier sell in some ways and so I'm curious if we have more expensive food for longer, maybe that is a benefit to their case.
Nathan Hunt: Have you seen any other alternative models for food supply chains that you consider promising?
Alex Bitter: So, I think there are definitely a number of interesting companies in this space, a number of startups as well, and they all deal with different steps in the supply chain. So you talked to folks who are obviously in charge of either running the production, running the farms, or at least sourcing from farms. There are other players like Imperfect Foods, which have been sort of ramping up their production and their operations in recent months in response to the pandemic, and what they do is they take food that's already been produced, so it can be produce that maybe is ugly or, you know, doesn't look nice enough to be on a produce cooler in a grocery store or maybe some cheese that closer to the expiration date, but still good. They are focused on reducing food waste and optimizing the food supply chain in a different way where they're taking things that are already in existence and maybe working more with the existing supply chain, but actually making it so that there's less food waste in general from the current supply chain. It's also interesting to note that there are actually a number of big players, big retailers that have interesting things they're doing that are vaguely like what Dan and Irving are trying to do. So for instance, Costco has talked for months now about their interest in growing more produce themselves, instead of simply buying it from third parties. They have sourced some of their own produce at their own stores from their own greenhouses here in the United States. And an interesting, interesting example of where this could go, Richard Galanti the CFO talked in December about how he saw Hawaii as an interesting example and sort of an interesting case study for doing this, because if you think about the transportation costs that your guests referenced, for instance, and certainly the time it takes and the nutrition that's lost in the transportation process, most things you buy in a Costco warehouse in Hawaii, you have to be flown in or shipped in on a barge and that can take a lot of time and cost, whereas if you grow more things in Hawaii, which is what Costco's exploring doing, you have a more nutritious product, a fresher product, and you also might save on shipping costs as well, which is something that a big company like Costco would care about. So there are, and both have to start up level and the smaller scale level, as well as at some of the bigger retailers and some of the big companies I write the most about there are efforts to do more production locally and closer to the consumer, recognizing all the benefits that come with that.
Nathan Hunt: Realistically, what do you think the chances are that we just revert to our old centralization and industrialization models to food supply once the crisis passes?
Alex Bitter: Realistically, I think if you believe that we're going to have a vaccine for this most likely sometime next year, and fingers crossed, we can get it to everyone who needs it next year as well, I think as bad as the crisis has been, and it has really exposed some vulnerabilities in the food supply chain. I think that things would need to degrade a lot more for people to really fundamentally rethink our supply chain. As I mentioned earlier, we've gotten used to having very affordable food and that has costs of its own, non-monetary costs, in terms of what happens to the people who grow our food or who processed it, how much do they get paid? What corners are, or what things are sacrificed potentially in the transportation and distribution network to make things as cost efficient as possible? I think as long as Americans and a lot of consumers around the world are used to that and having very affordable food, I think it's going to be in some ways, an uphill battle to make everything local. Now that said there is a market or what a lot of these companies, like the ones that were interviewed are doing not to stereotype, but when you think of Whole Foods, it's a very different customer targeted than someone who's shopping at an Aldi or a Lidl, perhaps. In the short term, at least there is definitely a big market for people who shop at Whole Foods and maybe organic focused store at farmer's markets, even outside the corporate retail channel for these products and I think more people realize the benefits of what these companies are offering and buying into the pitch, I think there's definitely a growth market for what they're doing but will it force us to abandon the structure and the supply chains we built entirely anytime soon? Probably not.
Thank you for listening to the Essential Podcast from S&P Global. For more research and insight on supply chains and the retail market from Alex and his team, please visit spglobal.com/marketintelligence.
The Essential Podcast is edited and produced by Molly Mintz.