The Vegetable Seed Industry Where is it Heading?

By: Philip W. Ashcraft Director Verdant Partners LLC November 6, 2009

seed buyers desire high yielding products with the characteristics and quality that their local retail customers want to buy. The vegetable seed companies serving this market segment must address these unique factors. The large grower segment (and in some cases the huge grower segment) has developed into a variety of complex, high-tech, very efficient business models. Marketing, distribution, seed purchasing, and other important decisions have become heavily influenced by the efficiencies and demands of large grocery chain and big box stores. Also of equal importance are the compelling forces generated by the fast food industry. These include consistent and very specific quality standards, reliable year around supply, and huge volumes. The vegetable seed industry has to address the wants, needs, and requirements such as those noted above, not to mention everything in between. Compounding this difficulty is the reality that, given such widely differing business models and criteria, major issues and opportunities inevitably present themselves or affect each model in very different ways. For example, a general economic downturn that hits most vegetable seed businesses can result in a counter cyclical boom for others. Given the disparate nature of the vegetable seed segment, the major forces that are impacting the business will produce a wide variety of results: good, bad, and indifferent. Never the less, lets take a look at some of these forces and factors that are shaping the vegetable seed segment today. Undoubtedly they will have significant implications for the business for years to come.

The vegetable seed industry is arguably the most complex and fragmented segment of the seed industry. It has a long, illustrious history highligted with many industry firsts and technical advances. Over time, many parts of the business developed different histories depending on the specie and the particular market segments being addressed. The ensuing paragraphs will review the common background and interests for some of the more notable vegetable seed business segments; and more importantly outline some key issues and implications for the future, especially for NAFTA based operations. To begin, most of the homeowner segment is closely associated with personal values and preferences. For example, the pleasure of paging through seed catalogues on a cold winters night to choose the perfect heritage tomato to be experienced in the summer to come. These individual experiences drive the homeowner segment of the business to produce products and distribution systems that serve these personal demands. In the small commercial segment, growers focus more closely on choosing seed products that will profitably fill the specific wants and needs of their local market base. Much of this produce will eventually move through farmers markets and roadside stands. These

The current structural changes in the economy and financial institutions will have a profound, and mostly negative effect, on the vegetable seed business for a long time. Profound in this case meaning it will apply to virtually every aspect of how business is done. This is true even for those companies currently benefiting from the difficult economic climate. Managing these difficulties and opportunities is one thing, but planning and taking advantage of the situation is quite another. This is where the real opportunity lies. In times of profound c hange, the older, more ridged systems in place tend to be shaken, redefined, or in some cases will even disappear. This changing landscape affects everything in the vertical chain for vegetable seed companies from plant breeding through sales. The opportunities created will vary, but the advantage will go to the quick and the nimble. The advances in technology, including biotechnology, have already brought dramatic change to the vegetable seed business. Inevitably this trend will continue, but as high-tech derived products become an everlarger part of the vegetable seed portfolio, even more dramatic changes will occur. There will be great opportunity for those with the resources to compete and with the resources necessary to withstand the trials and tribulations of the new frontier. Down the road, there will be many advances in biotechnology. Numerous technologies are expanding at an exponential rate, including technologies for yield improvement, drought resistance, disease resistance, quality enhancement, etc. Over time this wave of technology and science is reshaping the business. The largest players will lead the way and have the most to say about how these advancements are introduced

and how they are used. The mid-sized and smaller companies will need to be vigilant, carefully planning and redefining their roles, while simultaneously making the adjustments necessary to prosper and succeed. Seed coatings and treatments will also continue to develop and be a driver of change in the vegetable seed business segment. The advancements made to seed coatings and treatments in recent years have added significant value to many parts of the vegetable seed segment. A closer look at what is happening today in this area makes it easy to see the possibility of a bright future in this area especially in the long run. The movement toward vertically integrated marketing systems will undoubtedly continue for the foreseeable future. The long sought goal of vegetable seed companies being able to manage or to be more directly involved in branded produce is becoming a larger reality with every passing season. Narrowing the number of variables and increasing profit margin possibilities are a powerfully and attractive combination. Greater control of this channel by fewer players is very likely. Identifying the best strategic options will be the most challenging aspect, potentially resulting in large returns for those able to build a solid plan and implement it effectively. One of the most difficult drivers to get a good handle on is consumer tastes and preferences. Although it certainly is not inexpensive, qualifying and quantifying current consumer preferences is a relatively straightforward process. Meanwhile, tracking the trends and forecasting the future size and importance of these trends is

much more difficult. The process is further complicated by the importance of these issues. Yes the consumer is the final arbiter of choice and taste. Because the consumer is so far down the distribution pipeline from seed companies, it is all too easy to miss or misunderstand what they are saying and what it really means. Despite the uncertainty of the future, there are some ground swells that are evident and likely to continue for sometime. To strike a cautionary note, some of these trends are more fact or science based than others. Also, the size and duration of consumer trends are hard to predict. Such is the nature of preferences. That said, the shortlist of trends with at least a good chance to grow for the mid-term include: Things seen to be healthy or healthier Localvors (local is good) Freshness All things green (of course)

it could or should have been. Further, this rather pedestrian level of profitability over the years has limited, and in many ways defined the role of the vegetable seed business. A caveat at the outset, the writer wouldlike to acknowledge his responsibility for any contributions to this industrys shortcoming over the years. A quick review of profit margins generated by seed corn products compared to the average margins for vegetable seed products shows corn margins are considerably higher than vegetables. Over time, with less available recourses, the vegetable seed business has had to play a more limited role. In short, larger margins mean more opportunities. The seed corn sector has done a good job of building solid margins over the decades. Some of us remember what the leading seed corn companies were doing when hybrids were being widely introduced and promoted. The concept of added value was demonstrated and sold by techniques such as the use of weigh wagons in growers fields, providing visual proof positive of the benefits to growers. The idea that the seed companies should be well paid for these advances successfully concluded the transaction. There are many reasons that the vegetable seed industry has behaved differently over the years, and there is little to be gained by detailing it here. In fact, this quick look at the past is for the sole purpose of illustrating what can and should be done to improve profitability and build a stronger vegetable seed business in the future. The bottom line is that there are several driving forces that will quickly change the

One of the underlying forces in this area is a growing realization that what we put in our mouths matters and has consequences. This message is being asserted by a lonist of powerful forces and voices from the government, science, and other social pressures. All of these forces are converging to change human behavior. This is a monumental issue for the vegetable seed business, and for the most part it is quite positive. The final driver to be considered in this exercise is the relative profitability of the vegetable seed industry. The assertion of this writer is that over time the vegetable seed segment has not been as profitable as

way the vegetable seed business is structured and operates. The challenge is to quickly identify the issues, understand them, and then to determine what needs to be done to take best advantage of the situation. Despite the difficulties the vegetable seed segment is experiencing today, the emerging forces and business drivers offer the opportunity for a brighter, more successful tomorrow for vegetable seed companies.

Verdant Partners LLC is a leading investment banking and consulting firm specializing in the global crop genetics sector. With over 300 years of combined experience in all crops and in all phases of the international crop genetics industry, as well as in other sectors of agribusiness, Verdants investment banking and consulting skills are sharply focused and experience-based. Each of Verdants principals has senior management experience in leading agribusiness companies. Together, Verdant has initiated and managed transactions and alliances valued in excess of U.S. $1.5 billion.