Essential news and analysis for agribusiness leaders
Welcome to the 96th edition of Upstream Ag Insights!
Index for the Week:
Novel Services for Ag Retail
CNH Industrial News
Electrification of Tractors and Wright’s Law
EFC Systems Investment
Predictive Analytics Turn Data Into Decisions + Farming in 4-D
Landus and Indigo Partner
BASF Carbon Program Launch
Digital Skills Permeating Throughout Organizations
Thanks for reading and for sharing!
Thoughts from the Agricultural Retailers Association Conference and Expo 2021
I was invited to join my friends at AgVend* at the 2021 ARA Conference in San Antonio this past week. I was extremely impressed with the experience and excited about the opportunity to meet a ton of great people.
The most notable session I took in personally was “Define the Value of Service” led by Farrell Growth Group’s Brad Oelmann. The focus was in looking at ways to better manage margins and consider creating service revenue and enhanced experiences for retail farm customers.
Ag Retail has been focused on bundling together services with the inputs. Payment for these services, like soil testing or product delivery, is “unbundling” the services from the purchase. Earlier this year I wrote The Bundling and Unbundling in Ag Retail which gets into this deeper.
One of the points that I am adamant about is understanding costs to serve, a point emphasized in the session. I think understanding cost to serve is crucial, whether it’s the cost to tissue test or soil sample, or even scout a field! Understanding every service offered and the cost is not just a good exercise, but a required exercise in my mind. I think a strong process with specific expectations of staff around CRM actually is crucial to enable this understanding. I’ve talked about it in Upstream numerous times, there is an opportunity to leverage CRM to see how customer touches influence share of wallet, margin, sales growth, loyalty etc. It just needs to be measured.
On top of this Brad laid out a great thought process around understanding what your customer values. What always bothers me is when I hear that some one is “adding value, but still getting priced”. That’s an indicator to me that you don’t understand what the customer values, or don’t execute that service at a high enough level for your customer to value it in a meaningful way. Value is not consistent across customers. Sometimes it’s not even consistent across the individuals within one operation. It’s necessary to understand each customer.
Note: I am going to make a document that I think helps illustrate the questions and considerations a retail should be asking to know their customers better than their competitors and truly understand what they value.
Brad went on to state his perspective of customer service vs. customer experience. Stating that customer experience is proactive and customer service is reactive support. I like his frame of thinking and it’s consistent with where I think the biggest blue ocean opportunity is in ag retail, ambient ag commerce. This can add value and help remove unnecessary friction from the customer experience while increasing loyalty and value derived by the customer, with an example below.
In ag retail we are often trying to figure out how to scrape together margin from services that have already been commoditized and are generally undifferentiated. Every retailer will say they have the smartest agronomists, scout fields the most effectively and have the fastest assets and best delivery service. The reality is that it is tough to differentiate on these services to a point that pulls in meaningfully higher margins (though not impossible and I commend organizations that are working towards this).
The greatest opportunity in my mind is not in looking back at services already offered and figuring out how to make a few dollars of margin from them in the future. The greatest opportunity is to look forward and anticipate what services farmers will want, need and value in 2023 and beyond given the new trends and technology at our disposal. This is how a retail will differentiate meaningfully and change their margin structure, go-to-market and satiate evolving demands of their customers.
This can be scary, but what’s worth keeping in mind is that the biggest risk to your business isn’t a few small failures, it’s sustained mediocrity.
Let’s take the proactive “experience” vs. reactive “service” frame that Brad talked about. How can we create a novel service that is proactive?
There are numerous examples, but I look at a company like RapidAIM as one example of opportunity. RapidAIM delivers real-time data to accurately pinpoint the location of pests on a grid basis. Not only is there real time detection, but also modelled forecasts. This system has value for a farmer, but massive value for a retailer because of the nuance of pests across larger geographies and understanding where infestations are and how fast they are growing. This enhanced information could be a basic differentiator itself, for a retailer to support customers without a direct revenue, but let’s start to consider what the data around insects could be used for over time. Further modelling and prediction, or even underwriting. Companies like Growers Edge for example then present an opportunity to create a novel service where there might be an up front fee for a farmer to access this information regarding their farm in real time for a fee and if the insects arrive there is no incremental cost to the farmer for the insecticide. It comes as package. This likely requires more than data, but also alignment with manufactures. We can extrapolate this out to using proactive biologicals, like NPV products I talked about here for example, that fundamentally shift the action thresholds for insect control and mitigate any damage occurring at all (why do we tolerate any insect feeding?!).
It’s important to consider, what happens if your competitors or suppliers do this instead of you? The opportunity cost in not accessing that information is significant. Not having access to this is how influence erosion can progress faster.
I know most of you are thinking “easy to say, harder to do” and you are 100% accurate in that. But what is also hard to do is take commoditized services and access more revenue from customers or differentiate from competitors without new approaches to the market. Nothing is easy in competitive environments.
The reality is that the list of options to get creative with is long to support customers and differentiate and create new service based revenue: remote disease testing from companies like Root Ai or pest modelling from Ukko Agro, augmenting services custom services provided with drone based systems like that of Rantizo, creating unique precision services like MFA Coop (a great presentation from their team at ARA) or keeping it much more simple in terms of creating ease of access to financing for your customers or special finance offerings. None of these would be perfect today, but if waiting until they are 100% proven, then you are again going to see competition erode margins and differentiation.
Margin accrues from adding value differently than your competitors. Not from doing what’s standard.
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CNH Industrial Completes the Acquisition of Raven Industries - Business Wire
CNHI today announced that it has completed its acquisition of Raven Industries, Inc., a U.S.-based leader in precision agriculture technology. The acquisition builds upon a long partnership and is an important milestone in CNH Industrial's digital transformation. The first in-house products featuring fully integrated Raven precision agriculture systems will become available in 2022.
For more on the CNHI acquisition of Raven, I covered it in June.
This is one of the most compelling acquisitions of 2021, not just because of the autonomy aspect but because 10% of Raven’s revenue’s came from CNHI and because of what it now enables CNHI to do with in house technology and software.
CNHI made another acquisition this week:
CNH Industrial has bought software engineering firm NX9, in a further step to boost digital innovation in its agricultural division as it prepares to spin off its truck, bus and engine operations.
U.S.-based NX9 is a small software house specializing in so-called 'ISOBUS' technology for agricultural equipment, an industry-standard communication protocol which allows machines and implements to talk to each other, CNH said in a statement.
It was challenging for me to find much on this company, however, it appears this can help support integration of their implements for a more seamless experience for farmers/operators and could be supportive of their autonomous endeavours.
This comes after another announcement last month with CNHI announcing a licensing deal with electric tractor company, Monarch Tractor.
Speaking of electric tractors:
An Electric Tractor May Be In Your Future - Successful Farming
Electric tractors have been topical as of late and they will continue to be I am sure. With that said, they seem to be a ways out for the traditional large scale row crop farms. Though given the fact that Wright’s Law is always working, it is still worth watching closely.
Wright’s Law has an experience curve effect that expresses the relationship between experience producing a good and the efficiency of that production, specifically, efficiency gains that follow investment in the effort. Essentially meaning the more you produce something, the better it gets and the cheaper it is to do.
The effect has large implications for costs and market share, which can increase competitive advantage over time in equipment. It has proven out in many industries, often showing gains in cost efficiency and effectiveness to the tune of 15% in aerospace and 10% in electronic good manufacturing for every doubling of output, meaning very rapid improvements.
Wright’s Law plays out because of factors like standardization, labour efficiency, network effects, technology driven learning and product redesign to name a few.
This is notable for the strategy that we are seeing in electric tractors being in the smaller segments, and consistent to a degree, with the electric car industry.
In 2006 Elon Musk published the above “secret master plan” of Tesla, which is basically encapsulated below:
Almost any new technology initially has high unit cost before it can be optimized and this is no less true for electric cars. The strategy of Tesla is to enter at the high end of the market, where customers are prepared to pay a premium, and then drive down market as fast as possible to higher unit volume and lower prices with each successive model.
So, in short, the master plan is:
Build sports car
Use that money to build an affordable car
Use that money to build an even more affordable car
While doing above, also provide zero emission electric power generation options
We are 15 years later and Elon didn’t deviate from this basic plan.
The small tractor market in ag can be looked at in a similar way to the high end car market.
High end cars are more so used as toys and status signals. And while I would by no means call small tractors high end toys, where these tractors are frequently used is in orchards and horticulture driven locations where fields aren’t that big if battery performance isn’t strong (eg: dies quickly) and implements being pulled are much smaller. This is a great proving ground and what could become a proxy of how fast we see the potential of electric tractors coming to the large scale market, will be watching how rapid adoption is in the small tractor market. As more electric tractors move into the small tractor market, the capability of companies like Monarch or John Deere goes up in terms of what they are learning and can apply to the large tractor market.
According to Wright’s Law, lithium-ion battery cell costs fall by 28% for every doubling of units produced. There are a lot less tractors produced than cars, but I assume there is still some synergy between the car market electric growth and what can be applied to tractors.
What is also interesting with Tesla is not just the emphasis of electric, but how they emphasize software as part of the experience and improvement of their cars. This has become a novel revenue stream for Tesla as well as a key differentiator - in the traditional world we had to wait for a new car to get new and improved features, in the digital world we send updates via internet connection, this is how companies like Tesla can rapidly iterate and improve.
This mind set shift will be worth watching in the ag industry. Consider John Deere who has been emphasizing their digital systems like JD Link and Operations Centre, or consider the CNH Industrial acquisition of Raven. Having a wider array of digital capabilities as a core competency and customers engaged with them better positions these organizations to create enhanced experiences and outcomes for their customers.
In the consumer car market, this has been a point of disruption and shift in how car companies are being viewed. I highlighted some of the potential of that from the Rivian S-1 in the October 10th 2021 edition of Upstream:
Rivian is throwing the conventional automotive business model out the window. Rivian is shifting the industry away from the model of “# of cars sold per year x average selling price.” Instead, Rivian is leveraging “Rivian Cloud” and its proprietary data and analytics platform to offer a host of value-added services including telematics-based insurance, data-driven resale, FleetOS for commercial customers, charging-as-a-service etc. We were interested to learn that >50% of Rivian’s estimated market is driven by services revenue over the lifetime of the customer. In effect, Rivian has created the foundation for a SaaS-like business model which, if successful, could completely transform how investors look at the automotive industry.
I think ag is fundamentally different because of the other aspects of “service” required for say spray booms and nozzles, pumps and everything else equipment manufacturers are supporting farmers on, so this isn’t necessarily a point of disruption within the equipment industry (along with other reasons like speed of adoption and sales/upgrades cycles as a couple basic examples). But what it likely is is a source of improved experience for farmers if these organizations start leveraging a digital first mindset to go with their electric tractor businesses.
The equipment space is core to precision and digital agriculture and I think we are just at the beginning of new shifts in what will come down the line in the future.
Related: Trends in Autonomous Agriculture with Autotech Ventures - Precision Farm Dealer
Related: John Deere Plans 'See & Spray Ultimate' Limited Release - Precision Farming Dealer
EFC Systems, Inc. (EFC), a leading provider of ERP accounting and digital agronomy solutions for ag retailer / service providers, has secured a new investment that will enable both organic and inorganic growth.
This is an interesting release because of what it could signal for future happenings within the industry.
EFC Systems has two prominent products: Fieldalytics, an agronomy based platform and Merchant Ag, an ERP based system at thousands of retail locations across the USA.
It’s difficult to decipher exactly what the announcement means, but the subtle hint of “organic AND inorganic” growth indicates two things.
First, an emphasis towards acquisitions (inorganic growth).
When I look at the opportunity for growth for EFC Systems I view growth via acquisitions to augment both of their core products:
ERP System - Vertically integrating the “stack” is an opportunity. ERP systems are often considered “dumb” software. They aren’t traditionally the sexiest or best user experience as a general statement and we are continually seeing more technology that “sits” on top of the ERP data and is customer facing or has more agility to add value and insights to ag retail staff. EFC has customer facing and other advanced functionality already, but there is a list of functionality that could be acquired that includes customer portals for further enhancing customer functionality or total customer base, supply chain management functionality, program maximization functionality, or operational efficiency/workflow capabilities that could help add customers, functionality and/or talent.
Agronomic Systems - There is ample opportunity to look at smaller companies that would bring on access to more acres/retails or add on functionality that exposes the system to other markets, like horticulture markets or new functionality within the platform. There are numerous companies out there that bring potential in because they have a service that augments an agronomy tool, such as an analytics company as one example.
Secondly, organic growth:
In the release this week it states (emphasis mine):
The new investment strengthens the company’s neutrality as a service partner for all of the ag retail and service provider supply chain.
The neutrality wording signals to me Land’O has exited. This means any organizations that may have been apprehensive to work with EFC Systems in the past because of an organization like Land’O involvement may have a new interest.
Harvesting the Future: Predictive Analytics Turn Data Into Decisions - Tamar Rosati Linkedin
This is a good framework from Head of Granular, Tamar Rosati. Specifically agree with her conclusion:
Giving farmers clear information as to how the tool generates predictions and reminding them that predictive analytics is not an exact science. There will always be a margin of error on forecasts generated by computer models. Human judgement and agronomic expertise from farmers and their trusted advisors will always be required to decide the best course of action based on the information at hand. What predictive analytics can provide are more informed courses of action, which ultimately lead to more confident decision making. That’s when farmers unlock the true value of data.
It’s not about 100% accuracy, but incremental improvement over human gut feel. Augmenting the human decision maker with informed models is the route to better outcomes for farmers.
Take for example this stat in the medical space:
A deep-learning system using convolutional neural networks, trained with 100,000 images, found 95% of melanomas in a study, while human dermatologists only found 86.6% of them.
However, the deep learning and ML systems were inferior at considering other things like other conditions or plain the simple the fact that there is no empathy or nuance involved in the conversation. We see the same play out in air travel as well: algorithms can determine the fastest flight path or most fuel efficient and fly the plane in its entirety, but air traffic control and pilots ultimately determine the best routes and still fly the planes. Agriculture is no different.
The ability to augment human intelligence with artificial intelligence, specifically predictive capabilities, is the sweet spot. And as machines do a better job of predicting, that means we will see an increase in value of judgement. This is the determining decision parameters and value of the rewards from a decision based on goals and risks. This to me actually shows the value of agronomists increasing in the medium term, not decreasing and highlights where agronomists can create disproportionate value for farms not in identifying or predicting diseases or problems, but having superior critical thinking skills to solve problems and an ability to understand how various practices and products interact towards an outcome.
Take for example a yield prediction in corn of 195bu/ac where a nitrogen model also knows the amount of N applied, the soil mineralization rate, the lost N and the total N necessary to hit the 195lbs yield potential and even has the ability to recommend 30lbs of N additional; the agronomist or farmer is best positioned to judge the proper timing, application method/equipment, the source of N, the stabilizer necessary and prioritize and establish that work flow across all fields for the farm.
The framework Tamar uses is similar to the frame of reference I often think in: Hindsight, Insight, Foresight.
Having the understanding and judgement capacity to make something happen is a difficult skill for machines to do today and will continue to be difficult in complex environments, like farming, in the short and medium term.
I wrote an article on this topic in 2019:
Farming in 4-D: Hindsight, Insight, Foresight and Integration - ShaneAgronomy
The similarities in the articles signal to me that we are making progress, but not quite at the rate I had expected.
By applying data at every step of a marketing plan, we’ve been able to closely tie marketing tactics to business outcomes. For our clients, this has translated into a deeper understanding of how marketing plans deliver on ROI, sharper insights into products and innovations that will deliver increased value to their customers, and smarter tactics that actually convert.
Landus and Indigo Partner - Landus
Landus and Indigo Ag announced a strategic collaboration to drive improvements to on-farm profitability amid emerging digital opportunities in agriculture.
Through the collaboration, Landus farmer-owners will be able to engage directly with their cooperative to generate and maximize new revenue from carbon farming by participating in the industry’s leading carbon program. Landus is excited to collaborate with Indigo on carbon given its scientifically rigorous and comprehensive measurement capabilities, relationships with carbon registries, network of buyers, and modern technical infrastructure. The companies will further enable Landus farmer-owners to improve crop yields and realize operational efficiencies by utilizing Indigo’s system of solutions, including digital grain marketing tools and microbial seed treatments.
Landus is following in the food steps of the GROWMARK group who announced a partnership with Indigo in August. I covered the rationale here after that announcement.
BASF Agricultural Solutions plans to launch its Global Carbon Farming Program in 2022.
The program will:
• support growers worldwide to farm more sustainably and carbon-efficient, and
• supplement BASF’s sustainability in agriculture commitment to reduce CO2 emissions by 30% per ton of crop by 2030.
With agriculture being responsible for about 20% of global CO2 emissions, carbon-efficient agricultural practices can significantly contribute to combat climate change. BASF will establish a program that allows farmers to track and profit from practices reducing CO2 emissions, underlining its efforts to contribute to fighting climate change. The Global Carbon Farming Program will support BASF Agricultural Solutions’ commitment to reduce the carbon footprint per ton of crop produced by 30% by 2030 in wheat, soy, rice, canola and corn. BASF will launch its program in phases starting in 2022.
BASF is the most recent of the major input manufacturing companies to announce a carbon initiative, following the likes of Bayer, Corteva and Nutrien.
The endeavour will be supported by their AgBalance tool:
BASF has developed a Life Cycle Assessment (LCA) tool called AgBalance® that allows farmers to review the contribution of their current farming operation across all three sustainability pillars.
Life cycle approaches offer a robust assessment mechanism to monitor the sustainability performance. Life Cycle Thinking is about going beyond the traditional focus on production site and manufacturing processes, but includes environmental, social and economic impacts of a product over its entire life cycle (Life Cycle Initiative, 2017)1. This may facilitate the analysis of trade-offs between the economic, social and environmental dimensions within entire value chains.
I suspect we will continue to see the carbon initiatives announced from major agriculture companies and expect organizations like Syngenta to join the other three major players in the near future.
Non Ag Article
CEOs Need Hands-On Digital Skills - Harvard Business Review
Nothing could hurt a company more in the future than the mistaken notion that becoming a digital business is simply the CTO or CIO’s problem.
I am a firm believer that a digital mind-set needs to be a core part of every single persons job description in the organization. Just because you have a “digital lead” or “VP of Technology” doesn’t mean nobody else needs to consider the implications of artificial intelligence, software systems and digital tools (and other tech) on specific areas of the business. That insinuates that “digital” doesn’t influence other business units directly. While there may be a digital revenue segment that acts as a business unit like seed or crop protection, digital as a mindset needs to be built from the ground up and be thought of by everyone in how it impacts their role. If someone in a crop protection leadership role hasn’t considered how the likes of InnerPlant like traits could impact their segment and therefor farmer interaction, or how precision application technologies could affect the demand for their product, how AI could influence the decision making aspects surrounding their portfolio or what web3/blockchain technology could do to their farmer facing program initiatives I would suggest that person is not executing on an important function to their role, especially considering the individual likely has done forecasting for the next 1, 3, 5 and 10 years out.
This is especially true for the CEO.
We tend to think of digital technologies like a tattoo; something that is added on after the fact, in a mash of nonsensical add ons and not core to our day to day lives. What happens if we begin to frame digital capabilities like oxygen for the future? Necessary to thrive. I tend to frame it with the following question:
If the business was started today, what would be fundamental to building a successful product offering and company?
We tend to think with an analog first mindset even in a digital world.
Digital transformation is about so much more than adopting new technologies and processes. At its core, it’s about overcoming inertia and resistance to changing the way people think and work.
The companies that look at digital capabilities as a foundation enhancing everything from the bottom up. vs. a bolted segment in it’s own right, I think will be well positioned for the future:
Instead of thinking of digital as a vertical pillar on it’s own, it is better viewed as a horizontal, foundational enabler of revenue generating or demand creating verticals. It should not only enable and uplift each vertical, but further align the other verticals together - as in, integrate seed better with crop protection or marketing of seed and crop protection together.
Other Ag Articles
Later-Stage Agtech Startup Lessons #3 - Farmers Business Network - AgTech So What?
A Big Future For Biologicals - AgWeb
Nutrient Use Efficiency is on Deck - Successful Farming