Upstream Ag Insights - May 15th 2022

Essential news and analysis for agribusiness leaders

May 15

Welcome to the 117th Edition of Upstream Ag Insights!

Index for the week:

2021 FMC Annual Report Highlights and Analysis
How to Catastrophe Proof Fertilizers
What’s Behind Variable Rate Resistance
The Three Fears of Farm Data Podcast
Origin Enterprises Capital Markets Day
The Cat, The Fox, and the Unfocused Value Proposition
Agri Fintech in Numbers
Canadian Ag News and Highlights: Venture Capital, Announcements and Census
Synthetic Bio: The $3.6 Trillion Science Changing Life as We Know It
Farmers Edge Reports First Quarter 2022 Results

1. 2021 FMC Annual Report Highlights and Analysis - Upstream Ag Insights

FMC is in the same camp as Corteva: pure-play publicly traded ag company (Syngenta will join them soon). This makes them a lot of fun to dig into.

In 2021 they grew revenue approximately 9%, driven by volume growth and pricing gains in all regions and gaining share for the 3rd year in a row.

Approximately $400 million in sales for 2021 came from products launched in the last five years, representing almost 8% of the total revenue. FMC performed better than the overall crop protection market in 2021, which they estimate grew in the mid-single digit percentage range versus 2020.

To read more about their Plant Health initiatives, R&D expenditure and how they relate to share buybacks, EBITDA margins, rebate numbers and more, check out the full highlights and analysis!

2. How to Catastrophe Proof Fertilizers - Chemical and Engineering News

With everything going on in the fertilizer markets there has been an increasing interest in fertilizer technology from the mainstream world. All of the technology talked about in this article has been in development for years, but only during crisis does it come to the forefront.

The article highlights all three macro nutrients: Nitrogen, Phosphorous, Potassium.

One of the companies highlighted in the article is Nitricity, a company I have highlighted before working on distributed nitrogen manufacturing facilities. Centralized production has significant cost efficiencies today, but I believe we will see decentralized production of nitrogen and many crop input products in the coming decades. Nitricity is at the forefront of this. The Nitricity process will not be commercially available for a while, but given the dynamics of Wright’s Law, I am sure it is something that has viability long term. There is also the capability of distributed biological production and machinery parts, something I will touch on in a separate article in the future.

What I really want to highlight is the Nitrogen fertilizer side of things. Last week the Wall Street Journal highlighted a few of the biological companies working to decrease demands of nitrogen.

What is interesting to me is to put into context just how little influence these companies have (today) on nitrogen demands.

Consider they highlighted Kula Bio and Pivot Bio. Kula Bio isn’t commercial yet. Pivot Bio has an aim of 3 million acres for 2022. Then lets add on two other companies with nitrogen fixing products: Azotic Technologies and Sound Agriculture.

Azotic Technologies was the first in the Upstream Ag Insights AgTech Breakdown series and they stated they were targeting 4 million acres in North America for 2022.

I can’t find the specific acre number of Sound, but a 2021 AgFunder article had them pegged at 300,000. So let’s assume they will increase 5x to 1.5 million in 2022.

In total, these four companies will touch 8.5 million acres in 2022.

In Canada there is about ~70 million acres and in the USA we will say about 250 million acres of soybean, corn, wheat and cotton totalling 320 million acres of production. 8.5 million acres means these companies are touching about 2.5% of row crop land in North America.

But the reduction of fertilizer demand is much below that.

The average nitrogen use per acre in the USA is about 85lbs/ac:

But, none of the aforementioned products fulfill the entirety of nitrogen needs on an acre.

They each claim the following:

Pivot Bio - 40lbs of nitrogen fixed per acre

Sound Agriculture - state anywhere between 30 and 50lbs/ac, so we will pick the middle and use 40lbs.

Azotic - states a reduction of N needs in corn to be 25%, which equates to somewhere around 30-60lbs of N. Let’s go with 45lbs.

So on these acres touched where the average application of N is ~85lbs, there is a reduction of <50% of Nitrogen needs, which means the total reduction in N demand these companies are able to deliver to the market in 2022 is something like 1% (its actually much lower if including non-row crops).

That does very little to alleviate the demand or logistical pain farmers are being pinched with. To be clear, this isn’t a knock on these companies (I think their numbers will all grow), it is just useful to put everything into context for this season.

Another way to put it into context is that if they are on 8.5 million acres and reduce N demands by 40lbs/ac, with those numbers we know that the amount of N reduced works out to about 340,000,000 lbs. Divide this by 2000 to get US short tons (2000lbs) and we get 170,000 tons in reduction.

The USA in 2015 (to keep it consistent with the chart above) used about 22 million tons of nitrogen. Add in Canadian tonnage and we get well below 0.5% reduction in total Nitrogen demand for 2022.

The opportunity in these products is significant (and I didn’t include others like Utrisha from Corteva because there isn’t public info on their acres), but it paints a picture of just how far we have to go before even getting chunks of the “early majority” on board. At 2.5% of acres (not farmers, acres) we are barely hitting the entirety of the innovators in the context of the innovation adoption curve.

What is likely to increase in usage and have a bigger impact in the next 18 months are N stabilizers. These have been around for decades, but still haven’t gained as meaningfully as one would hope, yet are reasonably well understood and simple to deploy in most cases.

In 2020 I highlighted the USA Fertilizer Report that showed the following:

Retailers sold 1,230,000 tons of nitrogen treated with enhanced efficiency (eg: NBPT inhibitors).
(For Canadian context, this number for Nitrogen with all coatings and specialty fertilizers like ESN is around ~10% according ~2016 data)

Ultimately, the combination of different approaches along with the basics of the 4R’s, we be important for managing Nitrogen costs in the coming months.

This week’s edition of Upstream Ag Insights is sponsored by EMILI:

Agriculture Enlightened, EMILI’s annual digital agriculture conference returns on October 20, 2022 in Winnipeg, Manitoba. This event will feature keynotes and panels from leaders in agri-food data, intelligent technologies, including automation and AI.

Come learn, network and connect with other players across the digital agriculture industry.

Stay tuned for more details: AgEnlightened.ca

The event will be available as in-person and online offering.

3. What’s Behind Variable Rate Resistance? - Western Producer

It is seen to be the result of individual farmers more comprehensively assessing the overall costs and benefits of the technology on themselves as individuals, on their family’s life and on their farm operations.

In small business there is a continuum of profit maximization vs. life optimization. As these researchers point out, taking on new technology can be a challenge for farmers. In a traditional enterprise setting, there is typically the people and infrastructure to manage the undertaking of new systems and processes and strong competitive dynamics that influence the adoption. The average family farm simply doesn’t have the resources to execute in the same manner.

If we look at the most successful variable rate technology companies, I tend to find them to be very hands on - essentially doing all of the work and making the farmers life easier. If you aren’t a strong VR company, this can be difficult to execute on and causes head aches for farmers and results in no adoption or churn.

Farms on some level do compete with each other though, typically for land. I am a believer in well executed variable rate services, especially those with a depth of soil knowledge and full service approach to support the farms. It helps with a host of outcomes - yield increases, potential cost reductions, quality increase and harvest efficiency for example. If this gets executed on, these farms become more profitable and have better returns to be able to either buy land or rent land, or buy equipment that makes them more efficient, or hire more capable labour etc which puts their business in a better spot compared to neighbouring farms.

A study out of the University of Nebraska found farmers that adopted technology in fact did tend to have higher profitability:

The parameter reported in Table 1 for NFI suggests that each additional technology adopted is associated with increased net farm income of more than $43,000, a measure that is statistically highly significant.
The simple analysis of adoption versus non-adoption shows PA technology adoption is positively and significantly associated with higher profitability.

Though, there is a caveat in the conclusion:

However, the relationship alone does not prove causation nor indicate which drives which.

Meaning, are farmers that adopt precision technology better and more profitable to begin with? It also needs to consider farm size, where there are benefits to scale (and having employees to upport the adoption with). The other thing that has always stood out to me (as a generality, not a rule) is that larger farms tend to be more process oriented and logistically strong - this skillset lends itself to being able to implement precision technologies more successfully.

Here is another study from the USDA with similar results to the Nebraska study.

If the technology makes farms more profitable and the service offerings are continuing to improve, over time the ones opting for profit maximization will encourage the others around them to adapt, it just might not happen at the pace many (including myself) have anticipated.

4. The Three Fears of Farm Data - AgTech So What

Have we in agtech completely f*****d farmers by making them afraid of sharing their data?

I regularly join my friends Sarah Nolet and Matthew Pryor at Tenacious Ventures on a call to talk all things AgTech.

Recently, we were having a conversation where Matthew was sharing his perspective on ag data and Sarah decided to hit the record button. The outcome was a trial approach for them in turning it into a podcast.

One of the interesting concepts discussed that is not often referenced in ag data is Keiretsu:

refers to the Japanese business structure comprised of a network of different companies, including banks, manufacturers, distributors, and supply chain partners.

Check out the podcast if you are interested in data in agriculture and hearing from the inimitable group at Tenacious Ventures. The way they systematically break apart and think through industry dynamics is second to none and I think everyone can benefit from getting a “fly on the wall” opportunity to listen to Matthew and Sarah.

If you want to join the conversation, Sarah’s Linkedin post has many engaging comments.

5. Origin Enterprises Capital Markets Day - Origin Enterprises

Origin Enterprises is an agribusiness based in Ireland that has operations throughout the UK, Eastern Europe and into LatAm. Their primary business is ag retail and happen to be publicly traded on the Irish Stock Exchange.

Recently, they had a Capital Markets Day highlighting their vision and strategy. I think it’s notable where and what they emphasize: biological based products, soil resilience, a focus on nutrient use efficiency and overall messaging surrounding sustainability.

They are leaning into the technologies and processes that position them at the forefront of trends they see occurring, topics often discussed within Upstream. I think it’s easy for us in North America to say “but that’s Europe” where they have different geopolitical dynamics and cultural views, but I think we can learn a lot from watching what a company like Origin does with their business in taking a leadership position in areas like biosolutions and turns that into a more successful business and more successful customers:

They even call out an M&A approach of vertically integrating on the nutrients and biosolutions side of things:

Being relevant as an ag retailer in the coming decades I think will take a shift in mind set from leadership around “what” a retail does and where to focus. I think Origin has begun doing a great job of evolving that mold.

6. The Cat, The Fox, and the Unfocused Value Proposition - AgTech Marketing Insights

Focus in any business is important. Being everything to everyone doesn’t work and wastes resources. On top, it is human nature be overwhelmed when too many points about a product get shared and on top, we tend to get skeptical. But to the point made in the article, if you know the pain point well, have alleviated it and communicate that effectively, you have a better chance at success.

“When you try to be everything to everyone, you accomplish being nothing to anyone.”

Dan Schultz at AgTech Marketing Insights writes insightful marketing pieces illustrated by simple and concise stories that resonate. I always enjoy reading his newsletter and this one had a great story to start. If you have an interest in marketing, I highly recommend subscribing.

7. Agri Fintech in Numbers - Graze

A useful report summary from Niall Haughey on the trends within agrifintech.

8. Canadian Ag Focus

Observations on Early-Stage Canadian Ag-tech Landscape - Tanmay Bhargava Linkedin

Tanmay took a detailed approach to understand the dynamics of the Canadian AgTech landscape.

Here are a couple of the findings from his efforts:

Canadian and US investors are almost equally active (#deals) in Canadian agtech both in terms of leading and participating, throughout the stages.
The rounds led by Canadian investors tend to be much smaller than those led by US ones. This difference is starker for larger rounds.

What’s notable on the last quoted comment is that when Canadian agtech start-ups get funding from USA based groups, they tend to be the ones that are thinking big. In Canada when I talk with start-ups there can be a conundrum - be laser focused locally on crops and Canadian needs, or take into consideration the massive market to the south (or elsewhere) which typically has different demands and competitive dynamics. If there is a company attracting capital from US based firms, they tend to be the ones that are thinking more global in nature.

One country that fascinates me from an innovation perspective is Israel. They are powerhouses, especially in agtech as we can see from AgFunder’s recent report:

The reason I bring up Israel is that it’s small in terms of agricultural land base, but gets a meaningful portion of investment, in the range of agricultural powerhouses like Brazil! There is likely cultural, government and educational reasons for this, but I tend to zero in on their size constraint as being their biggest advantage: Because they are small their default is “global first” in terms of where they are going to focus. They have global ambitions from the start. This isn’t the same in Canada (at least not naturally) where it can be easier, or simply more logical and capital efficient to focus on Canada knowing there are 70+million acres of land to access before moving elsewhere.

I am generalizing, but this leads to the start-ups that are funded by Canadian based VC’s to be smaller rounds and valuations because they aren’t attracting the US or other international funds and the Canadian VC’s aren’t competing with them on valuation as well.

Canada’s 2021 Agriculture Census

Shane Thomas @ShaneAgronomy

Highlights from Canada’s 2021 Census of Agriculture Every 5 years Stats Canada delivers results from their census surrounding agriculture in Canada. Here are some notable take aways⬇️

xarvio® offers access to new weather station connectivity options in partnership with METOS Canada by Pessl Instruments - BASF

9. Synthetic Biology: The $3.6 Trillion Science Changing Life as We Know It - Visual Capitalist

Synbio has the potential to make a big splash in the agricultural sector as well—up to $1.2 trillion per year by as early as 2030.

10. Farmers Edge Reports First Quarter 2022 Results - Farmers Edge

A rough quarter again for Farmers Edge. Their stock was down 11% on Friday after the earnings release.

Acres and free cash flow decreased while net losses continued to increase year over year.

Their CEO Wade Barnes stated:

We are encouraged by PGP 2021 conversions and continue working on refining our business model

I find this to be the opposite of encouraging. Their conversion from the free acres to paid is just 63% as stated in their release. In their 2021 prospectus, they stated they were targeting conversion of over 75% which already wasn’t strong. To top it off, this is while churning already paying acres as evidenced by their continued to decline in total acres. This continues to make their business model unsustainable long term.

For more, I wrote about their CEO leaving in March, highlighting some of the challenges within the business.

Note: Will aggregate the Q1 2022 results for major agriculture companies in the coming weeks.

*Disclosure: I was employed by Farmers Edge in parts of 2019 and 2020

Non Ag Article

Tokengated Commerce - Not Boring

I continue to attempt to improve my understanding of web3, tokenomics, NFT’s, DAO’s and whatever buzzword you wish to call various forms of blockchain. This week I read how blockchain could impact online commerce, getting into concepts like reciprocal inclusion via online (vs. physical), “connecting your wallet” online, and much more.

Tokengating is about adding challenge to certain products.
This is demand 101: the default state of the world is not “everyone wants your product.” Creating demand is an art: you create a story, and a challenge, and you wrap the challenge in an adventure that the buyer and the merchant go on together. Think about a flash sale or a limited edition drop; these experiences are fun, and they’re wrapped in a story. You get to be somebody who successfully got the drop, and that’s half the fun.

Upstream Ag Insights