John Deere 2020 Annual Report Highlights and Analysis

John Deere is one of the most prominent names in agriculture, having been around since 1837 and having one of the most recognizable brands around.

In my biased opinion, I think they might be one of the most impressive companies on the globe. This may sound backwards when you have organizations like Amazon and Alphabet (Google) around, but John Deere is unbelievably impressive. They have been around almost 200 years, starting in pitch forks and now selling digital services and cutting edge million dollar pieces of machinery! The reason I think they are so impressive though is that they have essentially been at the top of the ag equipment space since their inception. What company can say that?

There are many companies that have been round for over a hundred years, but they might barely be hanging on or in the middle of the pack. Deere has not only been around for two centuries, but continue to be leaders in the ag space. An impressive feat to be sure.

Earlier this year I highlighted some of that strength in this post:

Developing Competitive Differentiation - Upstream Ag Insights

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Financials

Their ag specific business had revenue of $22.8 billion in 2020:

While revenue is down slightly an ag, their operating profit increased 18%:

Overview of the entirety of Deere’s revenue:

Breakouts by region:

Total sales across all Deere segments was down 9% year over year.

R&D is always an area I am interested in with organizations, especially Deere:

They are a shade over 5% of their revenue allocated to R&D, with total spent on R&D at ~$1.64 billion. This is down in terms of totality compared to 2019 where they allocated $1.8B.

For comparisons sake, CNHI’s works out to ~4%, across their entire business. What we never see from any organization is how this expenditure gets split up between divisions or areas. What percentage goes to Ag? What percentage to large equipment? What percentage to digital aspects?

Deere’s Strategy Overview

What Deere states at the start of their 2021 investor presentation:

John Deere’s Smart Industrial strategy will revolutionize agriculture

They will do this through:

delivering intelligent, connected machines and applications that will revolutionize production systems in agriculture and construction to unlock customer economic value across the lifecycle in ways that are sustainable for all

This is somewhat vague, but will make more sense from below.

They have three pillars enabling it:

These seem solid; managing the systems through enablement of the technology stack and ensuring the product lifecycle gets considered to maximize outcomes for farmers and Deere.

Systems are important in agriculture, whether talking agronomy, or grain marketing or operations:

What does their technology stack look like?

The concept of a technology stack is important to show how they differentiate and enable their products to support customers and their business. The interesting part with John Deere too is that it is primarily proprietary where as others seek outside technology to enable, they are integrated from manufacturing through to smart capabilities.

Here is their evolution of segments:

Unsurprisingly they tie their technology, services and capabilities into a sustainability message. They do not mention carbon outright, but Deere may have a fit in enabling seamless data acquisition for anything related to carbon initiatives:

John Deere machines, stacked with our industry-leading technology, optimize our customers’ complete production cycles – ensuring that every hour, every drop, every seed, every pound, and every pass counts – delivering better outcomes with less resources

Interestingly they value the economic benefit to customers at $40/ac through their technology. For an all green farmer I actually thought this sounded on the conservative side!

The above image is a great break down of where environmental impact is stemming from. The fertilizer aspect shows where John Deere has a likely future initiative: modelling of nitrogen availability and managing plant specific nutrition needs. This is a big opportunity for farmers in general to attain better outcomes, but if it also helps to mange the sustainability of farmers, you can bet John Deere is working on ways to manage this.

They already have begun at the dealership level to have soil moisture probes and weather stations along with agronomy expertise that is all key to understanding nitrogen availability and utilization.

The below image is a great bit of info. I need to update the digitized acre document, but Deere now claims over 230 million “engaged” acres. There is no definition of what engaged means. To me, that would mean the farmer actually actively input information, or exported information from operations centre along with interacting with some of the functionality at least twice throughout the year. A set definition of engaged acres adopted across the industry would be beneficial in my opinion at least as a starting point.

In 2020 they reported that they had 165 million, so they had large growth YoY. Operations Centre doesn’t have a fee itself, but does need a service for continuous data sharing. So this isn’t a huge source of revenue, but I would bet a lot they have the data to support what their reduction in customer churn is and increase in number of green pieces of equipment or even incremental financing dollars comes out to.

Lots of connected machines too! The data is growing exponentially and this will just continue as they release more see and spray based products and other pieces of equipment, like drones for example.

What this data also does is further supports Deere’s dealership build out along with product and inventory management.

From ESRI:

Deere has stayed ahead of the competition by using location data to remove the guesswork from market development. John Deere is really illustrating that companies that use data in intelligent and strategic ways are gaining competitive advantage in a lot of different ways.

The below quote reinforces Deere wants to, or needs to, engage the farmer well beyond the time they are in the tractor/equipment itself:

There is no “off season” for a farmer. Throughout the production cycle, John Deere’s connectivity technology and digital tools enable our farmers to monitor their operations, make tactical decisions and devise strategic plans for the following season. John Deere’s connectivity solutions and digital tools enable the collection and analysis of data throughout the production cycle.

This likely begins to reinforce some of the why behind their Harvest Profit acquisition last year.

This also gives them further access to new revenue streams, higher switching costs and better customer experience overall.

New Technologies

Deere touches precision agriculture in a very unique way from planting, to bland tillage work, to spraying and harvesting - bringing a precision aspect to every area of the business.

EXACTAPPLY™ spraying technology allows for individual nozzles on a John Deere sprayer to be turned on and off to eliminate overapplication and double application, and completely avoid waterways or non-productive ground. Turn compensation technology varies the application rate across the machine as it turns to minimize over and under-application. When combined with AutoTrac™ and Section Control, ExactApply™ gives producers industry-leading control over protecting their crops, applying less total nutrients to the crops and soil while driving optimal outputs. Outcomes: Reduced herbicide usage, avoidance of application in waterways, reduced carbon footprint.

When Deere talks about plant specific management, this is the beginning of what enables that:

COMBINE ADVISOR™, groundbreaking technology available on John Deere combines, incorporates vision technology and machine learning to automatically adjust to changing crop conditions such as varying moisture levels and the presence of foreign materials to mitigate any losses. Active terrain adjustment helps reduce losses while maintaining efficiency on hilly terrain. When combined with AutoTrac, Combine Advisor keeps the combine accurately operating on the row at all times. Outcomes: Increased yields, reduced operator fatigue, fuel savings, time savings , reduced carbon footprint.

They have the ability to bring precision to seeding, spraying and harvesting, all fully integrated into their equipment and digital systems. The continual augmentation of their equipment for very practical and consistent pain points across farms and geographies is what continues to show Deere is going to be around for a long time.

The adoption is even showing this:

Precision agriculture made additional strides in 2020 as more customers embraced its productivity-enhancing and sustainability benefits. Sales rates continued to grow for popular features that automatically guide machines in the field and equipment that plants seeds and applies chemicals with exceptional accuracy. Our precision capabilities were further extended during the year to the application of liquid fertilizer. The John Deere Operations Center continued to gain users, ending the year with more than 230 million acres of production data worldwide.

Other

Number of times a specific word or term showed up in the annual report:

Sustainable/Sustainability - 8 times

Precision - 15 times

Digital - 3 times

Innovation/Innovate - 14 times

Blue River - zero

x9 - 4 times

Autonomous/Autonomy - zero

CEO Comp

John Deere might have the least buzz-termy report of any ag company which I found refreshing. They are very focused on their business profitability more than talking about what they are doing with flashy terms.

I found this breakdown of CEO compensation to be interesting. It doesn’t highlight exactly what those incentive entails, but gives an interesting perspective of short and long term performance percentages:

Brand Management

Advertising costs are charged to expense as incurred. This expense was $196 million in 2020, $215 million in 2019, and $188 million in 2018

As we all know, Deere is a behemoth of a brand, so I found their advertising costs to actually be quite reasonable. Maintaining a brand and continuing to grow it is not a cheap endeavour.

Their Selling, General and Administrative expenses were the lowest it has been in 3 years.

Final Comments

It would be nice to see more information surrounding how the digital assets increase customer lifetime value for example. John Deere has a great differentiator in their green paint branding, but they also have a differentiator in their digital tools along with precision agriculture tools. This is only going to grow. And for John Deere that is continually emphasizing the use of their digital tools, I think investors will begin to ask for more background on just how effective those digital investments have been.

I know I will continue to follow along in fascination at the John Deere business, specifically because they are well positioned both on the digital and precision front along with the operational aspect.

Deere has influence directly over finances (credit), operational efficiency (machinery efficiency), variable expenses (tools to manage fuel, input costs etc) and agronomic decision making, planning and output.

That puts them square in the most powerful position in farming.

*Upstream Ag Insights is where I share my high level thoughts and perspectives about the world of agribusiness and agtech. I have recently started a consulting and advisory business on top of UAI. If you are interested in discussing projects, contracts or consulting surrounding business strategy, marketing or the agtech landscape please reach out to me at upstreamaginsights@gmail.com*

References:

John Deere 2020 Annual Report Presentation

John Deere 2021 Sustainability Report

John Deere 2020 Annual Report