John Deere 2021 Annual Report + See and Spray Ultimate Breakdown

Highlights and analysis from John Deere's 2021 annual report, 2021 sustainability report and their launch of See and Spray Ultimate.

For those interested specifically in the See and Spray Portion of this it starts at the heading “See & Spray™ Ultimate from John Deere” about 2/3’s of the way down the page.

Note: For a list of resources referenced and other useful John Deere reads please see the end of the write up.

Introduction

John Deere continues to be one of the most compelling organizations in agriculture. Not only is the colour and branding iconic, but they continue to innovate internally, acquire strategically (eg: Bear Flag Robotics, Blue River Technology) and change the frame in how to do things in the world of agriculture.

Consider their marketing tactic from January of this year surrounding the launch of their fully autonomous 8R tractor at the Consumer Electronic Show in Las Vegas.

Choosing a non-ag, mainstream show to launch their autonomy product was genius. They have been going to CES the last couple of years, playing up the emphasis of educating consumers on the challenges farmers face and technology they use to sustainably feed the world. I am certain that played a part.

But no company is entirely altruistic. And my suspicion is the marketing funds they spent on CES will be some of the best expenditure they will make all year (probably well beyond this year):

The Deere stock price went up over 6% the day of the announcement, a day the S&P 500 and CNHI were flat, adding over $6 billion in market capitalization to their stock!

Deere’s slogan is “Nothing runs like a Deere” (Now with “autonomously” added onto the end). I think what else could be said is that “Nobody markets like Deere”.

Deere has had two large announcements thus far in 2022, and while I want to get into those I also want to highlight some of the interesting aspects of their business from their 2021 Annual Report along with their 2021 Sustainability report.

2021 Year In Review

The most significant portion of their business continues to be the large scale production and precision pillar of their business account for 41% of their $44 billion in revenue:

That means their production and precision business was over $16.5 billion in 2021 and grew from $12.9 billion in 2020, a 27% increase:

Not to mention, their operating margin grew 5% in absolute terms! This allowed them to grow their operating profit by 69% year over year, a significant growth.

Their geographic breakdown didn’t change much from 2020:

Their R&D investment for 2021 went down as a percentage of sales and in absolute terms which is notable:

They have decreased their R&D spend for the 3rd consecutive year, however, it is notable they continue to acquire companies like Bear Flag Robotics, an autonomous tractor company out of California, for significant sums. In Bear Flags instance about $250 million.

Meanwhile, their SG&A expenditure stayed flat year over year, a nice outcome given their revenue jumped so significantly.

Interestingly, their inventories were the highest they have ever been in absolute terms, but on a relative basis to sales were flat to down across the business and specific to their large scale agriculture division:

Deere’s Strategy Overview

Deere talks about their strategy entailing the following:

John Deere will deliver 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

They have three pillars enabling it:

Managing the systems through enablement of the technology stack and ensuring the product lifecycle gets considered to maximize outcomes for farmers and Deere.

There are some notable aspects in here where they emphasize “value add through the life of the product” and “maximizing uptime and minimizing cost” and “enabling smarter machines.”

Any time we get into these kinds of comments and components my mind goes towards digital augmentation of physical assets and that leads to software as a service, or recurring based revenue models.

Consider comments from their investor call transcript:

One of the things we're talking about and making sure is that just like we did with guidance solutions in the past, where we started years ahead putting base functionality into machines that would allow us to both put the functionality for, in this case, AutoPath or further automation features into every machine, we'll start working through a series of making sure that the base functionality of the vehicle will allow us to either ship the vehicle with the functionality or upgrade it in the future. And we're looking at new ways and new business models to make that easier for customers to adopt. So that journey, we're on that path right now. We're rolling out ways that we're doing that with our precision ag hardware. You'll see us do it more with our subscriptions and software going forward. So we're out cooperating and working with customers and how we can make that work on their operations today and how they like to consume it and you'll see that revenue stream continue to grow from us in the future.

As we talk about and roll out our next-generation of goals, you'll see us think through an evolution of our business model over the next decade with respect to what Cory talked about and the value we're delivering every time our customers go across the field and how can we think through a business model that's more of an ongoing basis. So more to come on that. You'll see us have some relatively specific targets and goals on what we think we can deliver from that evolution.

New business models are coming and I think outside typical services like RTK, they will look at unique business models with the likes of their See and Spray Ultimate product (more on it below) and greater sense and act technology.

John Deere is already priming the message on what specific value their solutions provide per acre with numbers by product segment on an input and fuel basis, which can help them ease into outcome driven pricing models:

In order to raise prices sustainably to farmers where the farmers business remains successful and John Deere is able to capture some of the incremental value they create there really is three prongs to pull on:

1. Increased Production Ability - Through minimizing harvest losses, decreasing crop losses from stress (see and spray tech), precisely applying seed or fertilizer.

2. Decreased Cost of Production - Decreasing herbicide or fertilizer costs, minimizing inefficent paths with equipment

3. Bringing in New Dollars from Outside Ag or from Downstream/other areas of the supply chain - Empowering the farmers with their data to plug that into a carbon program or biofuel program that allows the farmer to access a new revenue stream or increased revenue amounts.

Given the above it becomes apparent that Deere can be the key point of integration for any and all companies looking to be aggregators in carbon programs, so I expect more to come from John Deere on this front, even just looking at the last points on the above image there is a CO2 emission reduction numbers that is likely strategic to their long term initiatives.

I don’t anticipate them being a carbon aggregating company themselves - too competitive, too much risk and not enough upside, but they can be an enabler for their customers to seamlessly connect into any program (sustainability, IP, biofuel etc) they want with their data making John Deere better off focusing on collaborating with larger organizations.

Lastly, anytime you can prove specific outcomes with technology, you are better positioned to create a novel business model surrounding a reduction in upfront risk. Consider their See and Spray Ultimate technology, it could be a scenario where there is a lattered software as a service pricing annually depending on percentage of field sprayed vs. a broad spray application which aligns incentives that is still significantly cheaper for the farmer.

Precision Agriculture

I hesitate to use a different sub header for precision because fundamentally precision is a staple in their strategy to differentiate against competitors, grow market share, generate new revenue and increase loyalty among customers.

John Deere is at the forefront of innovating and enabling precision agriculture.

Deere talks about precision being enabled by three things:

1. Telematics

2. Guidance

3. Data Management

In order to enable those three things there is a need for a tech stack.

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 through precision.

The interesting part with John Deere is that it is primarily proprietary where they are integrated from discovery to manufacturing through to smart capabilities.

Here is their evolution of segments across the stack:

As an agronomist by background I used to look (wrongfully) at the machinery companies as a basic means to an end to get crop protection products in the ground.

When I look out to the future through the lens of an agronomist I view the equipment as the most critical tool to enabling more production, more sustainable production, managing costs and managing areas like herbicide resistance and plant/soil health.

The more a person looks at the Deere business, the more we see that equipment like the combine with weed seed management tools bolted onto it and smart sprayers will be a key part of strong herbicide/weed management.

When I look at a company like John Deere they are actually best positioned to support farmer herbicide management than even traditional herbicide manufacturing companies in a lot of ways! Deere’s ability to integrate agronomically beneficial technology into their equipment positions them powerfully. It’s interesting to think about from that specific frame and what this means for traditional seed and crop protection companies - I suspect a big answer is really in the biotech stack for manufacturers of inputs and in collaborations with hardware companies.

When it comes to digitized acres in agriculture, I created a resource in 2020 that I will update once all the annual reports are released for this year.

I bring that up because Deere has topped the list of digital acres for both the 2020 and 2021 renditions. And I suspect they will be the leader in 2022 as well, citing over 315 million acres within their Operations Centre across over 440,000 connected machines:

An interesting quote from their investor call:

Engaged acres now stand at over 315 million acres, due in part to a sharp increase in Europe, where the number of engaged acres has doubled over the past year.

Organizations like Climate Field View would be the next closest hovering somewhere around 200 million acres for context.

What pleasantly surprised me for 2022 was the fact that they defined what an engaged acre is.

I have advocated for this within Upstream:

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.

This is an important step to understanding the relative digital position of organizations, though far from perfect (every organization won’t define it the same).

Here are the definitions of “engaged”, “highly engaged” and “sustainably engaged” from John Deere:

I like the fact that they have levels. It’s important for Deere to monitor their customers utilization of tools and systems. When looking at how well their precision strategy is working, seeing that they are increasing the engagement of their customers will be an important KPI to reinforce traction along with being useful to support upgrades.

They are targeting an increase in engaged acres to north of 500 million by 2026 with 50% highly engaged across 1.5 million connected machines:

This is important as well because what they are striving for is 10% of revenue is targeted at being recurring revenue (likely some variations of SaaS) by 2030!

To put that in perspective, based on their 2022 revenue, that would mean they would have had $4.4 billion in service based revenue!

Accounting for growth in their business out to 2030, it’s likely that revenue would be closer to $5 or $6 billion! Based on the vagueness on their investor calls, I suspect they don’t know exactly how that’s going to come to fruition today, but Im certain they have a pretty solid idea surrounding precision in furrow applications, sense and act technology and combine driven solutions. They don’t breakout revenue by recurring today, but I suspect it’s very low single digits, driven primarily by services like RTK.

They also don’t break this revenue target out by business unit publicly (eg: construction vs. ag), but if they did it would make possible to do a rough analysis of how much they are looking to capture per engaged acre on an annual basis. Considering they see a take rate in premium and automation software activation of over 85% for 8 Series and 9R Series tractors, this seems like a good start to engaging acres.

To put the service revenue into context - Apple as of 2021 had about 22% of their revenue gained through services (Apple TV+, Apple Music, Apple Fitness etc) at between 65 and 70% gross margins (which is fairly typical for software service driven revenue).

Thinking back to John Deere gross margins of 15% in 2020 and 20% in 2022, it’s interesting to think that if they execute on this strategy of 10% of revenue from services, but could be potentially 30+% of company gross margin dollars!

Finally, what’s notable, again sticking with the loose assumption that Apple as a consumer business bears some resemblance to John Deere as an agribusiness is that as Apple has rolled out their services, they have seen increases in loyalty and customer retention.

Consider a service Deere offers now:

Use of our digital features such as Expert Alerts and Service Advisor Remote has increased by about 30% compared to last year.

Expert Alerts is a proactive monitoring system that notifies dealers (with a customer's permission) of potential machine issues. This allows technicians to diagnose issues remotely and fix them before they become a problem, a significant value to the farmer as down time can be extremely expensive in a time sensitive situation - this would be tough to go back from for farmers once they experience it I suspect.

Increased retention has long been one of the promises of technology in agriculture across inputs and equipment, however it hasn’t grown as significantly as many would have thought. Given the focus from Deere this is an area to watch.

Other Areas of Interest

I was recently reading a CNHI investor presentation and noted one slide that stood out:

Deere hasn’t talked about enabling or empowering their distributors with a digital experience that I have come across.

CNHI explicitly calls out e commerce in their deck. I focus on this area in crop input retail a lot, but haven’t talked about it from an equipment dealership perspective. As dealerships get into agronomy and precision services along with wanting to support customers with a better experience in purchasing parts it becomes an area I wonder how John Deere is thinking about.

Not to get too futuristic, but it gets my mind going towards connection with distributed production, something I think will grow increasingly across many areas of agriculture.

3-D printing capabilities from the likes of Desktop Metal have potential in Deere dealerships where each has an industrial grade 3-D printer with blueprints of each part from John Deere where a farmer could select via an online experience the part that’s needed and it could be “printed” right there at the dealership and delivered out to the farmer (this could get into the Service Expert Alerts service touched on earlier and gets too close to the right to repair subject which I’ll refrain from getting into due to a lack of understanding it).

A potentially better experience for a farmer which I think feeds into the entirety of the Deere strategy around better experiences that deliver better outcomes to farmers.

I will be curious to watch if/how Deere begins to talk about this area in support of their dealers.

See & Spray™ Ultimate from John Deere

This week Deere also announced the launch of their See and Spray Ultimate, or green on green smart spraying capability where sensors and intelligent systems decipher between crop and weed, eliminating herbicide needs by up to ~80% in corn, soybean and cotton.

There is a great overview in the below video:

I have been excited about the potential of see and spray approach for years, and even though it’s been around from other companies for a couple years, it always feels more eminent when Deere announces (Note: Last year Deere announced See and Spray Select, green on brown capability).

Carlota Perez is world renowned for her interpretation of technological revolutions. In her popular book Technological Revolution and Financial Capital she talks about the different phases that technological revolutions go through, going from the industrial revolution, steam and railways, to steel and engineering to now the IT revolution. She highlights the fact that these various revolutions go through the same process along their journey from beginning to becoming the standard.

The two main phases are “instalment” and “deployment” which can be identified through the following:

Source

When a technology moves to “deployment” it is more mainstream. My friend Matt Coutts made this statement about Deere’s influence on that in agriculture on The Business Breakdown Podcast on John Deere:

In a lot of industries you may debate when the installment period ends and deployment period begins. And in agriculture, it's kind of like when Deere says so.

The same has felt true with autonomy, and now we are seeing similar with see and spray.

What does it entail?

The See and Spray Ultimate capability is only available on the 410R, 412R and 612R 120 ft boom model sprayers with no retrofit capability.

• Multiple processors across the boom use camera vision technology and machine learning to detect weeds from plants, and activate sprayer nozzles all within 200 milliseconds.

• 36 cameras mounted across the boom scan more than 2,100 square feet (195 m2) at once.

• See & Spray Ultimate uses the new John Deere StarFire™ 7000 Receiver with SF-RTK signal with 2.5 cm of accuracy, faster pull-in times, and 5-year repeatability. Plus, the machine comes with a JDLink™ modem for streaming data to your John Deere Operations Center™ account.

• Turn weed map data into actionable decisions by viewing weed density within your John Deere Operations Center™ account.

• The tank is split in two, with either 1,000 gallons (3,785L) or 1,200 gallons (4,542L) total capacity. Use two independent tank mixes simultaneously with targeted spray and traditional broadcast spray, or a single, combined tank mix for either targeted spray-only or broadcast spray-only.

• Individual nozzle control with ExactApply offers precise droplet sizing for a consistent targeted spray that also reduces over-application and off-target drift.

• The new, 120 ft. (36.6 m) carbon-fiber truss-style boom is lighter than steel, providing the stability needed to enable targeted spray.

• BoomTrac Ultimate ensures consistent height control when traveling across uneven fields for precise application, with increased spray accuracy

• Ability to travel at up to 12mph

Comparison between Select and Ultimate:

There are around 9 other companies by my count in the smart spraying space, with several commercial such as WEED-IT and companies like Greeneye Technologies and Agrifac looking to launch commercially this year in the green on green category. These groups are primarily after market or retrofit driven where as Deere is fully integrated.

There are two points from the above features that really stick out:

1. As-Applied & Weed Pressure Mapping

2. Dual Tank

From an as applied and weed pressure mapping perspective, this is important. It is important in managing the farmer psychology around performance (eg: where was product sprayed), but it also is beneficial for future decision making around herbicide products (knowing type of weed in field by percentage) and other practice options all the way to helping support access to carbon credits and variable rate seeding decisions. This data can be supportive of much more within Operations Centre over time and positions Deere to know more about weed field dynamics than any other organization, given their potentially extensive reach.

The dual tank aspect is a huge benefit, and there is some data from John Deere to show that they had 7% BETTER weed control and 47% LESS herbicide used because of it in soybean:

Deere notes elimination of herbicide antagonism, or a decrease in absolute weed efficacy, which often is a major issue in deciding what products to use each pass. Antagonism goes along with the dynamic of crop injury when products are mixed together they can get “hot” on the crop; having them in a separate tank doesn’t decrease the crop injury generally, but it can reduce the area of the field with crop injury which means that a farmer can improve weed control and manage crop injury at the same time which today has trade-offs: lower weed control across the whole field or have crop injury across the whole field. See and Spray Ultimate fundamentally changes that.

Deere did not specify on the business model, but as you would have read in the Annual Report portion highlighting quotes from their executives on an investor call: there will be a focus on a novel pricing model that enables a recurring revenue stream for Deere.

And in my mind it makes sense. Deere will be continuing to maintain and improve the software capabilities that make the see and spray technology more valuable to the farmer that purchases a see and spray capable asset. That continued investment from Deere will deliver new and better outcomes to farmers which warrants a continued annual fee, assuming it is priced fairly.

The Future

John Deere sees numerous interventions that they can help a farmer manage moving forward with “sense and act” and see and spray technology:

I can’t find specifically where John Deere mentions all of what sense and act entails. But in my mind, sense and act gets into numerous areas, from sensing and acting at planting timing with row firmers or fertilizer application, can be on the sprayer, or could be on the combine when it comes to LED lighting to hinder weeds seeds from germinating or managing for and accounting for harvest losses with auto adjusting settings.

Where see and spray heads next is interesting: once you put cameras and sensors on a unit, you can essentially train the artificial intelligence to ID anything that is distinguishable with their cameras, such as nutrient deficiency, disease or abiotic stress.

In Deere’s sustainability report, they state that they want to improve nitrogen use efficiency by 20%, so it gives a pretty good idea of where they will be focusing some of their sense and act R&D over the next several years:

I am actually surprised they are only looking at increasing crop protection efficiency by 20%, given they talk about cutting usage by upwards of 80%. This got me thinking.

When I first meaningfully wrote about See and Spray last year, industry veteran Tom Wolf reached out to me to share some of his perspective. He brought up the concept of Jevons Paradox that states:

In economics, the Jevons paradox occurs when technological progress or government policy increases the efficiency with which a resource is used (reducing the amount necessary for any one use), but the rate of consumption of that resource rises due to increasing demand.

If we look at the definition it almost perfectly describes the capability of see and spray technology.

It seems mind boggling to consider, but it might apply very well to our see and spray technology, specifically because of the two pronged capability Deere launched: a dual tank system with a broad application capability. Being able to apply a broadbrush app along with a precise application of a different product allows us to actually use incremental product.

On top, herbicide and crop protection companies could also adapt to focus more on residual technology or residual based herbicides, after all there is considerable benefit to eliminating weeds as their germinate instead of waiting until they have consumed nutrients and soil moisture.

We could also take this up a level though. Let’s not look specifically at herbicides, but crop protection products at large: might we see more application of fungicides in conjunction with precise herbicides? Or more in furrow applications of products? Obviously, I don’t know. But it’s not too far fetched to consider, especially considering that it seems naive to think Deere will stop at a 2 tank system; why not three?

So when I see only a 20% reduction I wonder if some of that is being acknowledged (though it could simply mean they are taking into account that not 100% of their customers will adopt the see and spray technology by 2030).

Lastly, the path forward likely leads to plant level precision, something Deere has talked about:

I touched on the capabilities to train models around other areas like nutrients, but there is also opportunities for unique collaborations.

One that stands out is InnerPlant, a company I have touched on numerous times that has the following capability:

InnerPlant’s seed technology “recodes” a plant’s DNA to create a fluorescent protein that lights up the plant’s leaves when it is in distress from pests, fungi, and other dangers.

I think of them as creating the Internet of Plants.

If you had the sensors on sprayer with the ability to know which stress was occurring in real time and have a numerous tank system to apply products, all of a sudden “plant” level becomes closer to a reality for abiotic and biotic stresses,

This is likely a ways out, and has shortcomings to be sure (JD would likely still need to train their models around visual cues since there is a strong chance not every variety their customers use has an InnerPlant trait in it) but if the vision to get to plant level management ever comes through, it seems to me InnerPlant would be a good company to coordinate with as one avenue to get there.

Final Words

As someone who didn’t grow up interested in farm equipment and as an agronomist wasn’t particularly keen to learn it, it surprises me to say that John Deere has become one of the most exciting companies in the industry to me.

There is a ton of potential at the convergence of precision and equipment and sustainability, and it seems likely that John Deere will continue to be a leader there for decades to come, driving better outcomes at the farm level.

Resources and Other John Deere Reading:

John Deere Investor Page - John Deere

John Deere Analyst Call Transcript Fall 2021 - Seeking Alpha

2020 John Deere Annual Report Highlights and Analysis - Upstream Ag Insights

Matt Coutts - Deere: Centuries of Farming Innovation - Business Breakdowns

John Deere Business Breakdowns Research - Business Breakdowns

See and Spray Technology Implications for Agribusiness - Upstream Ag Insights

John Deere See & Spray Select - Sprayers 101

Optical Spot Spraying and AI Scouting - Sprayers 101

Electric Tractors and Wrights Law - Upstream Ag Insights

Autonomous Farming: The Future Comes Faster than You Think - Upstream Ag Insights