Upstream Ag Insights - Apr 12th
Essential news and analysis for agribusiness leaders. Week of April 12th, 2020
|Shane Thomas||Apr 12, 2020||3|
Ag Growth International is a significant player in the ag industry:
“Planning, engineering and manufacturing full solutions and systems across 5 platforms: Seed, Fertilizer, Grain, Feed, and Food. Our products, equipment, technology, and services help facilitate the storage, blending, mixing, conveying, conditioning, processing, and protection of agricultural inputs and produce around the world.”
Their acquisitions in the last 12 months have emphasized the tying together of all of the above. More on that below.
In July 2019 AGI took a stake in Farmobile giving some insight into the Farmobile business.
Farmobile specializes in collecting agronomic and machine data from farm equipment. They organize the data into a portable data standard for live viewing, API streaming and permission-based sharing with trusted advisors and offer farmers revenue-generating opportunities through their Farmobile DataStore.
AGI invested approx. $19.7 million in them. As of now their fair value is <$40 million. According to the new THRIVE Agtech Report, their post money valuation is $40 million.
That makes AGI just under 50% shareholders.
Farmobile lost around $5 million in 2019 plus a fair value adjustment downwards.
For AGI, this investment builds a stronger foundation for their connected farm strategy. They need the data collection capabilities from the field to tie together the rest of their offering.
The AGI SureTrack offering (their whole farm connected digital solution) is starting to get some traction:
"In 2019, AGI demonstrated the success of its AGI SureTrack subscription model as demand exceeded our capacity and retail equivalent sales increased by 70%. In the fourth quarter of 2019, AGI increased its investment in sales, marketing and technical resources at AGI SureTrack to address capacity and accelerate the future pace of new user additions, resulting in negative Q4 2019 adjusted EBITDA at AGI SureTrack of $2.7 million"
SureTrack is being further enabled by their 2019 acquisition of sensor technology company IntelliFarms:
They also acquired Compass through their Affinity Management acquisition earlier this year, an ERP system, which I would imagine will be where SureTrack, Farmobile etc eventually roll up the entirety of their digital business and connect, giving farms and farm suppliers a dashboard to see the pulse of operations.
Their acquisitions and investments in Affinity Management, Farmobile and IntelliFarms paints the picture of tying together their product offerings and attempting to differentiate themselves in the market place, but also expanding them into new revenue generation.
With Farmobile’s Data Store and all of this rolling up, one can see how they are well positioned if they wanted to look at building out a carbon credit store or moving into traceability just as a couple examples. They even have clear steps in the future - I could see them working already with or looking at a company like VeriGrain/Intellicon and other organizations with the ability to assess quality parameters of grain. On top of this they will need to build out their agronomic tools to ensure a more robust collection of agronomic data at the field level. My assumption is they’d look at an organization with some imagery/AI capabilities to either acquire, or open up partnerships to feed into their platform/system.
Overall profit for 2019, was $14.63 million, down from $26.61 million the previous year. Sales were $999.93 million, up from $934.1 million 2018 (all numbers CAD).
UFA 2019 Annual Report (United Farmers of Alberta)
There are only so many publicly traded retails and co-op’s that publish any sort of business numbers. UFA is one that gives a bit of a peak into their business.
“Commercial ag sales were $218.8 million, a decrease of two per cent or $4.7 million compared to 2018”
Comparing to other public numbers, this would be consistent with where Nutrien finished down in western Canada as well.
“Commercial gross margin decreased by four per cent to $26.1 million. In percentage terms, overall gross margin decreased to 11.9 per cent from 12.1 per cent in 2018 mainly due to lower seed and chemical margins”
Interesting data points when viewed in conjunction with their increased market share:
While, it would need to be broken out more definitively to confirm this, if market share goes up, and margins go down, it can be indicative of price focused selling. Not surprisingly, the general focus in western Canadian ag retail is an emphasis towards value add and increasing margins (Note: Whether that’s the right approach is worth considering too!). With that said, in North America ag retail margins have been declining consistently, especially where there is no proprietary products being offered. Additionally, it’s difficult to say this was an emphasis for sure because of fertilizer margins being included in the totality of that number which could have influenced significantly (where purchase timing plays a big role). On top of this to obtain their market share increase they could have leveraged some of their other product lines, like bins for example to tie together crop input products.
With all of this said, this was the smallest decline in gross margin percentage in the last 3 years, if you look at UFA’s 2017 and 2018 margins, a drop of almost a full percent occurred in 2018.
Inventory levels were highlighted being slightly better on the chemistry side of things to the tune of about $4million. In percentage of sale terms: 53% in 2019 vs. 54% in 2018 or essentially flat, however still a small benefit to their working capital. Given everything that occurred last year with lesser fungicides and a difficult fall, any improvement should be considered a win. Worth mentioning, an industry target would be <30%. Looking to Nutriens annual report, we can see similar year over year changes to UFA.
There was no mention of future digital offerings, whether that be in e-commerce or farm enhancing precision technology. If you look at the ag retail market place in western Canada UFA is the only major retailer that doesn’t have a digital/precision offer to their customers. They do have a partnership with the Olds College Smart Farm which I’d assume is being looked towards for guidance in that space. Looking longer term, it’ll be interesting to watch how/if UFA enters this space.
I recently created a twitter thread targeted at new graduates. Even though it is targeted at new grads, it still entails topics, considerations and approaches to thinking that everyone in agribusiness can keep in mind day in and day out.
I received a ton of feedback (most popular tweet/tweet thread I’ve ever had and dozens of messages) on it so I had it rolled up into an article to make it easier to read that is accessible on my blog in the link.
Related: The Real ABC’s: Always Be Capturing
This is a compelling take on John Deere’s business model from an individual I read often. It aligns with the blog I posted two weeks ago Squishing the Fish in Agribusiness.
Looking at the business models of organizations like Bear Flag Robotics or Raven’s when they get deeper into automation, will John Deere benefit from moving towards what Bill Schmarzo proposes?
Today Deere sells a tractor one time and can theoretically benefit if that piece equipment doesn’t last long and needs more service/parts. What is proposed is a model that is similar to what Rolls Royce does with airplane engines - charging airlines on a Power-by-the-Hour basis while continuously monitoring the engines which de-risks the airline up front and throughout the life of the engine, proactively preventing unanticipated maintenance costs. On top of this RR gets an enhanced relationship with the customer, customization capabilities for the customer and recurring revenues. Now think of the airline as a farmer.
This isn’t specific to Deere either, but could be applied to CNHI and other OEM’s. Are ag use cases unique? You bet and that means the approach would need some tweaks. But this concept does force us to think critically about the revenue models in agribusinesses, specifically in equipment manufacturers, in an ever evolving industry. Considering it against the current revenue model margins and interconnection of their business with financing, servicing and the equipment would need to be assessed in a more in depth way.
When I read this it brought up another question related this topic too: 3-D printing. Here is a quick intro to where this is at today in ag equipment: The State of 3D Printing in Agricultural Equipment
The focus of this report is capital being raised/deployed by agricultural focused investors. There is a definite emphasis towards farmland and goes beyond agtech or traditional investment insights like we’ve seen in the 2019 Agri-Foodtech AgFunder Report or the 2019 Finistere AgriFoodtech Investment Review.
The above report has a lot of focus on land investing and this new organization caught my eye in this piece from DTN.
“People are about to know a lot more about land at the click of a mouse. It could be a game changer for the agricultural land market. It could also lead to some major shifts in how the leasing game is played.
CIBO, a company founded by Flagship Pioneering, is releasing what it calls a "land intelligence platform."
This product is worth acknowledging for other organizations that stand to benefit from understanding some of the fundamental qualities and characteristics of soil in a given area too such as crop input companies.
“Soil Health” is a commonly used term in the ag space. While I believe it is important, I don’t think it is the only parameter that needs to be monitored or considered. I think it’s necessary to have soil health apart of a bigger discussion around soil productivity or capacity to produce, something much more quantifiable. But I digress.
What I find interesting about this organization linked is that they are actually attempting to quantify and build out metrics and measurements to assess soil health. It’s like “sustainability” - easy to say, difficult to define. As you’ll see in the link, it’s complex.
An organization called Continuum Ag recently announced their Topsoil Tool, a system looking to provide continuous updates and insights around certain soil parameters (that are linked to soil health), primarily positioned to crop consultants:
A couple of weeks ago I stated this in the March 29th Edition of Upstream:
“Yara says they want to improve soil health, but really what they want to do is improve soil productivity. Soil health is a component of productivity, but farmers do not get paid for soil health and “health” is arbitrary today, where as productivity is quantifiable”
It looks like “soil health” is going to continually be attempted to be quantified, which is a good thing. I still think it has to be tied to productivity; I can have a carbon rich soil out the wazoo, but if my “productivity” (output) isn’t increasing, who benefits?
The global artificial intelligence in agriculture market has a forecasted CAGR of 26.2% from 2020 to 2025. Without the report itself it’s tough to derive context (what number is that growing from?), it shows anticipation for growth within this space is large. AI will influence precision, digital, automation, basic agronomy and more together creating predictive technologies that enhance the decision making capabilities of farmers as well as agribusinesses from manufacturers to retails.
Last week I highlighted that the Precision Farming Market is expected to grow from USD 7.0 billion in 2020 to USD 12.8 billion by 2025, a CAGR of 12.7%.
All avenues driving digital farming are expected to grow significantly in the coming 5 years.
This is a great post from Walt Duflock. He explains the challenges, but also the simplicity of approaching farmers to solve problems.
The problem statement is focused on a few key questions:
What is the exact problem as defined by the farmer?
How is the farmer solving that problem currently, and how much does it cost?
What is the cost of not being able to solve the problem, and how does that compare to the benefit of being able to solve the problem?
Closely aligned with this article is one from Tim Hammerich about tech adoption that I’d suggest is the next step in consideration:
Tim goes over the pitfalls of assuming 3 things with IN10T:
All farmers are the same
If you build it they will come
You know the feedback you need to hear
Being able to identify the problem, quantifying it and the potential benefit first, then being able to accurately assess how to position and improve your product and service is where the steps Tim lays out come in.
Highly recommend reading both articles whether you are a start up, investor, crop input manufacturer or retailer attempting to build out a process for product uptake.
Also from Tim Hammerich: The Future of Agriculture: Drones for Spraying, Seeding, and Pollinating with Rantizo (Great episode!)
“If I had to use one word to describe the significance of digitalization, it would be connectivity. From the earth’s deepest roots to its highest satellites, we are more connected than ever to our planet and the food it produces. Digital tools strengthen those connections between growers, the land and the people they help feed. It’s not just about data. It’s about using innovation and collaboration to connect and nourish us all”
I’ve been asked for my comments lately about what the biggest impact we will see from COVID-19 will be on precision and digital technology adoption. While this is a black hole of possibility (automation, online buying etc), one of the simplest changes I see, that I did comment on last week from an ag retail perspective, but goes beyond that, is an lot of opportunity for the connectivity of agribusinesses professionals to farmers in a simple way. We talk a lot about connectivity of farms, fields and data, but the most important connection is people to people and the transfer of information. Ensuring there is effective communication flow between two parties. This can be through many types of augmented reality tools, online commerce platforms, or FaceTime-esque connections like AGvisorPRO, or AgriSync who sees their opportunity to step into the market and build up use cases, experience and habits during the current crisis.
We are already seeing an emphasis from large agribusinesses like Syngenta to seek out and implement this technology rapidly. This will still be see a “blip” in the uptake, but I think it will set the trajectory of uptake on enhanced communication technology on a steeper incline than we would have seen, like this basic example graph below:
AgFunder also talked to some farmers about their view on uptake of agtech more specifically during these times:
“I would suggest that the pandemic is going to show us how we can use the tools that we already have”
“I think it’s increasing awareness of some of the tech we have but haven’t really deployed yet”
This is a great YouTube video of a presentation from Syngenta’s Chief Information and Digital Officer Greg Meyers who discusses digital agriculture offerings at Bosch Connected World 2020.
My favourite part:
“Micro doses” - Formulating products for applications that are targeting plants and niche areas of fields specifically vs. broad field applications. This could be considered in the context of drone spraying but also for see and spray technology like Blue River Technology from John Deere which can even change the economics of which pesticide’s are being brought to market. Both of these application methods will be worth keeping an eye on in the coming decade as their technology trickles into the market and grows.
Worth Diving Deeper: NEVONEX by Bosch
Here are 3 trends from Chad Colby on what will shape the future of organizations precision business.
1. Electrification is More than Buzz
2. Smarter Smart Devices
3. Testing Technology
Check out the article for his elaboration on those points.
This article emphasizes the operational aspects in fertilizer blending technology, which brings significant opportunity and ultimately benefits to retails and farmers. I think there is opportunity to align blending automation technology with agronomic platforms and soil labs (or new spectroscopy technology) in the future as well. Integration of blending technology with agronomic data and know-how is a logical use case to better serve farm customers in conjunction with the operational/administrative aspects (eg: streamlining invoicing).
“Agrellus had tripled its farmer members in the last year. Also, the company had a 50% annual increase in dealers, now totaling about 110 companies with 400+ locations. For Q1 of 2020, retailers joined at a 300% faster pace than Q1 of 2019.”
“Once a farmer is used to using the platform, it converts their behavior. We are not seeing that the online purchase behavior is skewed larger-scale or younger in age… it’s across the board.”
There is a wealth of useful resources for anyone in agriculture to reference within this well put together article. Below is a great image from the article as well:
Our industry is full of various associations. This is a thoughtful opinion on what industry organizations should be accomplishing, especially in challenging times.
“Associations are ultimately responsible for the protection of its stakeholders and industry, ensuring that no harm is done or that harm is mitigated as quickly and as effectively as possible. Though uncomfortable, this sometimes means protecting them from themselves.”
Other Ag News
How Much Bigger are Farms Getting? - Country Guide
Study Quantifies Benefits of Farm Tech - Ag Update
Gene Breakthrough in Fight Against Resistant Weeds - Rothamsted Research
Non Ag Article
This concept is fundamental to business. With more recurring revenue and software as a service (SaaS) business models in agriculture it is imperative to understand unit economics. The thing with farming is that we also tend to see more hardware assets vs. traditional “tech” and software companies.
I reference organizations and business units weekly in Upstream that are losing money. This of course isn’t ideal, but there is more to it than that, specifically early on in businesses that can have huge competitive benefits from gaining users/customers and have large returns to scale.
What’s necessary is to understand the unit economics. Calculating the unit economics (direct revenues and costs associated with a particular business model, specifically expressed on a per selling unit basis) will tell you whether they have a viable model on each acre, or by subscription or whatever “unit” they sell in. This means factoring in customer acquisition costs (marketing), retention, costs to service, competitive dynamics just to name a few. If their unit economics lose money on each unit, why is that? Are fixed costs not spread out across enough customers? At what customer numbers does the model become viable? Is that a realistic number given their total addressable market and what’s the timeline to achieving? Do they need a higher retention rate and lower acquisition cost? Or need to change their business model entirely?
I often reference Uber when going through this for people just getting accustomed to these types of business models in agriculture. Uber as a service is exceptional - it continually makes my life easier and less expensive. However, their business model isn’t viable today, losing money on each ride on average due to the high cost of human drivers and intense competition from other ride sharing services that also need the scale. Does it make Uber a bad service? No. Does it make their business model challenged? Yes. We see the same thing happening in agriculture and agtech.
I’ll stop it there, but this topic deserves it’s own overview in an agriculture context (I might attempt that in the future).
Thanks for reading!