Upstream Ag Insights - December 11th 2022

Essential news and analysis for agribusiness leaders

Welcome to the 148th Edition of Upstream Ag Insights!

The December 18th edition (next Sunday) will be the final edition of Upstream for 2022.

The first edition of 2023 is scheduled to come out Sunday, January 15th (Note: If there is any major events or topics the first week of January I will send out the first edition January 8th).

Index for the week:

1. CNH Industrial Tech Day 2022

2. CropLife Magazine Unveils 2022 Ranking of Top 100 U.S. Ag Retailers

3. FMC Corporation and Micropep Technologies Announce Strategic Collaboration to Co-develop Bioherbicide Solutions

4. Corteva Investor Presentation on Stoller Acquisition

5. AgTech Fundings for the Week

   1. Sound Agriculture Raises $75 million Series D

6. Amvac Interview: Acquisitions are a Key Part of Our Growth Strategy

7. ChatGPT and Agriculture

8. Finding Asymmetric Upside in Ag Retail and Agribusiness

9. Expertise and the 10% Rule of Professional Development

Thanks for reading, sharing and subscribing!

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1. CNHI Tech Day 2022 - CNH Industrial

This week CNHI had their 2022 “Tech Day” in Arizona. The video linked is approx. 2 hours. They did have outdoor equipment and technology demonstrations as well, but I could not find any recordings of it.

This might be a me thing, but what stood out to me the most was the executives tones, chosen verbiage and general vagueness when it came to the opportunities for CNHI more than getting excited about the opportunities themselves. I’ll elaborate more below.

The numbers that caught attention surrounding their technology business were these ones:

When this all rolls up within our Ag revenues for 2022, we estimate that Precision Technology will account for over $900 million. And we expect that number to continue to grow at about 10% to 15% annually, and in the near term we expect to deliver in excess of $1 billion in 2023.

$1 billion in 2023 is impressive. While CNH was hesitant to state margins, they did allude to it being “in the 30% range” in their video, which is a bump up from their traditional margin levels (<14% EBIT margins).

There was a statement from Derek Neilson, President of the Agriculture Business Unit on margins:

Honestly our attention is focused on unlocking value for our customers and then the margin for sure will come in after

This was the constant point of emphasis…”unlocking value for customers”. But it was vague around how this would actually occur. The executive team would emphasize open architecture and connected platforms, but they did not bring to life exactly how this value creation would come about for farmers. Is it through agronomic insights and decision support? If so, what are examples of products coming to market? How would they optimize equipment efficiency and turn that into new revenue or margin opportunities? Is it through delivering novel see and spray capabilities through their partnership with Augmenta? I could go on. Nothing was explicitly stated in any tangible way during the two hour event (Note: In their defense, this may have been gone over at the outdoor demo event afterwards). It’s possible to infer and assume, but there wasn’t a clear, explicit picture painted.

The tone from the CNHI executives was even what came across to me as dismissive of some of the questions, especially those when it came to the market opportunity and the recurring revenue nature of technology.

From Derek Neilson again on market size and recurring revenue size:

I mean honestly, everyone measures it differently. Everyone measures by different upside down inside out and comes with different permutation numbers. The simple fact is it's a huge pot of opportunity. Like I said, hundreds of billions. So again, we try not to lose time in trying to calculate this mythical recurring revenue, what's in what's out to 3 decimal points. We focus on value for our customers, profitability for our business, and growth for both parties, including our dealers as well.

I can empathize with the challenges of quantifying a market size when it is evolving and uncertain. It is incredibly difficult. But I think the dismissive nature misses the real point of why investors (whether VC, institutional or otherwise) like seeing those numbers: it shows you’ve done the work to understand the customer. It shows you’ve put in the work to understand the problems and how willing a customer is to pay for the solution. It shows you’ve thought about the changing landscape and where you fit. It shows you’ve given thought to specifically which areas have the biggest opportunity. If you can begin to quantify the opportunity, the statement that you “focus on value for customers” holds a lot more wight. In my mind the market sizing dynamic is more of a signalling function for analysts and investors that you and your team put in the hard time and necessary effort to know the market, customers and competitive landscape than it is about a specific number.

Added on by CEO Scott Wine:

Yeah, I mean I think what you've seen is tech companies make a big pronouncement about their annual recurring revenue because everybody thinks it's safe. Well, when you're in our business, if you have a parts contract with a customer, that's annual recurring revenue. Does it have anything to do with tech? No. What Oddone has built over many, many years in Financial Services is we have the ability to get paid by customers any way they want. If they want to pay us on a subscription basis, we can do it. If we want another recurring revenue contract. But as Derek pointed out, all of our focus is adding value to the customer. We're not going to tell them how they want to pay us.

There is a lot to unpack here. I think this response dismisses some of the nuance around what recurring revenue delivers to an organization that the question asker was looking for:

1. Recurring Revenue Margin - There is a lot of strong business rationale to have recurring revenue, some of which I highlight in the next couple points. But when analysts ask this question in the context of technology, there is generally an assumption of margin levels being greater than the core business because it tends to be viewed as software-as-a-service revenue which is usually 60%, 70% or 80% gross margin. CFO Oddone Incisa stated the following earlier in the event regarding where the $900 million in precision technology revenue would come from:

   Factory fit components that are used for precision applications, we are including aftermarket components that are retrofitted to existing machines by our dealers, we are including technology that is sold by Raven to third party OEMs or to independent dealers, and we are including fees paid by customers for unlocking or enabling some of the premium features that we are providing with our technology.

   If there isn’t a recurring revenue associated with something software/model related there is legitimate room for skepticism. As a consumer or user of a software or tech driven product, I want there to be an incentive for the seller of the software to continually upgrade and progress the technology, software, AI model etc. If it’s a one time unlock, it brings into question how the necessary maintenance gets done to have a best in class experience. Not to mention, I question whether that hinders farmer adoption due to up front capital needs for some of the technology if it isn’t thought about in a different business model context.

   There could be an argument that that isn’t how farmers want to pay for things. Though, I think farmers are savvy and just like anyone else, they don’t like change, but they adapt when it is in their best interest. If CNHI hasn’t modelled out how they see the payment structures working, I wonder whether they understand what actual take rates will be, churn rates etc. Obviously, none of this is knowable at a 100% confidence level, but just like above regarding marketing sizing, they didn’t illustrate that they put in the time and effort to understand the right fit for customers and they didn’t paint the picture that they have a plan in place.

2. Switching Costs - Having annual recurring revenue is generally an enabler of higher retention of customers on core products, meaning CNHI equipment in this instance and hopefully the new CNHI services. This is especially interesting for analysts and investors. To bring in an example from the consumer world, 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. What’s notable, is that as Apple has rolled out their recurring revenue services, they have seen increases in loyalty and customer retention.

3. New Revenue Opportunity - Mixing new revenue opportunities with financial services or parts businesses (older revenue streams) downplays the opportunity with the new offerings. It is difficult to understand what the new opportunities really are already because of a general vagueness, but then to start co-mingling old businesses with "

I do not want to make this about Deere, but I think the below is the most notable difference in how the two organizations and the two biggest competitors in the equipment space present themselves to the market:

While watching CNHI Tech Day recording, it was challenging to stay engaged. When I watched the John Deere Leaps Unlocked Event in May (equivalent type of investor event), I couldn’t wait to watch it again because it was full of thoughtful commentary regarding numerous areas of the industry.

I am certain CNH is creating value added products for their customers. It just wasn’t obvious to me what exactly those value added products are and how they are different than competitors in the market place.

Related: John Deere Leaps Unlocked Event Highlights and Analysis - Upstream Ag Insights

2. CropLife Magazine Unveils 2022 Ranking of Top 100 U.S. Ag Retailers - Crop Life

Crop Life recently released their U.S. Ag Retailer Report for 2022. I do not think much will come as a surprise to those in the industry with the Top 10 remaining essentially unchanged:

1. Nutrien Ag Solutions

2. Helena Agri-Enterprises

3. Simplot Grower Solutions

4. GROWMARK

5. Wilbur-Ellis

6. CHS

7. GreenPoint AG

8. MFA

9. Co-Alliance

10. Agtegra Cooperative

Their report emphasized the growth in revenue from fertilizer:

Given the price increases of fertilizer year over year, this wouldn’t catch anyone off guard. The fertilizer pricing increases is likely a positive contributor to the increased profitability on the retail front too, notably 77% of retailers said they will be more profitable in 2022 compared to 2021, a 10% increase. Fertilizer prices were continuing to increase (generally) month to month going into the major application season, which typically allows retailers to take advantage of price appreciation from their purchases in the fall or earlier portion of the year.

I like looking at the revenue breakdown by retailer along with the number of locations. Below is the top 7:

The most notable take away for me is an organization like Simplot that has just 235 locations, but places higher on the list than the likes of CHS and GROWMARK in terms of revenue. Revenue is of course not the ultimate indicator of retail success, but it does show some ability to leverage their assets (Note: there is nuance here depending on geographies served and revenue mix of course). Simplot, along with Wilbur Ellis do a great job of this according to the data.

What ultimately illustrates to me the success of a retailer is an indicator that we cannot see: profit per percent of store front. Any retail location can sell a lot of product - just lower your prices. Any retailer can sell product at higher margins when they are in a lower competitive environment.

What really indicates success is ability to generate a profit given the competitive dynamics in your geography because it considers asset utilization, optionality for customers, management prowess and more. When you break down the number of ag retail locations in a geographic areas (there are companies like Stratus that offer this information) to understand as a retail what percent of a geography your stores make up and then handicap that with a profit indicator, retails can really see what their capacity is to generate value in a given geography. That is the ultimate indicator of whether a retail is “adding value”.

3. FMC Corporation and Micropep Technologies Announce Strategic Collaboration to Co-develop Bioherbicide Solutions - PR Newswire

FMC Corporation, a leading global agricultural sciences company, and Micropep Technologies (Micropep), a global leader in micropeptide technology, today announced a strategic collaboration to develop biological solutions to control destructive herbicide-resistant weeds that reduce crop yields.  

Under an exclusive multi-year agreement, the partnership will focus on developing new solutions for controlling key herbicide-resistant weeds in corn and soybeans. The companies will combine their respective R&D capabilities leveraging Micropep's technology to expedite and improve the success rate in identifying innovative biological herbicides. 

We are continuing to see major input organizations partner with smaller, innovative start-ups. Just a few weeks ago we saw the first of what I suspect are many partnerships with Oerth Bio, a protein degrader technology company, that is working with Yara.

Micropep is different than Oerth Bio, but there is likely to be similar use cases in the world of crop protection.

With that, we need to understand what Micropep does.

Micropep has a discovery platform that blends artificial intelligence, computer science, plant biology and peptide biochemistry to select and produce the best micropeptide candidates. Their current pipeline targets resistant pathogens and weeds on a global basis.

So what are micropeptides?

Micropeptides are short natural peptide molecules that target and regulate plant genes and proteins. They are generally made of 10 to 20 amino acids. They only target the plant's RNA and not their DNA so they do not genetically modify them. According to Micropep’s website, miPEPs is one example of micropeptides that are produced by plant cells to regulate the expression of their microRNAs, which are themselves key regulators of physiological functions. As they naturally rapidly degrade in soils, micropeptides are safe for humans, animals and the environment.

Essentially, this means if you can target the micropeptide properly, you can have the same outcomes as a synthetic herbicide for example. This capability of micropeptides is validated in world renowned journal articles.

When I highlighted Oerth Bio a few weeks ago I mentoned RNAi being similar, and just like there are similarities in protein degraders to RNAi, the same is true about RNAi and micropeptides with an important difference: size.

Micropeptides are small, which can enable easier leaf penetration for example. There is another important aspect too that has plagued RNAi: cost. The same is true with micropeptides, which could be a long term hinderance to entering into commodity row crops for example. According to this article with Micropep CEO, Thomas Laurent, the aim is to scale up production and get a cost down towards 50 cents per gram which would get them to a level where it might be possible. The company is currently running fermenters at the scale of a few thousand liters, but it’s trying to scale up. The goal is to reach a cost of 50 cents per gram, which would make micropeptides cheap enough for row crops like corn and soybeans.

Having a collaborative partner like FMC hopefully helps get closer to this target.

4. Corteva Investor Presentation on Stoller Acquisition - Corteva

Last week it was announced that Corteva acquired Stoller (see the Upstream Ag Insights Highlights and Analysis from last week here).

This past Monday, Corteva held an investor presentation breaking down the acquisition. In the link you’ll find some breakdowns of Stoller finances, the product mix, the rationale from Corteva themselves and some other interesting slides.

Of all the slides, this one regarding the Stoller 2021 business and financial performance stood out to me as the most interesting:

5. AgTech Fundings for the Week:

The narrative, and realities, for start-ups in 2022 have tended to be around a more challenging capital raising environment. Anecdotally, from an Upstream Ag Insights perspective the number of announcements from raises has been much slower compared to the first two years of the newsletter. According to Pitchbook’s Q2 2022 AgTech VC report, things are slower, however, this week had numerous large raises to highlight, with the biggest being surrounding Sound Agriculture:

a. Sound Agriculture Raises $75 Million Series D - PR Newswire

Sound Agriculture, a leading agtech company improving how we farm and what we eat, announced a $75 million Series D equity investment, led by new investors BMO Impact Investment Fund and Chan Zuckerberg Initiative, along with FootPrint Coalition and returning investors Leaps by Bayer, Syngenta Group Ventures, S2G Ventures, Fall Line Capital, Cavallo Ventures and Northpond Ventures. Since its founding in 2013, the company has raised a total of $155 million to develop nature-based solutions for sustainable food production, replacing up to 30% of climate damaging synthetic fertilizer and breeding tastier, healthier and more sustainable crops.

This is a large raise for Sound Agriculture, positioned as enabling the following:

We will use this investment to advance our research platforms, grow sales and marketing in the U.S. and abroad, and sign new partnerships to support better methods of farming and food system resiliency.

It seems a big focus will definitely be expansion of SOURCE:

In 2023, SOURCE is being launched for use on wheat, cotton, alfalfa, hay and canola, in addition to corn and soybeans, and will be expanding internationally

The canola is a good indicator of Canadian expansion and given the market size, Brazil/LatAm is likely to be a focus for them as they look to prioritize their expansion.

The growth this year from Sound Agriculture was impressive:

SOURCE has seen rapid adoption since its launch in 2020, with 4.3x growth in 2022 and use on more than one million U.S. acres. In the process, SOURCE was used to either replace nitrogen fertilizer without impacting yield, or increase yields on farms with efficient nitrogen fertilizer practices.

Earlier this year I estimated they would grow about 5x in 2022 to north of 1 million acres which they executed on.

Given the per acre cost, we can garner a rough revenue for their crop input business itself.

With MSRP’s for their corn and soybean products ranging from $13 to $17/ac, we can pick a rough average of $15/ac.

If they are “north” of 1 million acres, we can put the number at about 1.1million for this exercise and do some basic multiplication:

$15 x 1,100,000 = $16.5 million in revenue from their SOURCE product line. This doesn’t include any revenue from their breeding platform.

Im not an expert in finance and VC so I don’t know what the post-money valuation would be, but given the fact they have raised over $150 million in total now, and considering this raise was $75 million, I suspect they are valued somewhere around $300 million (give or take). A large valuation given the estimated sales. That isn’t a surprise in the N fixing space though. In 2021 when Pivot Bio raised they were on 1 million acres at a rough price of $20/ac, meaning an annual revenue of $20 million with a valuation north of $1 billion.

What exactly is their SOURCE product?

In corn the ingredient is maltol lactone and in soybeans the ingredient is polyphenolic flavanol which fall under the category of strigolactones:

strigolactones are signaling compounds which serve as endogenous hormones involved in the control of plant development and as components of root exudates which promote symbiotic interactions between plants and soil microbes.

The mode of action means there is likely to be inherent variance in performance depending on conditions because they are reliant on exudates of the plant which are going to be influenced by weather and soil biological activity which can vary depending on things like organic matter, to pH.

The effects of maltol lactone are stated as such:

Source is referred to as a microbial enhancer because upon entering plants, it sends a cascading signal to corn plant roots that stimulate N-fixing and phosphorus-solubilizing microbes in the soil to improve nutrient availability.

There is some work done on strigolactones increasing N availability in the soil due to increased activation and symbiotic relationships of arbuscular mycorhizzae, shown here. So there is some legitimate science backing claims from Sound Agriculture, where they state they increase N availability by about 50lbs/ac along with increasing Phosphorous availability.

Their primary route to market is through independent dealers in the USA.

The N fixation category will continue to be one of the most interesting areas of agriculture to follow and it seems as though Sound will continue to be a company at the forefront of the space.

Other Raises this week:

Agrology Raises SEED Funding - Business Wire

BeeHero Raises $42 Million Series B - Business Wire

Naïo Technologies Raises 33 Million - Naio

6. Amvac Interview: Acquisitions are a Key Part of Our Growth Strategy - ChemWeek

This is a good interview with AMVAC COO, Bob Trogele.

Here are a couple of my highlights:

Our GreenSolutions line of biologicals is currently 10% of our overall revenues. However, it is growing quickly at a compound annual growth rate (CAGR) of 20%, especially in international markets.

This is in-line with other major crop input manufacturers and ahead of the forecasted market research. For context on the 20%, FMC stated in their 2021 annual report that they grew 19% and the general market research forecasts hover somewhere between 8%-14% depending on your organization of reference.

Albeit, the number is still quite small on a relative basis for them:

Amvac surpassed 1.2 million acres (485,622 ha) treated with GreenSolutions in North America, which is a milestone for us. We have high expectations for GreenSolutions and anticipate it being a major growth driver for us for many years to come.

And on their acquisition efforts:

Amvac is always looking at acquisitions and partnerships, and we have a successful track record of execution. Acquisitions have been a key part of our growth strategy, and likely will be so for many years to come.

Along with touching on SIMPAS:

AM: Are you banking on outright sales for SIMPAS, or will there be a subscription-based model as well? What is your revenue model from SIMPAS over the next few years?

BT: The SIMPAS hardware is sold by Trimble and its dealer network. Licences can be provided to third parties. Our revenue model for SIMPAS is based on a price per acre, which is derived from prescription requested by the grower.

AMVAC reliance on China:

We currently source between 10% and 15% of our needs from China. Therefore, we are on the lower end in comparison with our peers. Hedging involves several tools including multiple suppliers, if possible, loyalty, and contracts in a strategic relationship.

I haven’t touched on the AMVAC business in depth in about 18 months, but here is the last time I highlighted there business with any sort of depth: American Vanguard 2020 Investor Presentations Highlights and Analysis - Upstream Ag Insights

7. ChatGPT and Agriculture

GPT Chat, an artificial intelligence language processing model developed by OpenAI has taken the internet by storm over the last 10 days.

I have often wondered what could potentially displace Google as the knowledge engine of the internet, and while this would not be immediate or absolute, it becomes a good example of what could eventually displace search engine dominance.

There is not necessarily a direct applicability to agriculture today, however, the most notable aspect in my mind is the progress artificial intelligence is making and what that might mean for the industry longer term when we think about augmenting agronomists, developing decision support and how agribusinesses can integrate AI effectively and differentiate their offering meaningfully.

The key agriculture angle is how it can augment agribusiness professionals today: AgriMarketers wanting to create basic blog posts, copy ideas for a product or a script for a radio placement or podcast. It could be leveraged by sales reps wanting to generate email templates, or senior leadership wanting to streamline an email on change management.

Here is a basic example:

I hesitate to say that it generated “good” copy, however, it was generated the above in about 5 seconds and if you are looking for ideas it can pump out the examples or basic templates to build from at a rate the human imagination simply cannot.

8. Finding Asymmetric Upside in Ag Retail and Agribusiness - Upstream Ag Insights

Last week I received a bunch of feedback regarding this article so I wanted to re-share again.

Non Ag Article

Expertise - Seth Godin

Below is the entire blog post from Seth Godin, which I think is a great one!

In a competition between someone who knows the most and someone who is willing to learn the most, the edge usually goes to the curious and empathic professional, not the one who is simply protecting what’s already known.

Curiosity is a really basic, but important competitive advantage for agribusiness professionals. I think it’s important to have a system in place to ensure there is a constant progression of knowledge.

A basic framework I follow surrounding this personally is the 10% Rule:

The 10% Rule

Learning and continued self improvement is a continuous aim of mine. To keep myself accountable, I developed a simple framework.

I think it is an adaptable framework for any one as well, no matter how busy.

Some take experience as it comes at them, some take opportunities if they are convenient & some show effort for short bursts of time.

None of these are a recipe for prolonged personal or professional growth.

Just like our muscles need to be consistently pushed and worked out to be healthy; our minds need to be consistently stretched to grow.

The framework I use to help accelerate my own learning breaks out like this:

3% of annual income + 7% of my time devoted to learning, networking and getting outside my comfort zone = 10%.

Breakdown

Someone with $75,000/year salary would invest $2,250 in themselves through books, e-mail subscriptions, courses etc. ($75,000 * 3% = $2,250)

168 hours/week x 7% = 12 hours/week.

This equates to 12 hours/week devoted to reading, consuming subscription emails, taking courses etc that the 3% expenditure bought to ensure a consistent focus on developing.

This framework ensures consistent investment in oneself.

Understandably, not everyone can afford that sort of financial investment or time commitment, but I highly encourage you to adapt it to what works for you.

For example, try a 4% rule: 1% of income and 3% of time.

The point is consistency & holding oneself accountable for it weekly or monthly.

With the constant progression in technology, convergence of industry and science and continuous demands of people, our only real option as knowledge driven professionals is a constant commitment to self improvement. With that I always have this quote in the back of my mind:

We are only limited by what we’re not willing to take the time to learn.

Other Ag Articles

How Agriculture Can Capture the Carbon Market Opportunity - Crop Life

Cargill Names Brian Sikes as Chief Executive - WSJ

Exploring the Future of Digital Agriculture - Farm Progress

Arable Unveils Mark 3 and Arable Vision - Business Wire

State of the Farm 2022 Report - Bushel