Upstream Ag Insights - July 12th
Essential news and analysis for agribusiness leaders for the week of July 12th
|Shane Thomas||Jul 12, 2020||4||1|
I hope everyone is having a great weekend! Welcome to all the new subscribers from the past week. Thank you to all of you who have shared Upstream with your friends and colleagues of late!
AgTech Hasn’t Expanded Markets like Consumer Tech Has
One thing I’ve been thinking about lately is why agtech hasn’t seen sizable exits or IPO’s. Having had conversations with my friend Matt Coutts, seeing rumblings on Twitter and having sporadic questions had me think on it a bit more. I am by no means the best person to have a thought on this and I welcome others to send me an email with their comments.
Here are a few of my thoughts:
Lack of scale - Consumer products scale much better, companies like Instagram or Uber can fundamentally be used by everyone all over - agtech doesn’t have that same benefit. Mid western corn farmers are different than Pacific North West cherry growers who are different (and have different challenges) than western Canadian canola farmers. This limits robotics and digital technologies. Farmers are much more fragmented and are simply not the same everywhere, not to mention connectivity variability in rural areas, but also connectivity among other digital technologies. There is also a longer time to scale, with longer feedback loops (growing seasons…this also influences adoption rates) so we see time to meaningful scale (and strong revenues), and therefore exits, expanded out beyond 5 or 6 years and into 10-12+.
The major agtech investments have only happened in the last 7-8 years!
Not to mention reaching that agtech scale looks different than many consumer unicorn based businesses because they require boots on the ground and infrastructure, like sensors or other expensive (and depreciating) assets.
Lack of Product Market Fit - Ability to offer value in the market place is paramount. Often times we see technologies that do not deliver enough value to justify the cost, effort or hassle or they are extremely niche. This isn’t just for the farmers, but even the B2B segment where promises to make traditional farmer supporting organizations more effective have not come to fruition either.
Few potential acquirers - There are only so many organizations in the ag space that would be able to acquire start ups and as I have seen Seana Day and Gabriel Wilmoth allude to in a twitter conversation, a lack of middle market agtech consolidators with a viable balance sheet to tackle acquisitions. An example I do see of this occurring is with TELUS in Canada beginning to acquire/invest in numerous technology companies in the agtech space, some of which that can be synergistic to one another (eg: Decisive Farming and Hummingbird Technologies) and synergystic to their core business of connectivity. These acquisitions are smaller in nature though. This is consistent with a lack of private equity rolling up acquisitions into one meaningful offering. I think there is a private equity-esque play that we could see in the future.
Overcrowded and Commoditized- There has been numerous start ups, an explosion one might say, in the agtech space in the last few years. This has lead to numerous investments, records actually according to AgFunder’s reports, but lots of these technologies are redundant. There are only a few “unicorn” organizations in ag. In order for any of these organizations to IPO, they need to be increasing their actual revenue (likely beyond $100 million), have a roadmap to grow towards $1 billion in revenue in the coming years, be cash flow positive (or neutral) and have improving unit economics just to name a few considerations. When there are redundancies it’s tough to build up any sort of meaningful scale and the attempt to build up scale often commoditizes the organizations efforts.
What we haven’t seen done in farming and agriculture is market expansion either. Markets have expanded, but not in the same way tech companies have changed consumer spaces. Take for example AirBnB, there are now more AirBnB rooms in Paris than hotel rooms! When AirBnB started they were going after a small market - over crowded cities (San Francisco) with conferences selling out hotels. That market in and of itself doesn’t enable a multi billion dollar valuation. What gives AirBnB their teeth is that they have expanded the demand for open beds in cities, decreasing the friction for travel and the cost to travel and doing so with very low overhead. Similar can be said for Uber in that they didn’t just take out the high end black car market, or the taxi market - they upended public transit and even purchasing of cars! That fundamentally changes their total addressable market.
Now consider this in farming - has anything like this been done? Indigo (and others) is trying to expand farming into “carbon farming” (but it’s also been attempted before), some organizations are increasing the use of of digital tools like imagery - but it hasn’t quite stuck or influenced farming in the same way as AirBnB for example. Farmers Edge* is moving in this direction with expanding digital tools beyond agronomic uses into finance and insurance - multi billion dollar industries that have opportunity to expand their product offering, customer experience and business/product lines.
Will we see market expansion in agriculture in the future? Is this what is required to begin to see IPO’s or larger exits in the space?
*I am employed by Farmers Edge
This is an article out of Purdue over viewing the approaches to ag retailing that have been evolving:
(1) the retailer-farmer online-only marketplace (no physical presence);
(2) the manufacture-farmer direct online sales;
(3) the retailer-farmer omni-channel experience (both online and physical presences).
Based on this analysis, it seems the omni-channel model would have an edge as long as the price premium between omni-channel and the other two options does not become too wide
I find this quote interesting. It seems to insinuate that one route can win out so to speak.
I do not inherently disagree with the point made, but I think this is an opportunity for a more nuanced discussion that I’ll go about simply with questions.
An interesting aspect that this article doesn’t touch on is the last mile distribution of the non-omni channel routes - in many cases they need bricks to get physical product to farmers.
Does any particular type of retail “win”? Or do they each fit a specific niche in the market? At least to start.
What product segments may have a fit for online? Glyphosate for example that requires little service, is bulky and consistently used so may be a product more consistently purchased online. Fungicides, which can be more reactionary, to pull the trigger or take back, often require agronomic expertise so they may stay primarily as a purchase from a brick and mortar retail.
Another factor is how do these two other types influence the omnichannel retail? They will unbundle a lot of what the omnichannel retail bundles - service, product lines, or event different business lines (eg: crop inputs and fuel). This influences margins and customer retention.
If there is uptake of the other retails/routes to market, how does that influence the traditional omni-channel retails profitability?
Zeroing in on e-commerce and taking a look at traditional retail now to put things in perspective. Today about 12% of commerce is done online , peanuts right? Think about the carnage this small percentage has had on traditional bricks and mortar retails; Sears, Toys R Us, Radioshack bankrupt just to name a few, plus many others struggling. When you are dealing with significant overhead costs, a fine line on inventory and tight margins, losing access to a small percentage of customers to online stores can hurt.
In traditional consumer retail we see challenges for bricks and mortar retails once you approach the ~15% range of their product lines being sold online based on their cost structures.
Do ag retailers need to think about cost structures NOW? Re strategizing their product lines and offerings? Initiating service offerings? Changing how they bundle product offerings? Re-thinking the entirety of their go-to market strategy? Or are there enough synergies from integrating the physical and digital store fronts?
Can an omnichannel player evolve their strategy to become platform-like and serve farmers, manufacturers and their shareholders (eg: Nutrien..) in a unique way?
I have opinions surrounding all of these questions and more, but they are very nuanced.
I like to use Clay Christensens “jobs to be done theory” to think about this, and briefly it goes like this:
There are different types of farmers - business savvy ones, service focused ones, price conscious ones and relationship focused - or some combination of all of those.
What does a retail offer? The basics: knowledge, services and logistics to fulfill those different types of farmers needs of products, information and services (lots falls into those 3 pillars though).
What “job” is each of those different types of farm customers needing? How many are there of each? What’s their acreage? How can you fulfill those needs for them better than a competitor and just as importantly, as cost efficiently?
This will help retailers identify what segement of the market to go after, or access.
I have started a post on Porter’s 5 Forces assessment of ag retail that I think fits into this conversation well, hopefully you will see that next week.
Venky Ramachandran always has unique perspective on the world of Indian ag retail. While there are many things that vary between Indian ag retail and North American ag retail, there is also overlap. One of the tools that Venky laid out in this article is a 4 x 4 Quadrant that enables a framework in which to think about how a retailer wants to add value, or looks to compare how they line up to other retailers/competitors along the lines of their values and what they wish to deliver to their customers.
Venky lays out this quadrant using Paid/Free and Low Touch/High Touch. This can help to identify where you as a retailer fall and what your niche is and why. I think it goes hand in hand with what I mentioned above.
While this quadrant is using Indian companies:
I think if we were to generalize North American retailers we would see the majority of them fall in this sort of range where the red ‘X’ is (somewhere in the lower right quadrant):
While each company tends to segment customers and would adapt their offering and initiatives within this, most companies would attempt to put themselves towards this ‘X’ spot because that’s where they feel they can increase customer experience and margins. But that leaves gaps in the market place for organizations to identify their niche and serve the customers who they feel are over served, or under served.
It’s important to note there is no good or bad in these quadrants; none are inherently better than the other, it’s how a retailer executes on that type of offering and insuring you have identified the right customers, there are enough customers and your assets, knowledge and staff base aligns with where you fall.
This exercise can be overly simplistic, yet exceptionally insightful as part of a larger strategic initiative.
Drones in Farming
Drones came in blazing onto the ag scene ~10 years ago, promising to change the agricultural landscape with every farmer and agronomist using one along with the thought that satellite imagery wasn’t going to be useful. Then some of the challenges set in surrounding scalability and regulation - excitement slowed.
There appears to be a rejuvenated excitement in them as new technology (automation, size and capabilities), regulation and positioning surrounding them has come into play, as I’ve talked about in this popular Upstream Ag Insights edition.
This discussion surrounding them brings to mind a popular graph:
The Gartner Hype Cycle
It seems we (or maybe just me) can now place drones on the lower part of the “slope of enlightenment”. We have begun to identify their fit, specific use cases and have come to the reality that they are not going to eliminate satellites or larger crop sprayer equipment, but be ancillary to them, the “right hand” so to speak; delivering value in other ways that empower not only farmers but ag professionals and agribusinesses.
Here are some of the popular drone stories this week:
As far as we’re aware, Corteva has the largest commercial fleet of drones with more than 1,000 pilots
DroneDeploy has grown into a leadership position in providing data management for those that do put these flying data gatherers to work
To put the rise of drones in perspective, from 2018 to 2019, the company saw a 32% increase in drone flights across agriculture, and a 55% increase in agriculture acres analyzed by drones. And despite the coronavirus, DroneDeploy has seen a 39% rise in drone takeoffs and a 33% increase in takeoffs across U.S. agriculture users from mid-March to mid-April.
Related: Corteva Flight
Having numerous drones per field can help manage the efficiency and work load and offers unique service offerings for companies looking to scout, spray or monitor fields.
After a lot of work with the U.S. Federal Aviation Administration, Rantizo has gained permits to operate legally with drone swarms in rural areas in the lower 48.
Agtegra is already offering a service with drones for their farm customers.
According to AgFunder research, drone tech reached its funding peak five years ago, when investors committed $326 million to startups promising an agricultural future where skies were filled with super-agronomist drones, capable of mapping or spraying fields with unprecedented efficiency and precision.
The point from AgFunder reinforces that peak hype (“peak of inflated expectations” happened ~4-5 years ago and declined since. While I don’t think it was all coronavirus that drove the increased uptake (see quote further above from Drone Deploy), it still is propping up the interest and uptake, something that we shouldn’t see decline because of the decreased regulatory burdens and increased technology capabilities.
I have covered corporate venture capital relatively regularly. And I talk about R&D from these organizations often as well. But what UPL is doing is slightly different.
Just recently we opened the doors to our new OpenAg Center in RTP, USA as part of our efforts to attract partnerships with promising start-ups to characterize and bring new technologies to market.
We’re working with innovative entrepreneurs and partners to rapidly onboard and evaluate new technologies. Working together, we’re breaking down traditional barriers and significantly speeding the process of getting new technologies tested, approved, and out in the field. Through this type of collaboration, we believe we can accelerate innovation and transformation.
UPL is offering resources to support start-ups, in almost a tech accelerator like fashion. This approach is somewhat unique among the crop protection manufacturers; some have partnered with accelerators, but building a facility to essentially cultivate their own is unique.
150 Most Recent Crop Protection Active Ingredients
The breakout looks like this by molecule type:
The chart goes back to 2004, meaning since 2004 there has been a discovery of 150 new molecules. Many of these are in commercial use already too.
What came as surprise to me was how many of the discoveries came from non big 5 organizations. Mitsui, Nissan and even Sumitomo (who had 12) had a significant number of discoveries.
How did it break out by the top 5 crop protection manufacturers?
Bayer Cropscience (one includes a nematicide by Monsanto) clearly had significantly more molecules discovered in the time frame.
While absolute numbers are interesting; how these organizations end up packaging these in conjunction with their other molecules, biologicals, digital offerings and seed/traits will drive much success. With that, Bayer has been very transparent about their R&D and their road map. They have actually shared their R&D Pipeline and have discussed their 5-way herbicide tolerant traits that are raising questions among experts:
This compelling pipeline along with the show case that they are punching above their weight class in terms of molecules discovered indicates exciting years ahead for their portfolio and the solutions they’ll offer growers gloablly.
Big 5 companies breakdown by molecule segment:
There are a number of ways to analyze it, when looking at it from the last 5 years perspective the big 5 are all very close in terms of total molecules in the pipe.
A couple other points:
FMC has 3 new herbicide molecules, 2 of which are new mode of actions that have a fit in North America.
Corteva has 2 new fungicides with unique modes of action from the picolinamides fungicide family.
I tend to reference stories and things occurring in Brazil in Upstream. While this article emphasizes why to invest in Brazil, it is a fascinating read just as an individual interested in agriculture. We are seeing significant expansion in Brazil from major agribusiness and have been the last number of years. There is lots of opportunities, and these opportunities are highlighted. They also highlight the challenges of agriculture in Brazil which gives a good perspective.
$40 million Series B round co-led by S2G Ventures, Skyline Global Partners, and Atlanta-based media and automotive giant Cox Enterprises.
Bunge Ventures, the VC arm of global agribusiness and food company Bunge, also joined the round – offering Johnston, Iowa-based Growers Edge a potential avenue into overseas expansion.
Growers Edge is looking to offer risk mitigation tools that will help to increase the uptake of new technologies in agriculture, and potentially help serve ogrnizations with new business models.
Growers Edge is interesting in that partnerships with other agtech startups, seasoned manufacturers or ag retailers is really where their business will thrive.
We know companies like Bayer Cropscience and BASF with xarvio are looking to deliver outcome based pricing plus Syngenta is offering weather based parametric-like insurance in Australia and the USA - does it make sense for Corteva to look at Growers Edge?
Record breaking crops always pique my interest. Specifically, some of the numbers that revolve around hitting them.
The new world record is 257bu/ac!
The crop was in the ground for 305 days from April 2019 until February 2020 - showing the growing season dynamics that influence these record yields. The records, specifically in wheat, tend to move between the UK and New Zealand based on their climatic conditions.
How many nutrients are required to grow a crop this size?
Blue = pounds/ac. Green = grams/ac. This is referencing the Taurus Nutrient Uptake Chart.
Obviously, the farmer did not put down this many pounds of nutrients and factors in New Zealand influencing nutrient use efficiencies and needs would be different than North America, but this begins to give an idea of what sort of nutrient needs there are for a crop of this size.
When you think about crops of this nature it shows that utilizing specific products and tools to manage becomes a high priority. There were micro nutrients applied and phased feeding.
His latest success was a result of trying new cultivars, switching to liquid nitrogen and monitoring plant health more regularly.
How he managed and monitored plant health was not mentioned. With that said, it becomes an easy jump to think about what tools would be useful for achieving this sort of yield: regular NDVI analysis via drone or satellite, soil microbial analysis to identify how to maximize nutrient availability, biologicals to manage abiotic stress, insect alerts, real time sap analysis sensors just to name a few.
Large yields emphasizing the most efficient use of resources is what really intrigues me. This means a better chance at profitability for the farmer and highlights the ability to better manage resources. With technology coming down the pipe like N fixation, enhanced biostimulants and superior genetics, it’s easy to see a time when the needs of nutrients and overall inputs will decline on a per bushel of production basis - a signal of progress in crop production.
FMC Corporation Partners with Nutrien Ag Solutions to Deploy Arc™ Farm Intelligence Platform in the U.S.
This isn’t a surprising move from FMC. In the June 14th edition of Upstream I stated that we will see FMC move fast to cultivate partnerships with retailers so they can integrate and get this Arc technology to market.
FMC Corporation has partnered with Nutrien Ag Solutions on a pilot program to use the new FMC Arc™ farm intelligence platform. This platform delivers real-time pest mapping and predictive forecasts of diamondback moth populations in brassica crops to Nutrien Ag Solutions pest control advisors (PCAs) in the Salinas Valley of California.
Nutrien as a partner makes sense. They have been vocal about aligning with suppliers, and have done so with the likes of xarvio already.
Other Ag Articles
The One Person AgriFoodTech Can Never Have Enough of Is… - Walt Duflock on Medium
COVID-19 pandemic: The Right Time to Go Online - Future Farm
Rabobank Expects Fertilizer Prices to Remain Low Over Next Six Months - World Fertilizer
Evolutionary biology has significant relation to business. I’ve long been enthralled by the Red Queen Effect and it’s application to business and strategy. Morgan Housel does a great job of bringing this relationship to life.
Competition isn’t like a football game that ends with a winner who can then take a break. It never stops. A species that gains an advantage over a competitor instantly incentivizes the competitor to improve. It’s an arms race.
Some advantages create new disadvantages. Most species tend to get bigger over time because big things are strong. But being big also makes you slow, clumsy, and unable to hide.
Evolution is the study of advantages. Van Valen’s idea is simply that there are no permanent advantages.