Upstream Ag Insights - June 14th
Essential news and analysis for agribusiness leaders for the week of June 14th, 2020
|Shane Thomas||Jun 14|| 3|
I started a YouTube Channel this past week. Primarily, I’ll post sporadic thoughts about agribusiness as well as record a summary of the current weeks written Upstream edition.
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I highly recommend reading this report from AgCareers.com.
Last week there was the announcement about the new insurance product offering from Farmers Edge. This week I stumbled on another announcement that happened a few weeks ago, but made me consider questions around strategic partnerships, investments or acquisitions in ag tech.
“Insurance Australia Group Limited (IAG)is the largest general insurance company in Australia and New Zealand. The Group’s businesses underwrite almost $12 billion of premium per annum, selling insurance under many leading brands. IAG, Australia’s largest general insurer, made the investment in Digital Agriculture Services (DAS) through its $75 million venture capital fund Firemark Ventures”
Insurance is very traditional industry. Some parts of the world aren’t even able to acquire insurance. Other parts of the world can obtain insurance relatively simply, but the simplicity, speed and accuracy of adjustment leaves a lot to be desired. Digital tools can help with all aspects of this.
Insurance Australia has taken a position indirectly through their venture capital fund.
There’s three ways a company can begin to play in the digital space (insurance or other wise), all different strategies with pros and cons:
Acquire outright (M&A)
Take a position via venture fund
Acquisition enables acquisition of many kinds of resources: human resources (intellectual capital), intangibles (like brand names), technological resources (patents), physical resources (manufacturing assets) and financial resources. Whenever companies have to choose between acquisitions and alliances, they must begin the process by examining key resource related issues.
However, acquisition requires significant resources: capital, time and energy on integrations and directions, more overhead and a need to run a profitable business that may support your core business but have some adjacent focuses.
Strategic partnerships are capital light, typically having no/minimal capital requirements. However, the organization may be focused elsewhere, support may be weak or cultures may clash in working together. This would typically entail the non-digital organization paying for the services to the digital organization.
Venture enables components of both worlds (plus a potential return), however, it may not be the right route either. You get a seat at the table to learn, can slowly integrate their product into your business and see if they fit/work, however there is still the issues the same as the strategic partnership where they may have other focuses that trend away from your core business.
M&A makes sense if many of the target’s products and services can benefit from the acquirer’s capabilities. Those that don’t fit could be candidates for divestiture. This generally isn’t the case in an example of insurance like above.
One other rule of thumb can be that a partnership may be preferred if the target companies products and services don’t provide independent value when combined with the acquirer’s capabilities system. In this situation, the target’s products and services could be bundled with the acquirer’s products and services.
While every situation is unique, and the above is overly simplistic and doesn’t give any strategic direction from an insurance company perspective I lean towards a strategic partnership or venture in the headline story, as they did. Being able to learn from the digital organization and access their technology and products is beneficial versus acquiring in it’s entirety. Or being able to simply add a cost to their P&L if partnering on a recurring basis to access the use of the technology, while the technology assumingly gets updated and improved is of benefit for the organization.
Watching the moves of large incumbents over the course of the next 2-3 years with digital and other technology companies will be interesting to watch.
I really like this post from Seana Day and highly recommend giving it a read. Plus the visual is useful to contextualize what companies fall where, whats going on in each category and delivers some new opportunities for researching.
“Agtech” encompasses so much. Every single day I question my use of “agtech”. “Farm Tech” is more appropriate for what I emphasize, but I have to acknowledge I am primarily focused on “crop tech” within that.
In reality, it is messy on the farm and in the supply chain. Many of the traceability, remote sensing, and data integrators play in both camps. They offer solutions to both farmers and supply chain partners, so don’t be offended if your favorite AgTech category or company now appears in the new Food Supply Chain Tech landscape
The FarmTech sector is still waiting for a big data platform leader(s) to emerge, and it requires significant capital investment and domain focus, but it feels like we are moving ever closer to a world of interoperability and integrated “systems of systems” than any time before.
Digital Agronomy and Production: encompassing much of the IoT, robotics, and automation, and remote sensing activity;
Planning and Farm Management: intersecting across digital agronomy, resource management, and business planning and execution; and
Market Access and Financing: tools and technologies used by farmers, farm managers, and crop buyers to access markets and financing.
Determining macro categories in a space as complex as farm tech wouldn’t be easy, but I think these are excellent.
If you think about the investments in massive datasets, 53% of the $836 million invested in Farm Management Software, Sensing and IoT went into just nine deals in 2019…all in aerial remote sensing companies. I think this suggests that we are getting a feel for the power of scalable data sources
The area that excites me the most in tech is this category, because of the opportunity for scale (check out the overview on it from last week).
Business models are still in their infancy, and the appetite is cautious for funding substantial infrastructure investment with an unclear timeline to adoption or profitability
I think of note with this line to is that we are seeing business models to increase the adoption rate - whether it is with autonomous tractors or digital agronomic tools, the emphasis is to decrease the cost load up front to facilitate adoption and increase product functionality through increased data acquisition. I’ve talked about this consideration using solar energy as one example here before.
This concept interests me. I have mentioned several times I am not the biggest fan of the term “soil health” from an agronomic productivity perspective. On top of this the measurement accuracy of soil carbon and soil health isn’t the best. This concept though looks to create benchmark standards between non disturbed and disturbed land which is a compelling start.
Determination of a benchmark that defines the true magnitude of degradation and simultaneously sets potential soil health goals will optimize efforts in improving soil health using different practices. We discuss a new term “Soil Health Gap” that is defined as the difference between soil health in an undisturbed native soil and current soil health in a cropland in a given agroecosystem. Soil Health Gap can be determined based on a general or specific soil property such as soil carbon.
When we look at the discussion around soil carbon and soil health, there are often two pieces of technology that get referenced often: precision/digital agriculture and biologicals.
While there are many benefits to biologicals in terms of the length of protection some of them can potentially bring to crops, unique modes of action etc, there is a significant emphasis towards how they contribute to decreased fertilizer usage and synthetic pesticides. Because of this, they are emphasized to grow:
Precision agriculture, driven largely by sensing technology and data capture contributes as well:
Putting the right amount of products in the right places - whether it be crop protection or fertilizer ensures that the GHG emission/run off (or whatever else you want to measure) is decreased on a per unit of production basis (eg: Kg CO2e/ bushel).
But this is continually tricky to measure and manage:
Farmers can access additional income through either leveraging a market premium on their produce or through sustainability incentives such as conservation credits. In the future, this range of sustainability-related incentives may expand to include favorable land-lease terms and insurance packages. The key to accessing these income sources lies in farmer’s ability to provide verifiable proof of it — using digital records in farm management software and machinery “as-applied” files.
Verification is resource heavy. However, through collaboration of technology companies leading to the connected farm (and supply chain) and traceability initiatives this will empower further ability to unlock new revenue streams or new markets.
For more on this check out this overview from Mckinsey - I did include in last weeks edition as well, however, it fits nicely into this overview as well for those that missed it:
As discussed in the May 24th edition of Upstream, FMC is launching their own digital tool targeted at pest prediction.
Some companies are building out entire ecosystems, while others are focused on building out tools focused on helping the farmer with one specific area of their operation:
Angeli stresses that they’re having ongoing discussions with larger channel partners to determine how best to make the information available to help decision making on the farms they work on. They also are committed to using an open API to channel the data through as many systems as possible. “We are not building our own ecosystem here,”
FMC is focused on specific tools with integration capabilities. However, no farmer, retailer or agronomist wants to have 37 different apps on their phone to check: they want everything in one convenient dashboard. This is where there needs to be a focus on building out API’s, but also a way to integrate the product sale tighter into app utilization. FMC will not simply build out an app and API’s and hope the sales come; there will be an emphasis to tie this together in a way that delivers attribution from app use.
Consider Corteva. Corteva has focused on building out these types of tools too, however, they also have their own ecosystem in Granular to tie everything back to, plus their own seed business with direct to farmer distribution to drive through (and integrate sales through). With their own digital agronomy tools, eco system and distribution network, they can integrate everything together nicely:
In general, requests (for online purchases) were up 60% in March overall (compared to March 2019),” he says. “But it accelerated when COVID-19 came along. In the period from March 10 until the end of March compared to the same period in 2019, we saw a 225% increase in buying requests from farmers, which is pretty dramatic.
When you factor all of this in it makes sense, and the fact Corteva has financing, that Corteva would look to offer online purchasing mechanisms and ways to transact in the future because of this robust infrastructure.
Back to FMC: They have a strength in insecticides, but other major manufacturers have new insecticides in the pipeline as well and the same capabilities to create competing tools that integrate further into their eco system and network. This shows another reason why FMC is attempting to move fast to integrate this app into their partners systems as well as create others.
When you think of Yamaha, you don’t typically think of agriculture. However, when Yamaha thinks about it’s future, agriculture is a part of it.
“We got started about five years ago with the mandate of exploring the next frontier for our parent company,” Paul says. “Our company sees the importance of investing in new markets, and in 2016, we identified agriculture as a big area of focus.
The focus is to look at opportunities where Yamaha could leverage existing technology and move to areas that would resonate with the company’s core mission.
Last week I highlighted a podcast that featured Colin Steen, Managing Director of Syngenta Ventures. I find the overlap, yet differences between investment thesis’ to be of interest.
For Yamaha, their first consideration is:
“Does this company try to solve a major social problem in the next 10 years?”
For Syngenta, while I am imagining they emphasize social aspects too, the quote that stuck out to me was this:
“When I think of investing opportunities, it’s all about how does the farmer get to be more profitable — how does this make them make more product, and help put food on the table”
It makes sense that when Yamaha comes to mind, you automatically think motors, robotics and autonomous opportunities in agtech. But when you consider the above quote from them, their initiatives to dive deeper into the production aspects make a lot of sense:
“We’re saying we don’t just want to be a hardware robotics company; we see the importance of data picked up from the field”
Yamaha made a recent investment in The Yield Technology Solutions Ltd., an Australian company that manages data for irrigation-intensive crops. The Yield will be focused in the Australia market, but its technology will move into North America in the future.
Agriculture uses ~70% of fresh water globally:
Source: World Bank
So when we think of social impacts, water it right at the core.
Yamaha isn’t the only non-traditional ag company investing in the agtech space. Whether you think about Amazon, Microsoft or Google as a few examples, they are all investing as well.
Because of the chart you see above on global water use in agriculture, water is important. That’s of course why irrigation technology gets a ton of emphasis.
Whether it is modelling crop utilization, evapo-transpiration, or using microwave sensor technology to create real time moisture maps, there is a ton of opportunity to make better water decisions that mean less water use and increased production aka water use efficiency.
What does this look like?
“Valley is working on “a truly autonomous pivot” through a partnership with Prospera Technologies”
Or it could mean malleable production zones in precision agriculture, creating adaptive or dynamic production zones vs. static ones we see today in order to more effectively allocate resources and increase water utilization.
The value of irrigation and moisture sensor technology cannot be understated.
Last week I shared Agbio Investor’s Seed Consolidation document and this week have included the AgroChemical one.
I always enjoy learning from experienced ag industry professionals on their approach to business or approach to investing. John Lansink is a serial entrepreneur and current GP at Ag Capital Canada (ACC). I enjoyed listening to him talk about ACC’s targets and approach to investing in this video.
When technology has a clear return on investment, adoption can be quick. Unfortunately, some of the benefits of new technologies being brought to agriculture may not be attractive or seem beneficial to a farmer at first glance. Artificial intelligence is one example. A financial incentive would be useful to spur the adoption of these tools.
Growers Edge and Arva Intelligence have announced a new partnership aimed at improving adoption rates among farmers by offering data-backed ways to remove the financial risk of deploying new technologies.
This announcement was in Upstream last week, however, the title of this specific write up caught my attention. Adoption is a significant hurdle and will continue to be for many companies within agtech even given the times we are in where we have seen e-commerce, tech enabled communication and remote sensing technologies gain traction.
If risk is decreased, we could see increased adoption. However, there are still many other issues: connectivity, variation amongst farmers, data privacy concerns, costs, systems integration and more.
Below I have my simplistic scorecard and I do think risk mitigation plays into it (ROI).
I tend to think of about adoption of digital products through an (overly) simplistic lens:
Ease of Use (including reliability) + ROI (repeatability + quality) = Adoption/Retention
Ease of use - How simple is it to put into practice? How simple is it to manage? Does it require organizational or process reconfiguration? Is the product glitch or bug prone? How reliable is it without internet connection?
ROI - The repeatability and quality (how high of an ROI) are important to factoring uptake. How many years out of 5 can you expect an ROI? In those instances, how high will the ROI be? 3:1? 5:1? Higher? This can be tricky to determine right off the hop, but if you have organizations that can logically show you what the ROI will be without having it based on meteorological factors for example, it typically has a better chance of consistently obtaining a strong ROI. Of course total up front cost is associated with this as well and where a risk mitigation product could be beneficial.
If you score both of these on a scale of 1-10, you can get an understanding of potential value of a technology. The closer to the 20, the better the uptake. When I think of a 20, I tend to think of auto steer.
Now, the kicker is you need to use it in many cases to understand it so it’s better as a general guideline, but as a model for an organization to think about when assessing partnerships with technology companies, it is a quick and dirty assessment. One tool that can help to assess is Precision Ag Reviews, giving some more context to the consideration.
This below article relays into adoption as well giving context whether you are a decision maker in a B2B setting or a farmer that fits into the above model:
“In the Knowledge Stage, we are searching for information and recalling the information that we have found; we are integrating and comprehending that information and the messages that attend it; and finally, we are sifting and sorting that information which we need for adoption
In the Perception Stage, we are establishing our likes and dislikes about the innovation; we are actively engaged in discussing this innovation with associates and friends; we are resolving our confidence and acceptance in the messaging we are receiving; and we are forming an image and label for the innovation that will support our acceptance or decline of the innovation.
In the Decision Stage, we are intentionally taking action to gather more information and examine the buying/trial portion of this process
In the Implementation Stage, we are using the innovation on a regular basis and applying it often; we are examining other uses and beginning the reinvention of the innovation for use in other applications; and we are continuing the selling decision process repetitively and recursively within our communities of interest.
In the Confirmation Stage, we are recognizing and promoting the benefits of the innovation; we are participating in communities of interest and discussing and applying it in new and recently re-invented applications uncovered in our communities; and we are incorporating and integrating it into the processes and procedures of our business/ life.”
“According to the 2020 CropLife 100 Mid-Year Survey, when respondents were asked to rate their financial outlook for the agricultural year at the midway point on a scale of one to 10 (one being worse, 10 being best), 80% still believe it will be better than a five. Broken down, 45% of respondents see the 2020 growing season has rating between a five and seven in terms of overall growth, down 14% from the 2019 CropLife 100 survey results. But 35% now rate 2020 as being an eight to a 10 in terms of growth, up 12% from the December findings. The percentage of ag retailers rating the 2020 growing season between one and four on the 10-point scale has risen only slightly, 2% to 20%”
Swarm farming is the concept of utilizing multiple smaller robotic platforms to autonomously conduct farming operations as a substitute to large manned agricultural equipment
Key drivers for the motivation in swarm farming include decreasing number of people engaged in agriculture, sustainable crop production methods for environmental sustainability, potential negative effects from soil compaction when using larger ag equipment, increasing size of farming operations, and rising average age of U.S. farmers.
This also is aligned with the below framework in regards to the progression of autonomous:
Tomorrow's Technology In Use Today - 3 Levels of Autonomy
The first level that most farmers are already using and don’t even realize includes combines that automatically adjust harvest settings on the go without the operator making any changes. Examples would include header height adjustments or reel speed changing automatically.
The second level is connecting ground conditions to equipment operations, such as utilizing hydraulic down force pressure systems on planters.
The third level of autonomy includes driverless vehicles. These systems are already here and are just beginning to be adopted - the vehicles make adjustments based on information received from GPS technology and sensors. They have the ability to be remotely controlled, as well as shut down for safety purposes.
With autonomy comes unique business models. As a service is a model that is being looked at throughout the entire agriculture industry, by incumbents organizations to start-ups. It is beneficial for a number of reasons - better aligned incentives between provider and buyer, less expensive upstart costs, a balance sheet break and even recurring revenue from the perspective of the corporation.
Servitization or pay-as-you-go services is a sector with huge potential to jump-start the mass adoption of agtech by helping farmers overcome the burden of introducing new technology into their operations
The pareto principle is out the window in this instance! Cool visual below:
Other Ag Articles
6 Forces Rewriting the Rulebook for Global Agriculture - AgProfessional
Canadians Looking for More Home-Grown Tech Solutions - Future Farming
Non Ag Article
Bundling is central to most industries creating more value for their customer base and enabling companies to better manage their own costs and maximize their own revenues. This is definitely the case in agriculture as well.
But bundling often gets a bad rap. This white paper and podcast illustrate some of the realities of bundling and give some interesting perspective and frames surrounding it (or worst case scenario you’ll feel better about your cable bundle!).