Upstream Ag Insights - May 8th 2022

Essential news and analysis for agribusiness leaders

May 8, 2022

Welcome to the 116th edition of Upstream Ag Insights!

Index for the week:

Deveron to Acquire Controlling Interest in A&L Canada Laboratories
Nutrien Launches Next Step Carbon Program with Sustainable Nitrogen Outcomes
Record Fertilizer Prices Drive Investors, Farmers to Microbes
John Deere is Shifting to Recurring Revenue- What Does This Mean for Agtech?
Farm Data Usage - Coming to Terms
UPL to Partner with Kimitec to Commercialize North American Biostimulant Products
Farmers Edge 2022 ESG Report
AgriDigital raises $25M to Grow the Value of Grain
AGCO Acquires JCA Industries
Solinftec Raises $60 million

1. Deveron to Acquire Controlling Interest in A&L Canada Laboratories - Deveron*

Deveron Corp., a leading agriculture data company in North America, is pleased to announce that the Company has entered into a definitive agreement (the “Purchase Agreement”) dated May 2, 2022 with certain vendor shareholders to acquire a 67% equity interest in A&L Canada Laboratories East, Inc. (“A&L”), with an option to purchase the remaining 33% following the three-year anniversary of closing. Total consideration payable to the vendor shareholders includes $42.8 million in cash and $7.5 million in the Company’s common shares (the “Acquisition”).
Enterprise value of approximately $73 million represents an estimated pre-synergies multiple of approximately 6.3x A&L’s 2021 EBITDA.

This is a compelling acquisition by Deveron. They started out as a drone based company, then acquired an analytics company (Veritas), then acquired a user interface/software platform (FarmDog) then began to acquire distribution for their product capabilities (independent consultants across the USA) and then got into soil testing labs via a joint venture with A&L. This outright acquisition of A&L labs creates not only a vertically integrated soil, data and agronomy services company, but positions them as having a depth of understanding when it comes to soil - which in my mind positions them in an interesting manner having a data layer on the soil side of things.

There is the plain and simple agronomic and precision ag benefits this brings to their agronomy consultants and the increased access to agronomists this now brings A&L. What is notable though is that Deveron has been focused on becoming an enabler of carbon programs through their soil testing process.

If we look at this excellent graphic put together by Seana Day of Culterra Capital, we can see that Deveron has essentially taken some modular components of this value stack: soil sampling, soil testing and remote imagery and integrated together along with the Farm Management Software layer:

This makes them valuable to integrate with for groups that might be doing MRV (Verification such as Regrow) or the Transaction layer (eg: Indigo) for example. Deveron should gain a cost advantage and become a logical company to approach for any organization at other layers of the stack to be able to deliver soil sampling and testing to this market moving forward. Given their analytics capability they acquired as well and potential other companies on the market they could acquire, it also could give them an opportunity to touch other points in the stack.

Related: AgriCarbon Market Map - AgFunder News

*Disclosure: I am shareholder in Deveron

2. Nutrien Launches Next Step Carbon Program with Sustainable Nitrogen Outcomes - The Daily Scoop

Nutrien’s Sustainable Nitrogen Outcomes program is open for corn, cotton and wheat growers, and outlines a specific parameter for participation: a 5% reduction in nitrogen rates. Additionally, growers can receive rebates on using enhanced efficiency fertilizer products.

What stands out to me the most with this is the fact a fertilizer company is actively encouraging farmers to reduce their fertilizer use! I think that reinforces the long term view of Nutrien on where the world of agriculture is heading.

I found this quote from the Nutrien Ag Solutions Director of Sustainable Ag Strategic Partnerships, Sally Flis, notable because it comes across to me as a jab at the Agoro Carbon Alliance, a wholly owned subsidiary of Yara who has emphasized going to farmers with essentially a 10-year program - something that I would be apprehensive about if I was a farmer as well:

The Climate Action Reserve Nitrogen Action plan we’ve based this program on is requiring farmers to reduce their total amount of nitrogen on a field-level by 5%,” she explains. “It’s a lot easier of a lift for farmers and an easier entry point to participate than other programs which require nine years of data and soil testing.

I have talked about the challenges of a company like Yara in the market compared to Nutrien because of the holistic approach to agronomy, services and boots on the ground capability they bring compared to their Nordic competitors. One thing Nutrien is also illustrating, or maybe just aligns with my view, is their understanding of the farmer: an easy to understand and simpler to implement approach over shorter commitment periods is likely to get more buy-in from farmers and trusted advisors.

Farmers will not get rich from this program by any means:

Growers can receive two financial incentives for participation in the Sustainable Nitrogen Outcomes program. First, they are paid $15/ton for emissions reductions in carbon equivalent tons, which is approximately 0.05 to 0.25 tons per acre.

If I am interpreting it right, that means the high end is $3.75/ac for the farmer.

The beauty of a target of reducing nitrogen by 5% is that when you have nitrogen use efficiency of only ~50% (percentage of N applied that gets into crop), that means there is an ability to cut rates slightly if we are utilizing N application practices that increase Nitrogen use efficiency even if only a little which will maintain, or grow yields/quality anyways.

This means leveraging the 4R’s and brings up practices like top dressing nitrogen closer to when the crop needs it or banding N for example. It could also mean using other products: nitrogen stabilizers or coating based products, ironically, like ESN from Nutrien. In fact, this is worked into the program:

If farmers use Loveland Products plant nutrition lineup, they can receive a rebate in using those products once enrolled in the Sustainable Nitrogen Outcomes program

So even though farmers may be cutting N rates, they also will be using higher value, high margin products that are equally valuable to enhancing farmer outcomes. Win-win-win for farmers, Nutrien and sustainability.

They don’t discuss the number of acres they anticipate, but their 2021 number was ~250,000 and with the ease of this program I suspect they’ll want to see a 3-4x number come in.

Related: Nutrien Q1 2022 Results - Nutrien

Record Fertilizer Prices Drive Investors, Farmers to Microbes - Wall Street Journal

I talked about inflection points in September of 2021 in regards to biologicals and precision technology due to rising costs of fertilizer, highlighting that this is the first time there has been a significant economic incentive to drive adoption around these technologies and products:

While there are many challenges with tech adoption and biological product shortcomings, in part there hasn’t been significant economic pain when it comes to fertilizer to drive farmer adoption of these two areas (as much as it is already a high percentage of variable expenses on a relative basis). The relative price of $5-$15/ac for variable rate capabilities or $5-15/ac fertilizer use efficiency products has still been a tougher pill to swallow for the last 10 years than simply increasing fertilizer rates, when company and technology capabilities began to ramp up.
Sometimes inflection points are artificially manufactured by altering the incentive landscape, such as government regulation. Other times economic realities force changes in real time to account for the new constraints.

I followed that up in March highlighting the realities of reversion to the mean as a perspective that things could be a blip vs. asymptote:

Short term (12-18 months), I think it’s inevitable that we see an increase in biological use above forecasted and historical growth trends - whether because of constraints driving farmers and retailers to try biological fertilizer or biostimulants out or because of opportunistic programs such as those from the likes of Sound Agriculture entice some new uptake.

Th current fertilizer dynamics remind me of a recent non-ag example:

Consumer e-commerce thanks to COVID-19.

We all know what happened in 2020 when physical stores were forced to shut their doors due to lock downs. E-commerce sky rocketed. In fact if we look at the chart from technology analyst Benedict Evans below, we see that in the USA e-commerce popped 5+% in 2020:

But then if we look at the subsequent shrinkage of e-commerce as a percent of addressable retail we see that instead of this being an “inflection point”, it is more of a “blip”. We can see that in actuality the growth of e-commerce normalized to follow the trend line of growth. I think we could see similar outcomes with biologicals: a bump followed by a normalization.

Being that extreme outlier events are causing this potential bump in biological demand in the short term is a good indicator that we are unlikely to see long term trends grow above the forecasted global market growth rates of ~10-15% (depending which market research report you want to reference), unless there were intense, stable economic incentives (eg: policy change, fertilizer prices that stay elevated due to other supply or geopolitical challenges long term).

While at a macro level I do not think we will see disproportionate long term deviation from the trend because of current events, what these short term events allow for is specific biological companies to disproportionately grow their share in the market because they are equipped to scale, establish relationships or have commercially viable products meaning some will gain momentum and position themselves on shelves and in farmers minds for the longer term. All the more reason for biological companies to continue to be aggressive.

One other interesting note from the article:

Karsten Temme, Pivot Bio CEO, said he expects the company’s products to be used on more than three million acres of land this year, three times last year’s figure

My friend Janette Barnard wrote a good piece based on this WSJ article highlighting the importance of timing:

maybe Market Conditions are the real innovation arbiters - Prime Future

John Deere is Shifting to Recurring Revenue- What Does This Mean for Agtech? - Sarah Nolet Linkedin

This is an area that continues to interest me. I have written on automation and the SaaS dynamic most recently in August last year and when highlighting the John Deere 2021 Annual Report in March that has been the most read analysis I have written this year.

Sarah highlights some key points. One that stood out to me was this on dealers shifting:

Agronomic capabilities. Dealers too will need to think differently as the shift to recurring revenue occurs. I expect the trend of bringing agronomic expertise in-house will accelerate given the impacts that, for example, autonomous weed management tools will have on input decisions (including margins and perhaps volumes, as uptake of variable-rate increases).

I agree with her. We have already begun to see this in Canada. Deere talks about their pillars of precision being these three things:

Telematics
Guidance
Data Management

All of which they are well positioned to deliver on.

What happens with precision if you do not have strong agronomic recommendations associated with it is poor agronomy applied precisely which actually leads to worse outcomes than broad brushing good agronomy! Naturally this lends itself to having agronomic expertise integrated at the dealership and does so in a way that can eliminate some of the product bias that is often talked about within the sector.

I was recently having a conversation with my friend Patrick Hancoop of AgTech-Pro who has extensive background in technology and equipment and he noted that Deere has consistently had dealerships that have best in class knowledge around technology. He also noted something that I had experienced in the agronomic and crop input space that those dealerships with strong people in technology also tended to be better at selling the entire equipment package; selling solutions, not products. This reinforces more synergy between technology and equipment and the stronghold position Deere has not just because of their technology or equipment, but because of their distribution advantage as my friend Matt Coutts points out in his must listen to podcast on Deere.

Farm Data Usage - Coming to Terms - Matthew Pryor of Tenacious Ventures

Last week Matthew shared an excellent article talking about Farm Data and how the constant narrative of fear slows the adoption of promising innovations and risks being more harmful and detrimental to the industry overall. I think he is right. And this week he was back talking about data usage and insuring there is defined and well understood terms. In this week’s article he goes through the following important aspects surrounding data:

Integration
Interchange
Aggregation
Migration

UPL to Partner with Kimitec to Commercialize North American Biostimulant Products - Agro Pages

UPL, a global leader in sustainable agriculture solutions, announces that its Natural Plant Protection (NPP) business unit has entered into a strategic collaboration with Kimitec’s MAAVi Innovation Center to deliver tailored biosolutions technologies in the United States. The collaboration with the Spanish multinational a recognized global leader in the research, development and marketing of biosolutions, and its R&D Center MAAVi.
UPL is the world’s largest manufacturer and distributor of biosolutions, and last year launched Natural Plant Protection (NPP), a new global business unit championing UPL’s comprehensive portfolio of natural and biologically derived agriculture inputs and technologies.

UPL continues to grow their portfolio on the plant health side of things. Even though UPL is the largest manufacturer and distributor of biosolutions I wonder how long it will take them to really ramp these products that include a soil amending probiotic, fermented soil prebiotics, root enhancement and even a fertilizer in North America.

I think most crop protection manufacturers have potential in these areas (I have talked about a UPL combination with a fertilizer company here), but it’s important to acknowledge the large uphill battle culturally within organizations like UPL in North America.

On the sales and marketing side of things, UPL is good at conveying and communicating the value of killing things: weeds, insects and disease specifically. On top, these areas are very tangible: a dead weed is obvious, going from high insects to no insects is obvious and no disease progression makes it easy to illustrate the value of products being used and easily quantifiable.

What is more difficult to do is create demand for increasing plant health, especially when the value delivered is not tangible. This are subtle but important.

Talking about the benefits of biostimulants is largely attempting to convey value in an area one cannot see: overcoming abiotic stress, higher nutrient efficiency or higher microbial activity for example. Not to mention, when does this come up in conversation of the sales conversation or marketing approach? After selling the fungicide or before? Do you position the plant health product and then go on to talk about a herbicide? Retailers manage this, but they are generally already talking about the entire agronomic cycle already which lends itself to an easier conversation.

All manageable, but generally challenging to begin with for the organization and their staff which is why I think companies like UPL, at least in the short term, will struggle to create demand for products like these in North America when there are stand alone companies prioritizing these areas that have a core competency in the space.

There opportunities to manage this:

separate sales roles.
strategic alignments and programming with micronutrient companies for example, where they could bring in a non-competitive company adept to talk about the intangibles (eg: nutrition) to support the adoption and growth.
combination products (co packaged or co formulated).
prioritized training.

Organizations that have even more financial firepower like Bayer Crop Science haven’t blown the doors off sales of their biostimulant based products that they have through their relationship with Novozymes for example. UPL also lacks some of the other sustainability programs that other companies have as well which could hinder adoption of their products as well.

This will continue to be an interesting space to watch.

Farmers Edge 2022 ESG Report - Farmers Edge

What often gets forgotten about in the “ESG” equation is the S and the G. Social and Governance.

There is no doubt there there are tools in the Farmers Edge portfolio that can support better environmental outcomes. They also have done a good job on the Social according to their report.

However, when one looks at their Governance record, it seems they have forgotten the G at times. Case in point, the fact you can publicly read the Precision Weather Solutions Inc., v. Farmers Edge Inc. court proceedings from September of 2021 highlighting questionable email exchanges between Farmers Edge executives that even if deemed “legal” from a court of law perspective, surely raise red flags on the ethics that drive their corporate governance.

AgriDigital raises $25M to Grow the Value of Grain - AgriDigital

AgriDigital’s mission to grow the value of grain by building the best digital grain management and finance platform for the world’s farmers, grain buyers and traders, brokers and storage operators has been given a boost after the company recently closed a $25 million capital round with a local fund keen to be part of this growth.
Started by farmer co founders Bob McKay, Ben Reid and Emma Weston, AgriDigital has grown to be the largest digital grain management platform in Australia with 15% of all grain produced here being transacted at the sale, delivery or storage point through the platform; and over 14,000 users.
With almost 25 million tonnes transacted through AgriDigital last year at a value of over $6 billion and $150 million financed by us so far; we have big growth targets for AgriDigital Finance in 2022

AGCO Acquires JCA Industries - Greenstock News

a worldwide manufacturer and distributor of agricultural machinery and precision ag technology, announced it has acquired JCA Industries, Inc. (“JCA”), d/b/a JCA Technologies, a leader in the development of autonomous software for agricultural machines, implement controls and electronic system components.
JCA, based in Winnipeg, Manitoba, Canada, specializes in the design of electronic systems and software development to automate and control agricultural equipment. JCA’s path planning, sensor fusion, and remote-control software products are used today by original equipment manufacturers. In addition, JCA has been serving some of the world’s leading agriculture equipment manufacturers as a provider for electronic designs and software for autonomous machine development.

Solinftec Raises $60 million - Wall Street Journal

Solinftec, one of the world’s largest independent precision agriculture companies, has secured a $60 million growth investment round led by the Lightsmith Group. The investment will enable the company to further expand its digital farm operations platform in North America and South America. Lightsmith is joining existing investors in the company, Unbox Capital, which also participated in the round, and Circularis Partners (TPG ART). Additional undisclosed investors are also participating in the round.

This inflow of capital means Solinftec has now raised almost $150 million in totality, most recently raising in $27 million a year ago in climate bond funding. They are currently on 27 million acres globally.

Non Ag Article

Learn Like an Athlete - David Perrell

Athletes train. Musicians train. Performers train. But knowledge workers don’t.
Knowledge workers should train like LeBron, and implement strict “learning plans.” To be sure, intellectual life is different from basketball. Success is harder to measure and the metrics for improvement aren’t quite as clear. Even then, there’s a lot to learn from the way top athletes train. They are clear in their objectives and deliberate in their pursuit of improvement.
Knowledge workers should imitate them.

Related: The 10% Rule of Professional Development - Upstream Ag Insights

Upstream Ag Insights