Upstream Ag Insights - November 13th 2022

Essential news and analysis for agribusiness leaders

Nov 13, 2022

Welcome to the 143rd Edition of Upstream Ag Insights!

This week I officially began working full-time as part of the AgVend team. I have been an advisor to AgVend since 2021 and been an admirer of the organizations vision to digitally enable ag retailers since my first conversation with co-founder and CEO Alexander Reichert in 2018. I am excited to be apart of the team at AgVend as we strive to digitally enable ag retailers and work to connect the entire agriculture value chain.

One of the questions I received the most this week following the announcement was what happens to Upstream?

I opted to wind down my consulting business, but the Upstream Ag Insights newsletter will continue to come to your inbox every Sunday and remain 100% independently operated.

One of my favourite things to do each week is curate, research and write the Upstream Ag Insights newsletter. It will continue to be a weekly endeavour of mine and I am fortunate to be apart of an organization that not only allows, but encourages it being published every week.

If you have any questions please do not hesitate to reach out!

upstreamaginsights@gmail.com

Index for the week:

Q3 2022 Publicly Traded Agribusiness Results Summary
Farmers Edge Q3 2022 Results
Agriconomie Closes €60m Series B
Traction Ag Acquires Granular Business
Seed Buying for ’23 Starts Off Early with Renewed Focus
Bayer Acquires German Biotech Start-up Targenomix
Yara Growth Ventures invests in Agrolend
Wheat Grown Indoors Offers Promise for Global Food Security
New Collaboration Delivers Fintech Solutions To Ag Retailers
The Curse of Culture

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1. Q3 2022 Publicly Traded Agribusiness Results Summary - Upstream Ag Insights

It is the end of earnings season. This week I summarized the results of the biggest publicly traded names in agribusiness including:

In order of appearance:

BASF
Bayer
Corteva
FMC
Syngenta
Farmers Edge
Nutrien
Yara
Mosaic
American Vanguard
Bioceres
ADM
AGCO
Lindsay Irrigation

The most in-depth coverage is regarding Corteva, Nutrien, Farmers Edge, American Vanguard and ADM.

2. Farmers Edge Q2 2022 Results - Farmers Edge

Another dismal quarter for Farmers Edge. They missed revenue and EBITDA targets and decreased total acres down to 12 million from 15 million at end of Q2.

Earlier this year they secured a $75 million credit agreement with their largest shareholder, FairFax Financial, for when they burned through the funds raised in their IPO. They have burned through those IPO funds and have already pulled $20 million from the credit agreement and have begun to use that cash. They say they have enough capital to get them through the next year with that credit line, but it seems unlikely they build the business to the point of positive cash flow 12 months from now. The reason for that is the areas they have chosen to focus on.

The go forward plan is to focus in two areas:

The Company reassessed the reportable segments and determined that it has two reportable segments, digital agronomy operations and e-commerce operations

Farmers Edge states:

In the new operating model and strategy, new digital acres will be acquired through a combination of business to growers (B2C) and business to business (B2B) enterprise partnerships.

Their continued focus on digital acres makes sense, but is unlikely to lead them to any sort of free cash flow positivity in the next 12 months. They have already been churning acres and the unit economics have been challenged for a long period of time. They essentially end up stuck between a rock and hard place in the direct to farmer model: offer high service with an agronomist and/or customer support person plus a high cost of up front assets, such as weather stations and CanPlugs OR try to sell to farmers a straight software solution that is highly scalable, but not as sticky or value added to the farmers operation (like so many companies have done, such as Granular, FarmLogs and a host of others).

Then Farmers Edge have their B2B approach, which can be done how they were doing it before which is essentially going to a partner (such as an input retailer) and getting the retailer to sell the platform offering to the farmer for the fee with the retailer taking a small cut. Or they can take a true enterprise software approach, which makes them more directly in competition with the likes of TELUS and Agrian software, and delivering software to the retailer staff to use to manage their relationship with the farmer.

The challenge with this is that from a product perspective they end up “straddling”. While there are similarities and overlap between what a retailer agronomist first platform and a farmer first platform functionality should have, there are significant differences in how the product is used and what areas are focused on. This will continue to make messaging challenging and product development challenging. Given there is still an emphasis around future carbon efforts, my guess is they will continue to have a a grower focus for the time being, but will eventually transition away from all their farmer first acres and move towards a full enterprise effort (assuming they get any sort of pull thru at the enterprise level).

The second point they are emphasizing is e-commerce:

The company is also working on launching a new CommoditAg (CAG) e-commerce platform in the US and Canada to provide increased selection and improved customer experience. The long-term vision for CommoditAg (CAG) is to offer a compelling e-commerce marketplace to partners and growers.

New CEO Vibhore Arora comes from Amazon. My guess is that he understands marketplace fundamentals and operations better than almost every individual working in agriculture.

With that said B2B agriculture and B2C consumer are very different. I am still bearish on the endeavour and think that point of strategic focus will be the final nail in coffin for the company. I have talked about this extensively in Upstream including in Aggregator Marketplaces vs. Platform Enablers in Agribusiness and Indigo, Marketplaces & Grain Marketing Tech.

In fact, a new article I read this week from my astute friend Venky Ramachandran at Agribusiness Matter plays in very well here:

Atomic Concepts of Agritech Marketplaces - Agribusiness Matters

Venky emphasizes dynamics and companies in the Indian market, but his point about “atomic” concepts is a powerful frame for an organization like Farmers Edge looking to find their place.

Ultimately, it will depend on the functionality they mean when they talk about an “e-commerce marketplace”. If they mean e-commerce marketplace the same as I define it, meaning matching input sellers with farmers online to transact, it is likely to flounder. Take their current revenue as a basic indicator (can see it under “Crop Input sales” in the finance image above): They sold just $5.5 million in crop inputs through Q3 (GMV or gross merchandize value). That’s revenue including the cost of the products that flowed through the CommoditAg platform. On that revenue they have negative EBITDA of about $300,000.

If they can ramp sales up, they can have a small business as I suspect with their cost cutting initiatives they turn it into a profitable unit eventually (the 3rd quarter was actually run EBITDA positive, but that business will not ever deliver any sort of return to shareholders). However, this is where another challenge is. B2B selling cycles are not short. They are long and arduous to get retail customers onto their platform and attract farm buyers to use the system and as stated earlier, Farmers Edge is running low on cash meaning they don’t have time for a long process.

Just last week I went through the dynamics of e-commerce based on the Farm Journal E-commerce Survey Results. Currently, 18% of farmers are interested in purchasing online:

I do think the number will grow as I discussed last week. However, the need for retailers is beyond accessing an online marketplace. They need tools to support their staff and functionality to further support farmers beyond transacting. From last week:

We often think about the online aspects of ag retail as purely customer based. However, online engagement should extend to the retail staff in terms of how they can interact among one another (eg: agronomist to location manager), what they interact with (eg: real time sales and pricing dashboards) as well as how they interact with suppliers (eg: marketing). Anything digital requires systems thinking and agribusiness leaders need to think strategically through the actual goals and outcomes with rigour.

This extends into another challenge for Farmers Edge. Rebuilding their core competency into new areas. Digital and precision agronomy are not the same as e-commerce and e-commerce is not the same digital enablement of ag retail. The target customers are different and pain points vary. It is not impossible to learn, however, learning takes time. Given the lack of cash and lack of prospects surrounding free cash flow from the business operations, it is increasingly unlikely they have the time to turn their operations into a successful enterprise first business.

Farmers Edge has dropped in value by 98% since their IPO in 2021 and now have a market capitalization of just $18 million CAD after raising well over $250 million in private markets and public markets plus taking on debt from investors.

I was trying to be optimistic when the new leadership came in, but even the smartest people and the best strategy in the world can’t get you out of trouble when you have a deep hole and time isn’t on your side. If they aren’t taken private by FairFax Financial or sold off to a large player needing some level of digital assets in the next 18 months I will be surprised.

Related: Farmers Edge Q2 2022 Results Summary - Upstream Ag Insights

3. Agriconomie Closes €60m Series B - PR Newswire

Agriconomie, a leading European e-commerce company dedicated to farmers, today announced the close of a €60 million financing round—the largest AgTech platform fundraising in Europe in 2022. The round was co-led by Treïs, Temasek, and Aliment Capital (formerly Pontifax AgTech), with participation from Eurazeo. This investment allows Agriconomie, already present in France, Germany, Italy, Spain, and Belgium, to pursue its ambition to become the European leader in online agro-distribution.

This is a large raise for a series B, especially considering the macroeconomic environment.

Founded in 2014, Agriconomie is the first multi-service online platform dedicated to farmers. Initially known for its e-procurement site specializing in agricultural supplies, Agriconomie offers a complete range of online tools including purchasing support, personalized advice, and information source sharing. Its Supplier Services business includes data services, advertising, and software for its input suppliers.

The shift in emphasis from Agriconomie is notable. They started out positioning themselves as an “Amazon of Agriculture” and have now began to emphasize sustainability:

By championing the ongoing transition to sustainable farming practices, Agriconomie is making a significant contribution to addressing climate change and employing global decarbonization initiatives. Through its environmental sustainability action plan, Agriconomie intends to be the European leader in the organics and regenerative inputs market, the highest growth segment in agriculture. The environmental action plan includes the promotion of organic products, regenerative agriculture consultancy and associated advisory services, carbon measurement and trading services, and general support to farmers transitioning to more sustainable agricultural practices.

Their aim is interesting. I tend to like focused product/customer segments in marketplace models. Though, when you have a company that has been around since 2014, it seems to me they have not got the traction they anticipated in mainstream and are trying to play up a sustainability angle as a way to drum up new investor and customer interest.

I hesitate to comment on markets outside North America, so I’ll abstain for the most part. What will remain true across all geographies is that there is complexity in implementing “regenerative practices” as well as organic efforts for farmers. This means that how they are able to deliver “general support to farmers transitioning to more sustainable agricultural practices” will in my mind be the most important aspect to whether they are successful or not moving forward.

Where will agtech exits come from next? 3 corporates weigh in - AgFunder News

All three agreed that mergers & acquisitions were more likely to deliver the next big exit over public market listing via IPOs and SPACs and that the next big exit will be below $300 million
Syngenta’s Shankar argued that physical agtech products were the most likely to achieve exits in the near term.

I think this is good insight from Shankar. For example, there are a lot of efforts to bolster biological and non-traditional input product segments by the big 6 input players meaning there should be more biological exits in the coming 18 months.

Where we could see emphasis too is more tangible vs. intangible. What I mean by this is that the ROI of software to the user tends to be softer and less tangible in agriculture (generalizing here though). The ROI or experience to the customer tends to be “harder” with physical goods, at least on a cognitive level. Humans love tangibility. When I look at a combination of tangibility and integration closer to physical outputs, I think of soil testing. Soil testing is not a physical good, but delivers more tangible insights to take action with physical goods. I think to hardware first companies (eg: Stenon) and lab based, like Pattern Ag, Biome Makers or Trace Genomics. Maybe they won’t get acquired in the near term, but with the growing interest in soil and the need for soil data plus the desire for tangibility, this category of businesses have a good chance to grow in success in the future.

One last comment: Given there have been more efforts from private equity looking to enter the ag industry and roll-up companies, there may still be smaller exit opportunities for software providers coming, though the greater macroeconomic environment will still make this challenging.

4. Traction Ag Acquires Granular Business - Traction Ag

Traction Ag Inc., the first cloud-based accounting software delivering solutions to growers across the Midwest, today announced its acquisition of Granular Business, a Corteva Agriscience™ product. Granular Business is farm financial management software focused on helping farmers become more profitable and efficient.
The acquisition adds Corteva’s industry-leading farm management technology to the Traction Ag accounting system. This will allow for a seamless experience with best-in-class farm operations and industry-leading farm accounting to see practical and actionable insights while reducing the administrative burden on farmers and their employees.

I received a lot of questions this week regarding this acquisition. I think there are two points to make around it:

This is not the entirety of the Granular product suite. “Granular Business” is one product of the greater “Granular” product suite. Corteva still have “Granular Insights”.
I do not think this was surprising. Corteva has been open about getting out of non-core digital initiatives, had announced layoffs and previously sunset the “agronomy” product within the Granular product suite.

Corteva made it known their goal is not to monetize digital products directly with farmers. The one core Granular asset Corteva has left is “Granular Insights”, a product focused on assessing zone level crop health, seed needs, crop planning, imagery and based agronomic functionality to help support farmer decisions. I suspect this will be maintained. I do not think any organization today can be entirely without some digital software asset, especially considering they still have their Carbon business. I do think most companies today acknowledge there will not be a direct monetary upside from these digital assets.

From a Traction perspective, this was probably a good move. My my suspicion is they paid in the VERY low 7 figures for the Granular assets, taking out one competitor. It leaves Traction and Harvest Profit (part of John Deere) as key players in the farm accounting software space (in Canada there is Farm Credit Canada based software as well).

Farm management software solutions have eroded in value unlike anything we have seen in the agriculture industry before. As some interesting contextualization on the value declines in the digital agriculture space: DowDupont bought Granular for ~$300 million in 2017 and if they did sell for ~$1 million (purely speculating), that’s a write down of 99.7% (and not including investments over the last 5 years). Farmers Edge was valued at $600 million (CAD) and is currently valued at $18 million - a 98% decline. There are others in this segment that have raised significant capital and sold for pennies on the dollar too.

This decline is the outcome of what my friends at Tenacious Ventures call “Agtech 1.0”, where every agtech company was going direct to the farmer and monetizing them directly; an effort that has consistently been shown not to work, but it wasn’t obvious at first.

I have read numerous comments saying “Corteva was crazy to spend that much in the first place, I knew it wasn’t going to work”. I don’t know the modelling and assumptions done to get to a $300 million value, but I do know if you asked me personally in 2017, 2018 and 2019 if I thought organizations like Corteva should own assets like Granular along with having a direct to grower plan to deploy those assets, I would have said yes. Whether for the potential revenue directly from farmers, or for the novel business models that seemed a matter of when, not if. I was wrong.

At this point, of the major 6 input manufacturers, the only one that doesn’t have a global digital platform is UPL, and I think that’s because they were slow to acknowledge the space more than it was any sort of strategic hold off (though I do think UPL will own a digital asset and I am sure they will acquire one for cheap at some point). It’s safe to assume that of the big 4 in particular, they have all invested well into the billions on digital agriculture with very little to show.

The future of these digital assets within the big 4 will be more for enabling new revenue opportunities downstream or adjacent (eg: carbon, Bayer has novel views as well) and supporting the core products and sales teams (eg: decision support, insurance based mechanisms).

5. Seed Buying for ’23 Starts Off Early with Renewed Focus - Crop Life

This is a well written article overviewing the industry sentiment surrounding seed. I still think the evolution in the industry will shift from the one stated by Todd Pester, Corn and Soybean Lead for Nutrien Ag Solutions:

That industry catchphrase — “lead with seed” — is critically important to understand

Todd is right. It needs to be understood - seed is emphasized because it is always going to get used by the farmer, more managable for distribution and loigtsics, is high value per acre, establishes a starting point to understand future input demands of the farm customer and lays a foundation from a program perspective and even the grain origination aspect (for those with elevator and retail assets). No doubt it is crucial.

However, I think the point of emphasis will evolve.

In an article earlier this year Winfield United President Brett Bruggeman made the following statement:

We used to say it starts with seed—but it starts with soil. That’s the greater purpose. That’s the livelihood for the grower. If it doesn’t start with the soil, you’re missing a step

This has been a mantra of mine almost from the start of being a retail agronomist and readers will have seen the emphasis that everything starts with the soil come up dozens of times within Upstream, so I whole heartedly agree with Brett here. What stood out to me was the first line of Brett’s quote, as it is was a key part of what started my fascination with soil in circa 2012.

As a new agronomist, I knew fertility was important for influencing yield. The emphasis of most crop protection products is protecting yield whereas nutrition and fertility actively increases yield potential.

But what reinforced the soil to me was actually needing it as a crutch. Let me explain with some personal experience.

In ag retail there is a constant emphasis of starting with seed, like Brett and Todd’s comments indicate. But what I learned in my first year as an agronomist, seed is commoditized. Talking to farmers about a 3% increase in yield across a constrained number of basic parameters (standability, days to maturity, disease resistance etc) was really easy, meaning everyone could do it. Easy conversations meant challenges to differentiate in building relationships with farmers and adding value to their business. Difficulty differentiating means tightening margins. My aim was to build relationships with farmers through sound agronomics, yet I was also being told to sell seed…in my mind they didn’t really go all that well together.

In my 1st year, one customer near Lucky Lake, Saskatchewan had already bought his seed for the year so I went to the next logical place: soil sampling (in my mind at the time it went seed -> soil sampling). The farmer had had soil samples done before, but they were very basic, only emphasizing macronutrients. So I talked to him about doing a full test - from pH, to EC, micronutrients, base saturation’s and different phosphorous extractions etc on his fields.

When we sat down to go through them we were talking about aspects of his soil that he never really knew existed, or had never had it explained how these attributes impacted his production, and we were able to identify some opportunities for his flax and canola specifically. Not only did his fertilizer rates increase (along with yields), but the types of products he used evolved. More specifically to Microessentials SZ and S15, Mosaic products that no other retailers in the area had access to at the time. So now, I was able to talk to this customer about parameters of his business that competitors weren’t (or couldn’t) plus position products that were differentiated and higher margin.

This was just the tip of the iceberg. During the growing season itself, I was able to draw upon the soil test insight to further augment the relationship and agronomic opportunities through tissue testing and talking about in-season fertility which made crop protection discussions easier. And like a bad infomercial, there’s still more…that fall, when it came time to discuss soil sampling the farmer asked me about seed. And because of understanding his farm and soil better, I was able to discuss rotation and varieties even better. That was when it was reinforced to me that everything starts with the soil. As my interest in soil grew, my rationale for thinking “everything starts with the soil” evolved as well through looking at variability, soil health, water etc.

Now as we see more emphasis towards sustainability, carbon etc, the need to focus on soil is even more important. I think overtime we will see the most competent organizations evolve their focus and starting point beyond seed, particularly with soil, (at least be encompassing beyond seed with initial conversations). The more “blue ocean opportunity” for increasing revenue is nutrition and biology and while seed continues to be commoditized, there are increasingly new fertility and biology products that are value added and differentiated. This allows the best opportunity to support the farmer with fertility management and give upside to the input providers.

6. Bayer Acquires German Biotech Start-up Targenomix - Bayer

Bayer announced today the acquisition of German biotech start-up Targenomix. The spin-off of the Max Planck Institute for Molecular Plant Physiology (MPI MPP) uses novel systems biology and computational life science tools to identify new modes of action for crop protection compounds. The Targenomix expertise, personnel, and platforms will be an important part of delivering on Bayer’s commitment to the design of safe and effective molecules, and will accelerate the discovery and development of molecules with the potential to make agricultural production more sustainable despite dynamic challenges like climate change, and increasing weed, disease and insect resistance.

7. Yara Growth Ventures invests in Agrolend - Yara

Founded by brothers Alan and Andre Glezer in 2021, Agrolend offers to farmers easy, fast, and bureaucracy-free credit to buy agribusiness inputs such as seeds and fertilizers. Loans are formalized in a 100% digital manner using the grower’s Whatsapp, and the capital becoming available in less than a week. Agrolend has a vast network of more than 100 partners with the credit being offered directly at the point of sale with a retailer.
Following the R$145M series B funding round, Agrolend looks to build a profitable R$2 billion loan book with a client base of 10,000 farmers in the coming years . The series B round was led by Lightrock, a global private equity manager with an impact focus, as well as Suzano Holding (large pulp and paper producer), Mago Capital (investment vehicle of the founders of Locaweb in Brazil), and Yara Growth Ventures (the venture investment team of Yara International).

8. Wheat Grown Indoors Offers Promise for Global Food Security - Bloomberg

Infarm said that its first trials show projected annual wheat yields of 117 tons a hectare. That compares with average 2022 yields of 5.6 tons a hectare in the European Union and 3.1 tons in the US, which are some of the world’s biggest exporters, according to estimates from the US Department of Agriculture.
The company achieved those stellar yields thanks to six growing cycles per year, compared with just one in open-field farming.
InFarm said it could potentially increase its yield by a further 50% in the coming years thanks to better technology.

These yield results are compelling. 30x the average annual production (combining US and EU averages) coming from indoor farming facilities.

For North Americans, that tonnage per hectare works out to a production of 1,579 bushels per acre! That is about $8,000/ac in revenue using a $5/bu wheat price.

These are impressive results, however, I still question if the best use for indoor farming is commodity row crops. Assuming they can produce other high value crops more efficiently as well, the better return is always going to be to grow leafy greens or some other higher value crop, like potatoes. The opportunity cost to grow wheat seems just too high and given the cost structure of indoor farming, it seems highly unlikely that this would meaningfully change production areas.

9. New Collaboration Delivers Fintech Solutions To
Ag Retailers - Growers Edge

Growers Edge, a provider of data-driven financial technology (fintech) solutions for the agricultural industry, and AgVend*, the leading digital enablement solution provider, announced today their strategic partnership to simplify input-financing solutions for ag retailers. Shared retail partners can now provide a seamless and all-digital input-financing experience that improves visibility and management for their farmers.

*Disclosure: I am employed by AgVend.

Non Ag Article

The Curse of Culture - Stratechery

I talk a lot about “culture” and “core competency” driving success, or lack thereof, in organizations I cover in Upstream. One of the articles that was influential on this thinking for me years ago was this one from Ben Thompson, and then reading the referenced book Edgar Schein’s Organizational Culture and Leadership.

I thought this would be an interesting article for those wanting to read more on it.

Upstream Ag Insights