Upstream Ag Insights - February 5th 2023
Essential news and analysis for agribusiness leaders
Welcome to the 154th Edition of Upstream Ag Insights!
Index for the week:
It’s Time to Call It
Follow-up on Biostimulant Margins
Valent BioSciences Announces the Acquisition of FBSciences
2023 Digital Advertising Benchmarks For Agriculture
Enko Completes its $80M Series C to Progress Sustainable Crop Solutions
5 Ways ChatGPT Will Change Agriculture
Bayer to Distribute Pheromone-based Biological Crop Protection Solutions from M2i Group
Beware Flavored Software
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1. It's Time to Call It - Prime Future
My friend Janette Barnard started out her wonderful newsletter this week with the following:
Riddle me this: What do you call a category of companies that raised a ton of venture capital and, a decade later, had not one sustainable business to show for it?
There's (a) category that is 10+ years old, and a post-mortem is timely because, well, it's basically commercially corpse-like.
The category is farm management software, the row crop genre.
Janette does a great job breaking down some of the dynamics and what we can learn from the first decade+ of farm management software. And one area she mentioned is what I have been kicking myself about for a while now:
My hypothesis is that founders of Agtech 1.0 companies, and investors, had the hypothesis that farm management was a winner-take-all market. If you believe that only 1 or 2 players will dominate a market, then it is logical to invest aggressively in growth in order to be one of those winners.
But few markets are really winner-take-all.
In an industry such as farming where the potential user base is so diverse, their needs are so diverse, their business structure and profit margins are so diverse...the pie is so varied that it would be difficult for any one company to take the entire market, simply from a capability standpoint.
I am a culprit of having thought of the space as winner-take-all initially. I was wrong and have been kicking myself about my incorrect assessment for a couple years. Having sat in many meetings where the assumption was that stand alone farm management software would have just a few winners, I’d suggest that Janette’s assumption is accurate.
A winner-take-all market is one where the top players capture a disproportionately large share of the rewards, while the rest of the players are left with extremely little. In a winner-takes-all market. Therefore the incentive becomes to spend to acquire customers rapidly.
I’ve thought about where I went wrong in assumptions and to build on Janette’s comments I think there are a few learnings from the challenges in that area of agtech that can help ensure those same assumptions don’t get repeated.
The first thing to consider is what underpins a “winner-take-all” market?
The answer: Network effects.
Network effects are the incremental benefit gained by an existing user for each new user that joins the network. Every additional user to the telephone creates a stronger network effect. Same with Facebook or any social media.
The assumption in the farm management software space was that as more acres were gained on a platform, that would mean more data accrued leading to a deeper understanding of that customer and therefore deeper value delivery to the farmer which would mean more data for the organization to add value to other farmers which would increase switching costs of the farmer and make it difficult for any other farm management software player to break into the market. Farmers in theory would derive so much decision making value they would gladly play $5, $7 or $10/ac to access this. A winner-take-all scenario.
Because of these assumptions the emphasis became customer acquisition. Hundreds of million (billions in total) poured into pulling customers onto the software.
What’s important to note is that in order for a network effect to take off there needs to be utility for the user and ideally a tight feedback loop. Think of Google. Everytime you search on their platform you derive utility, almost immediately. And Google has a tight feedback loop surrounding time spent on the page, what you clicked on etc. ultimately enhancing their offering and making them better which means you keep going back to Google. The externalities influencing the system are close to none and there are only so many parameters that can influence the outcome.
Now if we think about this from a farming perspective, we get the opposite. The first issue is that the farmer has an arduous onboarding process and not only doesn’t derive immediate benefit, they might not derive any benefit for months, or years. This stems from data challenges and disparate connectivity issues.
Data is very clean, contextualized and connected in systems like Google. The value derived from using Google is immediate (I get the right website). In farming, we get uncalibrated, incomplete data and often manually input data that is inconsistent. This doesn’t even touch on the lack of depth of data such as missing soil information, or nuanced complexity surrounding the interactions of soil, weather, fertility and agronomy information just to name a few. Then factor in that not only is it complex, but it varies by region because the agronomic outcomes are localized and variable. This just scratches the surface of some of the challenges. The end result is a difficult time to deriving value.
This reality challenges significant value creation for the farmer, or agronomist leading to challenged business models and few network effects. That equals no winner-take-all.
To be clear, just because there is a weak winner-take-all dynamic doesn’t mean farm management software is irrelevant. People often say that farm management software is a solution looking for a problem. I disagree. Digitizing aspects of the farm and having a digital system of record for the farm is valuable. But the question becomes one of business models, total value created and value chain positioning to deliver that value in a positive way for farmers. There are sparing examples of success, limitations on scalability and the need for an alternative business model (eg: use the digital systems to augment the selling of physical goods). One can look at an organization like John Deere who boasted >350 million “engaged acres” in a 2022 report of theirs and we can see JD monetizes that portion of their software in a non-direct way and integrates it into a required physical asset used by farmers (equipment).
Of the agtech 1.0 farm management software groups as Janette calls them, we have still seen a lot of these independent FMS groups remain alive, however, we have witnessed these groups rapidly pivot towards areas like carbon management, MRV, marketplaces, layering on analytics capabilities or prioritizing ag retails as their go-to-market approach which has a fundamentally different total addressable market and solves solves different problems. In my mind this delays inevitable bankruptcy’s, it doesn’t eliminate them.
Of groups that fall into this space one stands out to me: TELUS Agriculture. They have acquired numerous FMS companies in an effort to roll-up and connect the data downstream. The sentiment many have referenced to illustrate their bullishness on this effort was the fact that TELUS has a long time horizon and they had done similar things in health care. Given acquisition price tags, current revenue splits between upstream companies and downstream companies in their portfolio and the fact they do not have a strong anchor point in the value chain/product integration (unless they can somehow do this with their mobility offering or something like farm wide IoT for example) it will be an uphill battle to deliver more value to shareholders and deliver on the vision they talk about in the market.
I don’t think anything stated here is novel, but it illustrates and reinforces some of the challenges we see with many stand-alone agronomy companies in the analytics space of the industry, as analytics as a stand alone become commoditized because the bundling of analytics and assets is where value accrues (eg: John Deere). The highlights surrounding network effects also reinforce the challenges with marketplace business models in agriculture (which rely heavily on network effects to be successful).
FMS aren’t irrelevant, they just aren’t winner take all which means they should have had a different investment and prioritization strategy. I am certain I am not the only one who wishes they recognized this before 2020.
Related: Taranis Introduces AcreForward, Setting a New Standard for Crop Intelligence - PR Newswire
2. Follow-up on Biostimulant Margins
Last week I mentioned news around ADM getting into biostimulants could mean the start of a decline in biostimulant margins. The comment wasn’t fully explained and drew questions in from readers so I want to ensure I share where my logic stems from.
First, it’s important to note I was primarily meaning retail margins. However, as products become more mainstream, more competition and “me too” (we think of these as generics in the crop protection world) products arise which can lead to lower margins as well at the manufacturer level (this means programs aren’t going anywhere).
To better explain my thought process is that on top of the challenge with a company coming in without strong specialized people and intellectual support for the product usage, my experience has often been that margin declines with increased product adoption: