Upstream Ag Insights - January 22nd 2023

Essential news and analysis for agribusiness leaders

Jan 22, 2023

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Index for the week:

Is Deere Pushing Electric Tractors? An Exclusive Interview With John Deere's CTO
The Ag Retailer of the Future
Looking head to the World AgriTech Innovation Summit in San Francisco
John Deere and Nutrien Ag Solutions Deepen Tech Integrations
Bayer Launches New Collaboration with Oerth Bio to Further Advance Innovations in Crop Protection
Technology Empowers Any Farmer to Trade Grain Globally
Bayer Acquires Software Company Combyne
EarthOptics Secures $27.6 Million Series B Funding
Differentiation: Why You Should Be a Mutant

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1. Is Deere Pushing Electric Tractors? An Exclusive Interview With John Deere's CTO - AgWeb

I talked about the 8R tractors….When I ran the numbers on it, if you power that with a lithium-ion battery today, it's twice the volume, twice the weight, twice the mass, and four times the cost. That just doesn't pencil.

The above is a quote from Deere CTO Jahmy Hindman regarding what an electric tractor would look like today on large scale farms with large equipment needs. To his point, it doesn’t make a lot of sense. It might not for some time. There is a framework we can think through to help understand a potential evolution of electric tractors though.

(Note: The below is a variation of what was written in the December 5th 2021 Edition of Upstream Ag Insights)

Electric tractors for several years now and they will continue to be I am sure. With that said, they seem to be a ways out for the traditional large scale row crop farms. Though given the fact that Wright’s Law is always working, it is still worth watching.

Wright’s Law has an experience curve effect that expresses the relationship between experience producing a good and the efficiency of that production, specifically, efficiency gains that follow investment in the effort. Essentially meaning the more you produce something, the better it gets and the cheaper it is to do.

The effect has large implications for costs and market share, which can increase competitive advantage over time in equipment. It has proven out in many industries, often showing gains in cost efficiency and effectiveness to the tune of 15% in aerospace and 10% in electronic good manufacturing for every doubling of output, meaning very rapid improvements.

Wright’s Law plays out because of factors like standardization, labour efficiency, network effects, technology driven learning and product redesign to name a few.

This is notable for the efforts that we are seeing in electric tractors being in the smaller segments, and consistent to a degree, with the electric car industry.

The Tesla Secret Master Plan

In 2006 Elon Musk published the above “secret master plan” of Tesla, which is basically encapsulated below:

Almost any new technology initially has high unit cost before it can be optimized and this is no less true for electric cars. The strategy of Tesla is to enter at the high end of the market, where customers are prepared to pay a premium, and then drive down market as fast as possible to higher unit volume and lower prices with each successive model.
So, in short, the master plan is:
Build sports car
Use that money to build an affordable car
Use that money to build an even more affordable car
While doing above, also provide zero emission electric power generation options

We are 17 years later and Elon didn’t deviate from this basic plan.

The small tractor market in ag can be looked at in a similar way to the high end car market.

High end cars are more so used as toys and status signals. And while I would by no means call small tractors high end toys, where these tractors are frequently used is in orchards and horticulture driven locations where fields aren’t that big if battery performance isn’t strong (eg: dies quickly) and implements being pulled are much smaller. This is a great proving ground and what could become a proxy of how fast we see the potential of electric tractors coming to the large scale market. As more electric tractors move into the small tractor market, the capability of companies like Monarch or John Deere goes up in terms of what they are learning and can apply to the large tractor market, though given the quote above from Hindman, it could still be some time till we even get to parity.

According to Wright’s Law, lithium-ion battery cell costs fall by 28% for every doubling of units produced. There are a lot less tractors produced than cars, but I assume there is still some synergy between the car market electric growth and what can be applied to tractors.

What is also interesting with Tesla is not just the emphasis of electric, but how they emphasize software as part of the experience and improvement of their cars. This has become a novel revenue stream for Tesla as well as a key differentiator - in the traditional world we had to wait for a new car to get new and improved features, in the digital world we send updates via internet connection, this is how companies like Tesla can rapidly iterate and improve. This dynamic is something I think we will see more of in all tractor market; a digital first mentality.

This mind set shift will be worth watching in the ag industry. Consider John Deere who has been emphasizing their digital systems like JD Link and Operations Centre, or consider the CNH Industrial acquisition of Raven. Having a wider array of digital capabilities as a core competency and customers engaged with them better positions these organizations to create enhanced experiences and outcomes for their customers.

In the consumer car market, this has been a point of disruption and shift in how car companies are being viewed. I highlighted some of the potential of that from the Rivian S-1 in a previous Upstream:

Rivian is throwing the conventional automotive business model out the window. Rivian is shifting the industry away from the model of “# of cars sold per year x average selling price.” Instead, Rivian is leveraging “Rivian Cloud” and its proprietary data and analytics platform to offer a host of value-added services including telematics-based insurance, data-driven resale, FleetOS for commercial customers, charging-as-a-service etc. We were interested to learn that >50% of Rivian’s estimated market is driven by services revenue over the lifetime of the customer. In effect, Rivian has created the foundation for a SaaS-like business model which, if successful, could completely transform how investors look at the automotive industry.

I think ag is fundamentally different because of the other aspects of “service” required for say spray booms and nozzles, pumps and everything else equipment manufacturers are supporting farmers on, so this isn’t necessarily a point of disruption within the equipment industry (along with other reasons like speed of adoption and sales/upgrades cycles as a couple basic examples). But what it likely is is a source of improved experience for farmers if these organizations start leveraging a digital first mindset to go with their electric tractor businesses.

The equipment space is core to precision agriculture adoption and I think we are just at the beginning of new shifts in what will come down the line in the future.

2. The Ag Retailer of the Future - Farm Journal YouTube

There is a lot of good commentary from CoBank’s Ken Zuckerberg and Brett Sciotto of AimPoint Research on the future of the grower and the ag retailer.

I highlight more of a framework than any sort of prognostication for this last week:

Upstream Ag Insights - January 15th 2023

The recording is worth watching for anyone interested in the space. Here are a few points I wanted to highlight:

There was an emphasis on omni-channel which I overwhelmingly agree with and think the majority of the industry is on board with today (if you aren’t, I’d love to hear your take as to why). I think the biggest distinction is how a company truly becomes omni-channel in terms of customer experience and evolving processes to integrate effectively. I talk about it as ambient ag commerce.
Ken made a comment that he might “die in the seat” before an independent advice based business happens. It always depends how this is viewed, but I think he can actually say today there is one: *Deveron. They didn’t start as a retail, however, their business has underlying technology enabled capabilities (analytics, software etc) and then millions of acres under management of independent consulting businesses, driving EBITDA positive business revenue each year. They have then began to back this up vertically integrating into one of their biggest expenses: soil sampling.
There is often talk of the farmer of the future and sometimes questions about the retailer of the future. Important subjects to be sure, specifically the grower. What gets missed, and I need to do a better job of making this point frequently, is that retails are made up of people. Skilled and experienced professionals. What skillset does the agronomist of the future have? I talked about this in 2018 and it’s probably worth updating. Not to mention, what mindset and mental tooling does the agribusiness professional of the future have? I have talked about this in 22 Mental Models for Agribusiness Leaders. Last week I alluded to the how you can tell a lot of what you need to know about the quality of an ag retailer by their investment in training and support infrastructure, this is incredibly important for the retail of the future to consider and think about - regardless of your strategic focus.
Ken cites an example I use often to tie back to ag retail: Best Buy. He specifically highlights the GeekSquad and an independent service model in ag retail. I think the learnings go even deeper though! The devil is in the details of the comparison.

Let me elaborate.

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