The following article was written by Geoff MacPhail, Partner/Analyst, based on his experience at the Farm Progress Show in Boone, Iowa last fall. Please see important disclosures at the end.
The application of technology in agriculture has the potential to transform farmers’ operations and generate tremendous growth opportunities for companies driving innovation. When you speak with farmers, you frequently hear “yield is everything.” This certainly rang true over the three days I spent in Boone, Iowa at the Farm Progress Show last year.
Farm Progress is the United States’ largest outdoor agriculture trade show. It connects farmers from across the globe with agriculture companies ranging from global equipment giants to software-driven startups. With approximately 50,000 attendees and 600 exhibitors, this was an excellent venue to develop fresh, timely perspectives on the state of the global agriculture industry and reinforce our beliefs about the key technological innovations driving change. The goal of attending this show was to broaden our network in the agriculture community, with a focus on how farmers are leveraging the latest technology to increase productivity and profitability.
Yield is everything: Currently, machinery makes up about 25% of non-land farmer costs, while seeds, fertilizer, and chemicals account for close to 60%, and labor represents just under 10%. (i) With the cost of these inputs rising and the weather becoming increasingly variable, farmers are under immense pressure to increase yields to remain solvent. The only way this can be achieved is through greater adoption of new technologies.
Attitudes are changing: The USDA estimates precision techniques are only used on less than 50% of planted land. (ii) Precision agriculture technologies allow farmers to increase crop yields, reduce input (seeds, fertilizers) usage, and improve labor efficiency. Some examples of precision agriculture include autonomous farm equipment, GPS-driven tools, and cloud-based farm management systems. Conversations at the show suggest that we are now reaching an inflection point. One owner of nearly 3,000 acres of farmland shared that he believes there has been a shift in farmers’ mindsets from embracing traditions to focusing on the need to evolve in order to remain successful. He believes that we will see the pace of adoption move from 15 years to five.
New technologies are transformative: Innovations such as John Deere’s ‘See & Spray’ technology, which uses camera technology to detect color differentiation in the field and determine how to disperse chemicals, can reduce a farmer’s herbicide usage by nearly 80% relative to a traditional broadcast sprayer. (iii) Automation, as witnessed by the debut of CASE IH’s/Raven Technologies autonomous spreader, is around the corner and should help to alleviate farmers’ persistent labor shortages. Advancements in health care are also percolating into the industry, with companies such as Bayer using advanced genetic engineering techniques to develop short-stature corn. Seen as a ‘game-changer’ by farmers, short-stature corn protects against wind damage (which causes 5-25% yield loss) and has deeper roots (which reduces the need for chemical spraying). (iv) These are just three of many examples from the show that illustrate the transformative nature of technology for both farmers and the companies behind the innovations.
While many of these opportunities are compelling, they must be considered in light of deep challenges faced by farmers, including those stemming from tightening financial conditions, continued supply chain issues, and broad risks associated with a potential recessionary environment. These macro conditions highlight a major hurdle for the adoption of these technologies – affordability. A material price premium is placed on equipment embedded with precision ag technologies. A challenging economic environment coupled with rising financing rates makes it increasingly difficult for farmers, especially smaller-scale operators, to acquire this machinery and benefit from the associated lift in efficiency. Farmers who are already operating on thin margins and cannot afford to invest today will inevitably fall increasingly further behind peers who can, compounding their competitive disadvantage.
At Altrinsic, we believe that the application of innovative technology across industries will have profound long-term effects that are not reflected in stock prices today. The agriculture sector is beginning to embrace innovation in ways not seen in the recent past and could be on the precipice of significant change and disruption. Our portfolio is currently exposed to this opportunity through Kubota, the global leader driving wet farming (rice) innovation. The time spent at Farm Progress served as an opportunity to deepen our investigation into other companies that are poised to benefit from this transformational episode in the agriculture ecosystem. We will continue leveraging our cross-sector expertise in technology and global perspective to identify compelling new investment opportunities in the sectors affected by these evolving dynamics.
Article Sources
(i) Combination of data from USDA Economic Research Service, Iowa State University research (https://www.extension.iastate.edu/agdm/crops/html/a1-20.html), and Altrinsic research
(ii) USDA Economic Research Service, “Precision Agriculture in the Digital Era: Recent Adoption on U.S. Farms,” February 2023.
(iii) https://www.deere.com/en/sprayers/see-spray-select/
(iv) https://extension.umn.edu/growing-corn/wind-and-hail-damage
