Upstream Ag Insights - April 29th 2024

Essential news and analysis for agribusiness leaders

Welcome to the 213th edition of Upstream Ag Insights, where every week more than 15,900 agriculture professionals dive into the latest events, innovations, and business dynamics impacting the agribusiness landscape.

My name is Shane Thomas.

Whether you're a new subscriber or this newsletter found its way to you through a forward, you're in an unparalleled place for frameworks and insightful analysis designed to help you navigate innovation in agriculture, and answer questions surrounding what happens next, enabling your business and career to thrive.

Index for the week:

  1. CNH Industrial Annual Report Highlights and Analysis

  2. CNH Industrial Names New CEO

  3. Four Business Building Takeaways Everyone Can Learn from Lumo

  4. Biological is Not a Category

  5. Rebates in the Crop Protection (CP) Industry: An holistic approach to Analyzing GTM

  6. Bunge-Viterra merger scrutinized in Canada

  7. Notable South American News

    1. The Brazilian Way: A primer on a global agricultural powerhouse

    2. Nutrien to Leave South American Markets

    3. Why South America Is an ‘Ideal Hub’ for Biopesticide Innovation

  8. DJI Unveils Agras T50 and T25 Drones for Enhanced Agricultural Productivity

This week’s edition of Upstream Ag Insights is brought to you in partnership with Headstorm

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Highlights
  • Agriculture revenue was $18.1 billion with EBIT margins at 15.1%

  • In 2023, R&D expenses were $1.04 million compared to $866 million in 2022.

  • Selling, General and Administrative Expenses (SG&A) expenses were $1.86 billion in 2023 (7.5% of revenues) compared to $1.75 billion in 2022 (7.4% of revenues).

  • The forecast for CNH's 2024 ag sales are to be down between 8% and 12%

For full access to the CNHIndustrial breakdown, become an Upstream Ag Professional member today:

2. CNH Industrial Names New CEO - Seeking Alpha

Scott W. Wine has decided to leave the Company having successfully overseen the delivery of the 2021 Business Plan

Scott Wine’s abrupt departure caught most off-guard.

The market didn’t seem to like the abrupt departure, either with the stock dropping around 10% on the news.

In 2021/early 2022 CNH Industrial stated the 2024 targets as the following:

  • Net sales of Industrial Activities projected to grow to $20 - $22 billion by 2024 with CAGR of ~6%

  • Adjusted 2024 EBIT Margin of Industrial Activities of ~12% to 13%, more than 200bps increase from 2021

    • Agriculture EBIT Margin to reach 14.5% to 15.5% by 2024

  • Adjusted EPS of above $1.70 by 2024

  • ROIC of Industrial Activities projected to achieve ~19%, with a 3% growth during the plan period

  • Cumulative 2022-2024 free cash flow of Industrial Activities projected over $4.4 billion

  • Gross margin in excess of 24%

Scott Wine did deliver on the majority of these metrics, however, 2024 guidance is expected to be at the bottom end of them of most of those.

CNH stock price did not deliver over that time frame when from January 2021 AGCOs stock went up over 14% and Deere went up 47% while CNH stock declined over 11%.

Given the recent efforts to fully integrate Raven, ignite the precision ag focus and deliver on restructuring plans, it would seem peculiar that he would be aiming to leave (and to announce it on a weekend)— it seems he was just getting started.

The last time a high profile publicly traded ag business had a CEO leave on a weekend, it later was reported that Nutrien CEO Chuck Magro had a disagreement with the board. It seems more likely that there was some friction with the board more than anything else.

The new CEO is Gerrit Marx, who has been CEO of the CNHI divested Iveco Group. So he has CNH experience. What is notable is that he hasn’t spent time on the agriculture side of the CNH business, or any business.

*This article is free for all Upstream Ag Insights subscribers*

Overview

Lumo co-founder and CEO Devon Wright shared a post on Linkedin after receiving a patent for Lumo One, the world's first smart irrigation valve, this week titled Lumo One Patent Approval and the myth of a "Faster Horse" where he shared this line regarding the classic quote “If I had asked people what they wanted, they would have said fast horses”:

That faster horse line is dangerous. Because too often it’s used by innovators to look down upon or dismiss the same exact people they’re trying to serve. It creates a God complex that’s extremely harmful to hardworking, people (aka your customers) who have meaningful insights and valuable contributions to make.

It’s a unique take on an often quoted line. But Lumo is full of contrarian takes and approaches.

Lumo differentiates itself by being the first irrigation valve to have a built-in controller, the first to have a built-in flow sensor, and the first valve that is completely wireless and internet connected. All of which are powered by Lumo’s irrigation management software.

I have been fortunate to talk with Devon and his co-founder Bennett Fitzgibbon in the past and while the product is compelling, what has stood out the most to me was what made them start the business and their approach to building the product and the company. 

In my conversations with them, four things have stood out that I think all of us can learn from.

1. Solve Your Own Problem First

Devon has an eighty tree orchard in California. He realized the amount of water being wasted for a variety of reasons— asking around about what he could do to solve the issue. Everyone he asked told him it’s just the way it is. But that wasn’t good enough, he wanted to figure it out, and along the way realized, if he is having that much trouble managing water usage on his hobby-orchard, how much trouble are they having in the large orchards?

The story reminds me of a framework that VC and Lux Capital founder Josh Wolfe uses where he asks the question “What sucks?” to find ideas. Asking what sucks identifies where opportunities lie.

I think anyone looking to found a company, or build a product within an existing organization can use the “What sucks” framework and Lumo story as inspiration.

2. Roll Up Your Sleeves (This is my favorite point)

After determining that there might be a business, Devon and Bennett realized they didn’t know anything about large orchard irrigation. Many would go ask consultants, do farmer interviews or simply build without consideration for customer needs. Devon did something rare— he took a job working for a viticulture management company for several months where he drove from vineyard to vineyard and got to learn the inner workings of large irrigation systems and the problems the farmers and irrigation managers face. Devon would then report back to Bennett what he learned, helping to form a deeper understanding of the customer context, the problem to solve, inform product development and company focus.

Devon got paid by a different company while building his own business.

3. Nail Your Customers Job-to-be-Done

Much of the reason for taking on a job was to grasp a better understanding of the “job-to-be-done.” (highly recommend watching the linked video)

The theory of Jobs to Be Done is a framework for better understanding customer behavior, identified by the late Clay Christensen.

The framing is that people don’t “buy” products, they “hire” them to perform some job in their life or within their business that moves them forward to an outcome or goal.

It’s based on the classic quote that “people don’t want a quarter-inch drill bit, they want a quarter-inch hole”. The premise is to figure out what kinds of situations people might find themselves in, contextualize the situation under which decisions are made, understand what kind of pain individuals experience, and why they might go looking for solutions to solve that problem. This framework has been cited numerous times within Upstream and I think is a useful lens for informing a deeper context and understanding for why customers (and farmers) do what they do.

Irrigation technology companies have struggled with adoption and success. In 2021, I teamed up with Tenacious Ventures to write the The agtech adoption dilemma: irrigation where we highlighted the psychological aspects challenging adoption. Devon and Bennett wanted to avoid this and so they worked to be crystal clear in the job to be done.

The takeaway they shared with me is subtle, yet incredibly astute:

“In irrigation, everyone thinks the job to be done is opening and closing valves…the real job to be done is getting a certain amount of water on the crop at the right time”

The reason this context is notable is that irrigation systems are complex— opening and closing valves is one small component of irrigating. There are other components that need to be simultaneously working, measured and managed, including the water pump, pressure fluctuations, flow rate limitations and much more.

This insight informed the unique product development that made for them designing their smart irrigation valve, which has a built-in controller and flow sensor, while also being connected to the internet.

4. Focus, Focus, Focus, then Focus Some More

Businesses often go after numerous different markets simultaneously. In the world of start-ups, this is acutely challenging because it stretches people and financial resources at a time of financial constraint.

As Shawn Carolan has stated, start-ups don’t starve, they drown.

I have talked about a lack of focus as a key challenge of Indigo and FBN.

In order to raise money, venture capitalists are drawn to large total addressable markets (TAM).

When a young start-up is in need of a capital injection, it can be easy to say “why not go after geography x or crop y as well? We already have people asking for it in those crops and regions.” And that is how a start-up can drown.

Start-ups often focus on “de-risking” VCs TAM risk (aka too small to ever deliver a return even if successful) before de-risking the operations of their own business.

Bennett and Devon told me they want to ensure the business works operationally in a specific geography, in a specific crop before expanding anywhere else.

In fact, Lumo only operates in wine grapes in the Napa/Sonoma region of California. And in their words to me, they will continue to do so until they reach at least $1 million in ARR.

It takes immense discipline to operate this way. Customers always ask for more, VCs want to see a product can work beyond a small region and crop and often founder ego drives a desire for “bigger.”

Lumo just closed a seed funding round, and in an already challenging raise environment, it was made more challenging because many VCs expected them to expand beyond their focused region and crop. They wouldn’t budge, illustrating their conviction.

As they pointed out to me, almond growers face different problems than grape growers, have different regions and different end users and demands. This would challenge the operations of the young business. Expanding too early would require them to spend more capital on people, change the product, and stretch their attention.

It’s noteworthy that Bennett and Devon both worked for Yelp— a market place-esque business. Marketplace operators have to be disciplined in when and where they expand because of geographic nuance and the need to build out network effects tjhat make marketplaces successful. Geographic nuance is well-known in agriculture and one of the most under valued marketing tools in agriculture is farmer-to-farmer praise— something that can only gain momentum in a constrained geography and is its own form of network effect.

Final Thoughts

Lumo is still early. They operate in an area of agriculture I know virtually nothing about. However, the approach Devon and Bennett have taken to build the initial product and customer base is compelling, and makes them not only worth worth watching, but also learning from for anyone building a company or building a product.

4. Biological is Not a Category - The Future of Agriculture

As always, this is a wonderful podcast from Tim Hammerich.

In it, he shares his view, along with some leading agricultural companies, on the bio molecule space, such as the following:

The term “biological” doesn’t tell a farmer customer anything about what the product will do for them. Is it effective? Is it profitable? What value does it have? In fact, in some cases calling it a “biological” is used to almost justify that it’s not as effective.

I share similar sentiment to Tim. The emphasis in “biological,” often stems more towards a macro consumer marketing message.

Being precise in how we talk about biologicals is crucial to have a constructive conversation about the space.

There are multiple sub-segments, as we can see in this graphic I created (working on simplifying, thanks to everyone who shared constructive feedback), all of which are going to have their own strengths and weaknesses depending on a host or parameters from needs, crops, conditions and more:

Thanks to comments from two individuals that have built companies in the bio and nutrition space, they highlighted something to me important that is in the same vein of what Tim gets at in his podcast:

“Biologicals” is the wrong umbrella term. 

For the full analysis of how bio-based molecules can be better thought of, including where bio ends and synthetic begins, whether it matters, what we really mean when “biologicals” gets mentioned and more, become an Upstream Ag Professional member today:

Crop protection rebates can be challenging to understand and are a topic I frequently get questions on, both from individuals entering the industry looking at a black box, or those looking to build one into their product launch. This post gives a great overview of how to think about them, including examples of how to strategically use them.

Bunge and Viterra announced last May that they had agreed to a merger that will create one of the world’s largest agribusiness companies, moving it closer in size and scope to competitors like Cargill and ADM. 

The Competition Bureau of Canada issued a report April 24 that the proposed acquisition of Viterra Ltd. by Bunge Global SA is likely to result in substantial anti-competitive effects in the market between Viterra and Bunge.

There are some more specific issues raised, such as canola crushing competition in certain markets that are likely to be alleviated, but there is one component that stands out: Bunge’s 25% interest in Canadian grain company G3 (along with Saudi Agricultural and Livestock Investment Company), one of the largest grain originators and exporters in Canada. G3 and Viterra hold a combined share of 42 per cent of elevator capacity in western Canada, meaning that the the new Viterra + Bunge entity would influence a significant portion Canadian grain origination and export.

It seems likely that a sale of the 25% interest in G3, along with the potential sale of one or two crush facilities, would appease the competition bureau.

7. Notable South American News

For those beyond the borders, Brazil is often a “must-win” market. A steady stream of companies have entered Brazil by either buying Brazilian companies (like Syngenta acquiring the popular farm management software, Strider), partnering with Brazilian companies (Grao Direto has financial backing from nearly all of the global majors: Cargill, ADM, Louis Dreyfus, Bayer and BASF), or building their own solutions with a Brazilian flavor.

Nutrien Ltd, the world’s largest maker of fertilisers, said it is seeking to sell its retail operations in Argentina, Chile and Uruguay in order to focus on Brazil and other global markets.

Nutrien’s Brazil business had negative EBITDA in 2023. As highlighted by Ariel Patton above calling Brazil a “must-win market”, other countries taking resources could be one thing hindering success in Brazil for Nutrien.

The growth of the biologicals market, specifically in Brazil, is based on a nurtured “ecosystem.” There is a concerted effort between regulatory, government support, and educational programs, to provide the production system with increasing alternatives for growers. Thankfully, Brazilian growers themselves are highly entrepreneurial.

Agras T50 features a coaxial dual-rotor design and 54-inch propellers, enhancing stability for its 40kg spraying or 50kg spreading payloads. It boasts a dual atomization spraying system that can efficiently cover up to 50 acres per hour. For additional versatility, it can be converted to spread dry granules at a rate of up to 108 kg/min.

To date, over 980 million acres worldwide across over 100 countries and regions have been treated by DJI Agriculture drones.

Related: What Happened to John Deere’s Ag Spray Drone? - Precision Farming Dealer

Non Ag Article

Traba is taking a different approach. Traba implements a Chinese-style 996 schedule (12 hour days, 6 days a week). While peers and forebearers emulate the decadence of a banal, patronizing Rome, Shebat is aiming for something closer to Sparta. Intensity, effort, sweat – these are not the unsavory byproducts of building a company; they are the end, in and of themselves. “The purpose of life is to be defeated by greater and greater things,” the poet Ranier Marie Rilke wrote. Above all, this seems to be Traba’s pitch: tech’s best talent wants a mountain to climb, not a nap pod.

Other Interesting Ag Articles