Upstream Ag Insights - February 12th 2024

Essential news and analysis for agribusiness leaders

February 12, 2024 • Read Time: 20 minutes

Welcome to the 203rd Edition of Upstream Ag Insights!

Index for the week:

  1. Highlights and Analysis from AgbioInvestor Agrochemical Product Discovery, Development, and Registration Report

  2. Finding Asymmetric Upside in Ag Retail and Agribusiness & New Data Builds "Model Retailer"

  3. 2023 United States Technology Assessment Precision Ag Report: What the report illustrates more than agtech adoption is the reality of farm revenue and the lack of ability to invest in technology

  4. The Agtech Disruption Myth and Disruption Through Complements

  5. 5 Ways Truterra Wants To Break The Carbon Market Adoption Plateau + What CPGs Can Learn from Precision Ag Companies

  6. Dicamba Availability for 2024 Growing Season in Question

  7. The Currency of Success

About

Welcome to Upstream Ag Insights, where each week, we dive into the latest events, innovations, and business dynamics throughout the agriculture landscape.

My name is Shane Thomas (Linkedin).

Whether you're a new subscriber or this newsletter found its way to you through a forward, you're in the right place for frameworks and insightful analysis designed to help you navigate the complex agribusiness landscape, enabling your business and career to thrive.

This week’s edition of Upstream Ag Insights is brought to you by AGI (Ag Growth International)

AGI’s mission is to advance storage, handling and processing solutions that strengthen and secure the global food supply chain. With production sites and sales offices across six continents, AGI serves customers in over 100 countries and has the local expertise to meet each customer’s unique requirements.

Key Numbers from the report:

  • The cost of bringing a new active ingredient to market has surpassed $300 million USD. The timeline to introduce new active ingredients now exceeds 12 years.

  • Stewardship costs associated with post-launch monitoring have increased by 330% in the last five years.

  • Chemical products account for about 93% of the agrochemical R&D budget, while biological crop protection products comprise roughly 7%.

  • The registration and chemistry segments of product R&D and commercialization saw the most significant cost increases.

  • In 2017, for the first time, there were more patents filed for biological pesticides (173) than for conventional crop protection products (117).

For the complete highlights and analysis of the report, including the concept limiting discovery, what companies are doing to overcome it and innovation strategy comparisons by company, become an Upstream Ag Professional member:

The “New Data Builds Model Retailer” article gives insight into fascinating Farm Journal and Ag Retailers Association (ARA) work. The survey does a great job illustrating what the “average” retailer does, including acres services with custom app, employee base, growth in product segment sales, acres served and more.

Averages are great for some things, such as contextualizing a situation or looking at trends (one of the aims of this work).

Not mentioned, though, is the reality that the average ag retail doesn’t wow its customer base, generates single-digit gross margins (and declining), is fraught with inefficiency and high employee turnover, and struggles with effective capital allocation and ROIC.

I like to look at edge cases where possible vs. averages. The margins are where the real learning opportunities are. Getting into the psyche of an innovative organization offers incredible learning opportunities.

Throughout my conversations with agribusiness and leaders and best-in-class ag retailers, I look for similarities in how they think about problems, opportunities and what’s next. The best retailers look for asymmetric upside.

Defining Asymmetric Upside

An asymmetric opportunity is simply one in which the upside of a decision or action is much more significant than the downside.

Reading Nassim Taleb’s “Antifragile: Things That Gain from Disorder” was where I first encountered the concept and a definition for what he calls “Fundamental Asymmetry”:

Fundamental Asymmetry: When someone has more upside than downside in a certain situation, he is antifragile and tends to gain from (a) volatility, (b) randomness, (c) errors, (d) uncertainty, (e) stressors, (f) time.

Every asymmetric opportunity starts with a contrarian idea. If it doesn’t, there isn’t asymmetry.

Today, most retail and retail strategies look alike, which is one aspect of why margin gets competed away (for more, check out Influence Erosion in Ag Retail)

Asymmetric outcomes are a function of supply and demand. If everyone does something, the reward gets diluted because of large-scale participation. This commoditizes the action.

This can be brought to life very simply in ag retail. I often hear, “We’re high service,” “we scout fields,” or “we deliver chemicals at 11 pm during planting”.

Guess what? Those are table stakes.

Every retailer worth their salt does these things.

They aren't differentiators that bring disproportionate customer delight or monetary upside.

The upside is in doing things no one else is doing. Said another way, if a few groups do something, the reward will get concentrated to the few that took on the risk.

This concept gets talked about primarily in investing, whether investing in publicly traded stocks or venture capital investing.

The same is true in business settings: Invest in unproven capabilities and areas. Invest across different time horizons. Invest in complex areas. This can mean investing in assets, talent, services, or other infrastructure that your competitors arent. Asymmetric opportunities are hard to identify and even harder to execute. But that's the beauty of it. If it were easy, everyone would do it!

Where Does Asymmetry Lie?

Most asymmetric opportunities come from five different places:

  • Doing Hard Things

  • Complexity

  • Apathy

  • Focus

  • Leveraging Technology Strategically

For a breakdown and examples of all the areas, become an Upstream Ag Professional member today:

This is an extensive report on ag technology adoption within the United States.

When you look at the data, it comes across as generally disappointing in adoption:

While precision agriculture technologies, such as variable rate fertilizer applications and yield monitoring, have been available since the 1990s, only 27 percent of U.S. farms or ranches used precision agriculture practices to manage crops or livestock, based on 2023 U.S. Department of Agriculture (USDA) reporting.

However, there is an important breakdown of farms by revenue:

In 2022, the U.S. Department of Agriculture (USDA) estimated there were 2 million farms in the United States, covering approximately 893 million acres. At that time, the average farm size was 446 acres. Smaller farms that produced up to $100,000 in goods accounted for approximately 81 percent of all farms in 2022 but only about 30 percent of all farmland. Large farms that produced $500,000 or more in goods in 2022 accounted for approximately 7 percent of all farms and 41 percent of total farmland.”

In this survey, one farm that produces $1,000,000 in annual revenue is considered the same as one that generates $90,000 in revenue.

That is a problem when assessing technology adoption and an operation's propensity to invest in technology.

We can imagine the free cash flow available to invest in technology on a farm or upgrade to viable equipment with $90,000 in revenue compared to one with $1,000,000+, would be drastically different.

If we use the 2 million farms number and look at what the survey defines as “large farms,” we see that only about 140,000 farms in the United States (7% of 2 million) have $500,000 or more in revenue. 

For context, a $500,000 revenue farm that grows average corn yields (~180 bu/ac) would only be farming around 620 acres.

Even at the $500,000 cut-off point, it’s questionable whether farms consistently generate enough to invest in new technologies, such as precision spraying or planting equipment.

A cash-strapped farmer is unlikely to invest in new technologies or sustainable solutions.

I have discussed The Theory of Innovation Adoption in Agriculture to improve adoption.

However, farm consolidation might be the best explanation of what will increase adoption and, therefore, outcomes for the industry and the environment.

Farms having the capital to invest in new technologies is unlikely on lower revenue-generating farms, specifically those below $500,000 in annual revenue, which is 93% of farms in the United States.

Even for farms generating $1,000,000 in revenue, assuming around a 10% gross margin (will vary by area, farm type, etc), that leaves just $100,000 to reinvest back into the farm, pay oneself, pay down debt, etc.

It’s unclear what percent of farms generate more than $1 million in revenue, but I am speculating well below 5%, which leaves <100,000 farms.

I often look at agtech company total addressable market (TAM) numbers, which usually have high potential reach; however, from the above report, these TAMs frequently do not consider the farm context. From The Theory of Innovation Adoption in Agriculture:

'Compatibility' refers to how well a new innovation aligns with the established beliefs, experiences, appetite for risk, revenues and skill requirements of farmers. This, along with portions of relative advantage, gets at the core of considering farmer psychology and the sociology of a local market.

When evaluating new technologies or practices, farmers consider how these changes fit with their current operations, goals, and values. This compatibility impacts the likelihood of adopting innovations.

This reality drastically decreases the TAM and likely adoption of many technologies. This can begin to illustrate why there is less disruption than anticipated, too (more on that in next story).

I hope these reports enable the ability to break out adoption utilization more precisely by farm size in the future. I would speculate that adoption of technology in larger farms, greater than $1,000,000 in revenue, is much higher than what the overall average is.

4. The Agtech Disruption Myth - Prime Future

This is a fantastic write-up from my friend Janette Barnard, where she highlights several potential explanations for a lack of “disruption” in agriculture.

There is legitimacy to all of them that she shared, but two stand out to me:

Maybe in agriculture, the best disruptions are more visible by what they unlock than by what they displace

Maybe the best agtech disruptions will completely shift the competitive landscape.

The first one is interesting to unpack in the context of Uber and AirBnB— thought to dismantle taxi services and hotel chains, respectively.

They have forced adaption among incumbents, impacting revenues, profits, and shareholder values.

However, they have also unlocked trapped value and made travel more accessible.

Consider what prominent investor Bill Gurley outlined in a post from 2014 — many people dramatically underestimated Uber’s market opportunity. One finance professor at NYU, Aswath Damodaran, an NYU Finance Professor, wrote early about Uber:

For my base case valuation, I’m going to assume that the primary market Uber is targeting is the global taxi and car-service market.

He calculated a TAM of $100 billion.

Uber’s market cap is $144 billion today.

Uber has displaced taxi spending, but its biggest contribution has been unlocking access and enhancing user experience, which drove increased demand for its services.

Janette highlights this in the context of genome sequencing in cattle. Gene editing and artificial intelligence, thought to be two significant technologies within agriculture, have also contributed significantly to the seed world. Sam Eathington, CTO at Corteva, highlighted similar aspects on a 2021 investor call (emphasis mine):

Now, in fact, before a seed is ever planted, our predictive analytics based on genomics and digital insights enable us to manage a larger breeding pipeline than ever before, all while increasing efficiency and data quality. We were able to predict the performance of the candidate new products prior to field testing. You know just in corn for example, we have nearly 20 times the candidates in our pipeline compared to 10 years ago far more than we could ever do a trial.

It's really industry first and this opens up new revenue stream for us into out licensing the technology. So, taken on a whole, our seed innovation position is strong, giving farmers choice and really is industry changing.

The “unlock,” in this instance, comes as a benefit to the incumbent.

One aspect of disruption comes down to “playing a different game.”

Depending on your definition of disruption, in the classical Christensen sense (low-end disruption) or in what Ron Adner calls ecosystem disruption, one seeming hallmark for a disruption event to occur is an entity playing a different game or changing the rules of the game.

Ron Adner has a book called “Winning the Right Game.”

Today, farming is focused on producing more with less and efficiently shipping and processing that farm output. That’s been the “game” for centuries.

Unless that game changes, or there is a shift in where value accrues in the value chain due to power dynamics— it will be challenging to wholesale displace incumbents because they are optimized around that competency. And the rate of change doesn’t happen fast enough for incumbents to miss it.

Janette also astutely highlighted changing competitive dynamics as an explanation for disruption, emphasizing John Deere’s See and Spray capabilities.

See and Spray is a form of disruption known as “disruption through complements,” another Adner framework.

Disruption through complements was the critical framework applied in one of the most popular Upstream Ag Insights articles of all time:

Complement-based disruption is one of the most likely “disruptions” we will see in the short term, with shifting competitive dynamics within value pools and farmer budgets.

The examples go beyond John Deere, though.

I have highlighted the likes of crop protection companies increasingly creeping into the plant health and crop nutrition budget pool or non-tradition companies competing in adjacent categories. For example, Corteva acquired Symborg and now actively markets its Utrish-N product as a partial nitrogen supplement, tapping into a different farmer budget.

Related: This is a fascinating read surrounding the question “Will Plants Ever Fertilize Themselves” in the New Yorker. It represents a further example of seed companies potentially accessing different portions of a farm budget.

The adoption of carbon programs in the United States has been much slower than anticipated. According to Jamie Leifker, Truterra President, their traction has been as such:

By our estimates, less than 2% of farmers are participating in these programs industry wide….For us at Truterra, for the first two years, we sequestered 462,000 metric tons, paid $9 million. But it was still less than 300 growers enrolled in 2022 and 2023.”

For comparison, Indigo has 2,000 farmers that have enrolled more than 6 million acres, and Agoro Carbon Alliance recently stated that they had 2 million acres, which is what Truterra target for 2024 is. FBN and ADM have indicated that they expect to serve over 3,000 growers representing over 2 million acres.

Two weeks ago, I asked subscribers in a poll whether they were bullish on carbon programs.

77% said No

(Note: N= 54. Votes are entirely anonymous. For context though, the Upstream readership skews heavily towards agribusiness professionals in crop protection/seed, fertilizer, equipment manufacturing, ag retail, and agtech start-ups. Very few downstream readers and only a small number of farmers)

The question isn’t optimal because I conflate insetting and offsetting, along with only highlighting carbon vs. other GHG, and it doesn’t factor in “regenerative ag” programs, so it is flawed to derive any meaningful insight (I will work to improve questions in future for better veracity).

With that said, the general sentiment among the voters seemingly aligns with the slow adoption rates.

Part of that has to do with the go-to-market of these programs, too.

Liefker hits on something I have talked about:

We think it’s unique and an advantage to work through ag retailers. Many have tried to go around the channel. The trusted adviser relationship the ag retailer has with the farmer is tested in time. That’s our full commitment. We are going to work via retailers. We’re going to work with them to get to and stay with the farmer as a long term and durable approach to the market

Many believe carbon programs are a zero-interest rate policy phenomenon.

But even for those bullish on sustainability programs at large, the approach of many organizations has been flawed. I wrote about it in What CPG Companies Can Learn From Precision Ag Companies in July 2023.

For a deeper dive into what CPGs can learn from Precision Ag companies and what Truterra is doing that makes them unique based on that insight, become an Upstream Ag Professional member today:

On Feb. 6, a federal court in Arizona vacated EPA’s 2020 registrations for dicamba products to be used in over-the-top applications in soybeans or cotton. As it currently stands, this means no OTT applications of XtendiMax (Bayer), Engenia (BASF), and Tavium (Syngenta) for the upcoming 2024 growing season, until the matter can be reviewed by the EPA.

This week’s news surrounding the loss of the ability to use dicamba caught many off guard. Dicamba has been used as a herbicide in the United States since 1967.

Syngenta, Bayer, and BASF all voiced their disappointment:

We respectfully disagree with the ruling against the EPA’s registration decision, and we are assessing our next steps,” wrote Bayer in a statement. “We also await direction from the EPA on important actions it may take in response to this ruling.”

BASF also reacted to the news saying in a statement, “BASF is reviewing the order and assessing its legal options while awaiting direction from the U.S. EPA on actions it will take as a result of the order. BASF remains committed to working with the EPA and other stakeholders to identify workable, durable weed control solutions for dicamba-tolerant crops and serving its customers by offering effective crop protection solutions.”

It would disappoint most even if this were for the 2025 season. Still, since the ability to use has been immediately revoked, farmers, retailers, and the aforementioned dicamba manufacturers are scrambling, hoping they can get it pushed back.

Various American soybean groups are seeking to push the EPA administration to help. The groups have urged the EPA to provide clarity of use to U.S. farmers by issuing a broad existing stocks order for dicamba manufactured under registrations currently in the supply chain, along with encouraging them to appeal the ruling.

The order would have a direct negative impact on yield and quality and herbicide resistance management in 2024 and beyond.

I suspect an entity like Corteva has concerns because of how quickly a ruling can pull the carpet out from under an entire product line, but they are unlikely to complain about the immediate gains their soybean business could experience.

According to a September 2023 Wall Street Journal article, Enlist (2,4-D Choline) made up at least 55% of soybeans planted in the U.S. in 2023. For 2024, about 60% of the U.S. soybean market was forecast to use Corteva’s Enlist between licensing and direct sales. That could increase now, too.

We can infer that would make ~40% of the soybean market a dicamba based trait, or well over 30 million soybean acres challenged by the ruling, meaning a lot of stranded dicamba herbicide if any push from the EPA is unsuccessful.

The other implication is that the longer term comes back to see and spray capabilities. While I could not find any work suggesting the See and Spray application has any impact on the drift of dicamba, if there is a loss of dicamba as a tool to manage herbicide resistance, the utilization of See and Spray capabilities can be another tool for farmers to pick up and manage them longer term.

Non-Ag Article

When Mark Cuban started his first business, “I would go to bookstores, and because I couldn’t afford the books, I would sit there for hours reading everything about business I could.” Asked if he still reads as much as he did when he was starting out, Cuban replied, “Yes. To this day. To this minute. Because knowledge is the currency for success.”

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