Upstream Ag Insights - February 19th 2024

Essential news and analysis for agribusiness leaders

February 19, 2024 • Read Time: 21 minutes

Welcome to the 204th Edition of Upstream Ag Insights!

Index for the week:

  1. Farmers Edge Announces CommoditAg Now in Canada: Can an online marketplace work in North American agriculture?

    1. Muddy Waters Short FFH Report

  2. Sense-prescribe-act: Sentera takes on precision weed management with alternative to See & Spray

  3. John Deere Q1 2024 Earnings

  4. 2022 USDA Agriculture Census Highlights

  5. EPA Provides Update on Over-the-Top Uses of Dicamba

  6. InnerPlant Achieves Satellite Dection in Argentina

  7. The Insight is the Edge: Why CNH Industrial Struggles to Keep Up

  8. Why Growth Models Fail

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.

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1. Farmers Edge Announces CommoditAg Now in Canada: Can an online marketplace work in North American agriculture? - Farmers Edge

Following a successful venture in the U.S., CommoditAg brings its innovative online marketplace to Canada, marking its first international expansion. 

CommoditAg’s Canadian launch is not just about products; it’s a comprehensive platform that introduces a wide array of products including nutrients, chemicals, equipment and services, creating a convenient one-stop-shop for farmers.

The first thing that comes to my mind when reading this announcement is the following quote attributed to philosopher George Santayana:

Those who do not learn history are doomed to repeat it.

Marketplaces in North America have been challenged for over two decades now.

There are bankrupted companies, pivots and struggling organizations everywhere. I have highlighted marketplace challenges extensively in Indigo, Marketplaces & Grain Marketing Tech and Aggregator Marketplaces vs. Platform Enablers in Agribusiness.

I want to be open-minded around this effort because sometimes timing does change what technologies and business models have a fit. So I reached out to Farmers Edge to ask: What novel insight or approach makes CommoditAg uniquely positioned to be successful in North America with a marketplace? 

The response was the following:

CommoditAg stands out due to its mission of including retailers that lack an established ecommerce platform/website, unlike many larger retail chains. In doing so, CAG provides an opportunity for these retailers to enhance their online presence. We also welcome large retailers too who wish to leverage CommoditAg as an additional channel for expanding their online reach.

Furthermore, our platform is designed to offer farmers a broader array of options that were previously unavailable. This includes access to services within their local area, diverse selection of small equipment, parts, other than just crop inputs. Through these offerings, we aim to cater to the specific needs of farmers while facilitating greater convenience and efficiency in their procurement processes.

United States Uptake

In the press release, they state the following:

Following a successful venture in the U.S. CommoditAg brings its innovative online marketplace to Canada

First, I wanted to see what the “successful” venture in the United States looks like.

When comparing the first 9 months of 2022 and 2023, CommoditAg experienced a ~50% decline in revenue from $5.5 million in 2022 to $2.7 million in 2023. They do state “this decline is primarily due to the Company shifting to a third-party business model”, however, I do not think $5.5 million can be considered a success when factoring the CommoditAg business itself has been around since 2017.

Marketplace Frameworks

My friend Janette Barnard, who has also not only written eloquently about marketplaces, but experienced the hurdles in building one in the animal agriculture sector, wrote a great piece called Just say no (to marketplaces). In it, she highlights many factors, including:

  • Oligopoly structures don’t go well with marketplaces.

  • The tradeoff between specificity and total addressable market (TAM).

  • The importance of liquidity.

Oligopolies and Fragmentation

The reality of oligopoly structures in agriculture has not changed and is unlikely to change. That indicates the market is not fragmented.

Renowned Silicon Valley investor Bill Gurley, wrote All Markets Are Not Created Equal: 10 Factors To Consider When Evaluating Digital Marketplaces, emphasizing what I think is one of the biggest contributors to marketplaces in agriculture being challenged:

High buyer and supplier fragmentation is a huge positive for an online marketplace. A concentrated supplier (or purchaser) base greatly diminishes the likelihood of a successful online marketplace. A highly concentrated supplier base will be reluctant to allow a new intermediary in their market, and as a result will likely fight rather than support your arrival.

Most buyers (farmers) know most sellers (input providers, equipment dealers etc.) in their given market. On top of that, there is little desire to spread purchases outside a regional geography, both from a supplier (too expensive to serve) and farmer perspective.

One of the nuances of agriculture is the psychology, sociology, and incentives of farmers.

Anecdotally, I remember working at an ag retail location in a town that was 15 minutes north of another town where we didn’t have a location— I was trying to find new customers about another 5 minutes south of the other town and had some great conversations with some fantastic farmers.

But when it came down to getting those farmers to commit to purchasing from the retail location I worked at, the answer was an emphatic “no.”

It wasn’t our price. It wasn’t that they didn’t like the company. It wasn’t that we made it more challenging to purchase products. It wasn’t a lack of credit.

We “didn’t directly support the town their kids went to school, where some of their employees lived and didn’t employ people that lived in the town.”

They wanted to support the only retailer in town no matter what because it supported their local community— they purchased lunches from the only local restaurant, sponsored the annual parade and local hockey teams, bought from the local store and more.

I bring this up because it contributes more nuance around why marketplaces will be challenged to be successful in farming— the best price might not be the most important thing.

Specificity

CommoditAg is attempting to be everything— bins, soil samples, crop inputs, equipment parts (and more). This is a challenge in marketplaces. Amazon didn’t start as the everything store, it evolved into the everything store, famously starting with books.

For the full analysis and breakdown, including frameworks for assessing whether online marketplaces can work in North American agriculture, become an Upstream Ag Professional member today:

Related: Muddy Waters Short FFH Report - Muddy Waters Research

Fairfax Financial (FFH), Farmers Edge’s largest shareholder, recently purchased all outstanding shares of Farmers Edge to take them private.

Last week, a report from MuddyWaters Research came out indicating they are short FFH “because we find that Fairfax has consistently manipulated asset values and income by engaging in often value destructive transactions to produce accounting gains.”

One of the holdings called out in the report was Farmers Edge, specifically around impairment charges:

Fairfax Under-Impairs a Consolidated Subsidiary by ~$66 Million When the Market Cap Has Already Crashed to ~C$10 Million.

On top, Fairfax allegedly made additional “undisclosed” credit access of $75 Million after already having $376 million invested into Farmers Edge since 2015.

Farmers Edge pulled $38 million on the loans in 2022, and then $36.9 million through Q3 2023, for a total balance of $74.9 million while having an adjusted free cash flow through the first nine months of 2023 of negative $42.4 million.

I was asked several times this week if the short means much for the Farmers Edge business— I do not think so. The main allegations are around accounting practices, which FFH denies, and seemingly, the market agrees too with the stock flat since the news.

The new leadership team at Farmers Edge has been implementing a turnaround plan and the early efforts are making progress (albeit from a challenging spot), which leads me to believe FFH will give them an 2-3 years of runway to hit specific KPIs at which point I am sure there will be more critical decisions made (eg: sell off parts, leverage parts in other areas of the business etc).

Sentera announced Aerial WeedScout last year. Aerial WeedScout is a selective herbicide application approach that enables a lower total use of herbicides by farmers who do not have precision spray capabilities, like John Deere See and Spray. Sentera uses aerial imaging and artificial intelligence to detect weeds and create a map with a pre-spray drone flight to generate sprayer prescriptions for herbicide applications. 

When the service was announced in 2023, Sentera did not have an official partner noted in the release. Sentera now points to “many multi-national” service users on “thousands of acres.” It shows some interest, though I suspect there are a lot of input retailers with a “dip our toes in the water and see” mindset.

The offering from Sentera is interesting. I like the concept.

However, the “sense-prescribe-act” means there is a step needed for the sensing and data collection, and then a concerted effort to integrate into the sprayer system to spot apply.

I frequently reference the below image to illustrate the connection of sensing to action in a cost-efficient and time-efficient way to obtain the best outcome from digital and precision agriculture:

Unlock all the insights and analysis surrounding challenges and opportunities in Sentera’s Aerial WeedScout product and what that means for the future of the offering, along with other company comparison charts like the one below.

Become an Upstream Ag Professional member today:

3. John Deere Q1 2024 Earnings - Seeking Alpha

John Deere reported a net income of $1.75 billion for their 1st quarter, compared with a net income of $1.96 billion in the same quarter in 2023.

Worldwide net sales and revenues decreased 4%, to $12.19 billion. Net sales were $10.5 billion for the quarter, compared with $11.4 billion in 2023.

In the Production and Precision Agriculture segment, net sales dropped 7% from just under $5.2 billion in 2023 to $4.85 billion with operating profit dropping from $1.2 billion to just over $1.04 billion, a drop of 13%, putting operating margins at 21.6%, down from 23.2% in the same quarter of 2023.

Deere re-emphasized their production and precision ag strategy:

Our Production and Precision ag strategy is predicated on three distinct pillars: product leadership, system leadership; and finally, go-to-market leadership.

Product indicates the traditional equipment, tractors for example.

The system is the integration of technology solutions into their euipment that make it seemless for customers to more plant seeds and apply chemicals and nutrients more precisely, while capturing the data surrounding that.

The third pillar is around the dealer channel and go-to-market capabilities to sell and support not only the equipment, but also the suite of technologies.

Deere then talked about the Solutions-as-a-Service uptake:

Furthermore, we are providing the dealers with enhanced tools and capabilities to drive greater adoption and utilization of our technologies. We've launched our Solutions-as-a-Service approach with customers, where we're lowering the overall upfront cost of technology and shifting to a pay-as-you-go model. Our initial experiences have been extremely favorable, as we engage a broader range of customers with our technology.

Additionally, we are gearing up our precision upgrade offerings to further drive technology utilization on many of our existing machines in the field. See & Spray premium is one of the latest products that enables customers with late model sprayers to take advantage of the savings that See & Spray provides. Early demand for this solution has been strong and beyond our initial expectations.

They are also seeing good uptake from their upgrade kits:

And one more thing to add as it relates to go-to-market. We've seen tremendous response to our newly released Precision ag Essentials upgrade kit, which is our display receiver and modem with the SaaS go-to-market approach, offering low upfront cost and annual subscription. Orders exceeded our expectations, and this approach allows us to reach deeper into the installed base of equipment, as a large portion of the sales were incremental, going to customers that did not previously have this level of technology on their existing machines.

Deere doesn’t support these comments up with any specific numbers, though.

There was also commentary on the investor call surrounding the Starlink partnership interest exceeding expectations as well. Executives touched on their monetization approach with Starlink as well, consistent with my comments from the announcement in January:

How do you monetize? One, we would expect these to come through a solution as a service model. And on top of that, enabling -- as you enable automation and enable autonomy, that comes with the combination of hardware and the potential for more of a SaaS solution as these things are getting better over time, and there's ability to continue to improve on those products. So this is foundational, particularly for Brazil, but we think it's going to drive a key component of how we think about solution-as-a-service going forward.

Three weeks ago, I wrote John Deere 2023 Annual Report Highlights and Analysis, diving into the 2023 report, including talking about the Solutions-as-a-Service portion of Deere’s business and the logic behind it.

AGCO and CNH Industrial released their earnings this week too. With Deere, CNH Industrial and AGCO all having released 2023 results, I will have more direct comparisons in the coming weeks for Upstream Ag Professional members, along with other earnings results as they begin to be released this month and into March.

I went in this direction last week highlighting numbers from the 2023 United States Technology Assessment Precision Ag Report surrounding tech adoption and the realities of targeting farmers with precision tech given the economics of their operation, concluding:

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.

This was slightly off from the data shared in the census.

This week the USDA released the official 2022 census data, which gives more granular detail that I broke out:

  • 1% of farms had > $5 million in sales (42% of total sales)

  • 5% of farms had $1 million to $5 million in sales (36% of total sales)

  • 8% of farms had $250K to $1 million in sales (15% of total sales)

  • 12% of farms had $50K to $250K in sales (5% of total sales)

  • 74% of farms had < $50K in sales (2% of total sales)

Only 6% of farms have more than $1 million in revenue. Below $1 million only gives so much cash flow to reinvest back into the business and technology.

There is ample amounts of information in the census data. Here are a few other stats:

  • 40% of farmers are over 65 up more than 30% from the previous census year while 9% of farmers are under 35.

  • 1 million farmers with less than 10 years’ experience

  • ~17.99 million acres using cover crops

  • 105.2 million acres of no-till practices used

In light of the February 6, 2024, ruling by the U.S. District Court of Arizona vacating the 2020 registrations for over-the-top (OTT) dicamba products, the U.S. Environmental Protection Agency (EPA) is providing the following update. On February 14, 2024, EPA issued an Existing Stocks Order for Dicamba Products Previously Registered for Over-the-Top Use on Dicamba-Tolerant Cotton and Soybean. This Order addresses use of the formerly-registered dicamba products and authorizes limited sale and distribution of dicamba products that are already in the possession of growers or in the channels of trade and outside the control of the pesticide companies.

An exciting step forward with the recent satellite-based detection of our signal from InnerSoy plants in a test field in Argentina.

Successfully accomplishing a working signal enables initial work with John Deere, Syngenta and GROWMARK in 2024.

For more on InnerPlant:

InnerPlant is developing genetically-engineered varieties of plants that elicit unique signals when they’re experiencing specific stressors.

When crops experience fungal pressure, are attacked by insects, lack nutrients, or are thirsty, the leaves fluoresce in different colours, serving as an early warning system for growers. InnerPlant’s trait technology platform allows remote sensors, such as satellites, to see and understand what a plant is feeling and when, delivering the ability to more proactively and precisely take action and achieve better environmental and profit outcomes (view the InnerPlant patent application here).

*Disclosure: I am an investor in InnerPlant

Recently, I listened to one of my must-listen agriculture podcasts, The Future of Agriculture by Tim Hammerich.

On the particular episode I want to highlight, Tim had Marc Kermisch, Chief Digital and Information Officer of CNH Industrial.

There are many comments from Mr. Kermisch on the future of precision agriculture and the CNH Industrial business that make the podcast worth the listen.

My biggest takeaway, though?

I can’t help but come away from listening and wondering about the vision of CNH Industrial.

In fact, the messaging comes across as CNH Industrial is content being #2 in North America to John Deere, showing little desire for leadership in any future-driven area, whether it’s autonomy, precision capabilities, or new business models.

A comment that stands out to me reinforcing this was the following regarding annual recurring revenue (emphasis mine):

“If it makes sense for the farmer and the farmer wants to go there, we will go there…we want to make sure the farmer is leading us through that business model change”

If they do not deem recurring revenue to be the future, that’s understandable. However, the rationale behind that view is noteworthy because it likely guides more than just their business model endeavors.

World-class companies lead their customers. Not vice versa.

These companies lead their customers based on unique insights that drive customer actions and behavior.

In most industries, the businesses with the insights have the edge.

CNH Industrial doesn’t clearly state a unique insight or vision guiding them, or their customers, towards the future of agriculture— whether listening to this podcast, their 2022 Tech Day, or reading investor materials, it remains unclear where they are leading their customer and why.

Find out what differentiates companies like John Deere and AGCO compared to CNH Industrial surrounding their vision for the future, their strategy and what it means for the future of CNH Industrial:

Non-Ag Articles

8. Why Growth Models Fail - Dan Hock’s Essay’s

All models are wrong, some are useful. Focus on making yours useful.

Other Ag Articles

Reflections on 2023 Agtech Trends - Global Ag Investing