Upstream Ag Insights - November 27th 2023

Essential news and analysis for agribusiness leaders

November 27, 2023 • Read Time: 19 minutes

Welcome to the 194th edition of Upstream Ag Insights!

Index for the week:

  1. Ecosystem Innovation Through the Lens of InnerPlant

  2. Upstream Ag Professional Video Summary for Q4 To Date

  3. Anglo American’s high-stakes bet on a new way to feed the world

  4. Carbon and Deveron Q3 2023 Results

  5. Rock, Paper, Scissors and Enhanced Rock Weathering

  6. John Deere Q4 2023 Results

  7. FMC Investor Day 2023 Highlights and Analysis

  8. Q3 2023 Agribusiness Results Highlights and Analysis

  9. How to Miss By a Mile

This week’s edition of Upstream Ag Insights is brought to you by:

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What agribusinesses can learn from *InnerPlant and applying The Wide Lens to their strategy.

Two weeks ago, I highlighted the announcement surrounding InnerPlant, John Deere, and Syngenta creating an ecosystem in working toward plant-by-plant disease management.

I used the term ecosystem to describe it very pointedly.

The reason stems from reading professor and strategist Ron Adner’s book The Wide Lens.

I think using just a few of the concepts from the book helps us understand why InnerPlant is seeing success and paints a picture for future players within the ecosystem.

InnerPlant through The Wide Lens

The back page of The Wide Lens states the following (emphasis mine):

How can great companies do everything right— identify customer needs, deliver excellent innovations, beat competitors to market— and still fail?

Many fail because they focus too intensely on their own innovations while neglecting the innovation ecosystems on which their success depends. In our increasingly interdependent world, winning requires more than just delivering on your own promises. It means ensuring that a host of partners—some visible, some hidden— deliver on their promises, too.

When looking at the InnerPlant technology— a biotech trait that enables farmers to understand what a plant is experiencing (stresses such as disease, insect feeding, etc), it becomes apparent that there is an array of other technologies necessary for InnerPlant to be successful— sensors that can interpret the plant signal, satellites inexpensive and ubiquitous enough to deliver constant signal readings, pieces of equipment in a field with the ability to interpret the signals and act on them, a higher quality germplasm to place the trait, and crop protection companies that want to leverage that novel signal to deliver a better outcome to farmers as just some of the examples.

Much of this can be done in an integrated fashion by InnerPlant itself. However, there is an ability to collaborate with various influential players, increase value throughout the supply chain (more on this later), and embed itself in the fabric of industry best practices.

In a 2006 Harvard Business Review article on the same subject called Match Your Innovation Strategy to Your Innovation Ecosystem (I highly recommend purchasing the book, though the article is very insightful, too) by Dr. Adner, he stated the following (emphasis mine):

For many companies, however, the attempt at ecosystem innovation has been a costly failure. This is because, along with new opportunities, innovation ecosystems also present a new set of risks—new dependencies that can brutally derail a firm’s best efforts. Even if a firm develops its own innovation brilliantly, meets and exceeds its customers’ needs, and successfully excludes its rivals, a market may not emerge. Whether—and when—it emerges is determined as much by the firm’s partners as by its own performance.

InnerPlant CEO Shely Aronov has not only acknowledged this in regards to InnerPlant’s innovation but has also leaned into it by establishing collaboration initiatives with the likes of John Deere, Syngenta, and others:

Risks

To lean into this approach, there is the need to navigate and optimize around, as Dr. Adner identifies, new types of risks for ecosystem development:

  1. Execution risks—the challenges you face in bringing your innovation to the required specification within the time necessary.

  2. Co-innovation risks—the extent to which the successful commercialization of your innovation depends on the successful commercialization of other innovations.

  3. Adoption chain risks—the extent to which partners will need to adopt your innovation before end consumers can assess the whole value proposition.

For a full breakdown of ecosystem innovation risks, including exclusive insights from InnerPlant CEO Shely Aronov on developing partnerships with the most influential businesses in agriculture, what the framework from Ron Adner means for future InnerPlant collaborations and how to apply it to your own business, become an Upstream Ag Professional member today:

Disclosure: I am an investor in InnerPlant

2. Upstream Ag Summary for Q4 To Date Video - Upstream Ag Professional

Upstream Ag Professional members receive access to exclusive videos, including monthly reviews of the most important news, events, research, and deep dives from around the agribusiness and agtech world.

This month’s edition includes elaborate video commentary on the following:

  • Biological Company Headcount Reductions

  • Q3 Agribusiness Earnings Highlights

    • Continued Destocking in Crop Protection business

    • Syngenta

    • Bayer

    • FMC

    • Fairfax and Farmers Edge

    • Valmont Writes Down Prospera Business

  • InnerPlant, John Deere and Syngenta Partnership

The video can be viewed at the link, along with access to a PDF version of the slides used.

Anglo American (AA) is one of the largest mining companies in the world, including having majority ownership in diamond giant DeBeers.

In January 2020, AA purchased Sirius Minerals, an entity establishing a mine in North Eastern England.

The mine, named The Woodsmith Mine, has 50+ years of multi-million tonnes of production of polyhalite, a mineral that contains potassium, sulfur, calcium, and magnesium. Notably, it is low in chloride and can be positioned as an organic-approved fertilizer.

Polyhalite isn’t entirely new— ICL markets polyhalite-baseds products as Polysulphate.

According to the ICL annual report, they produced just under 950,000 tonnes in 2022— up from just over 700,000 in 2020. According to the FT article, the market is approximately 3 million tonnes in total today.

AA has bigger aspirations for its polyhalite product, though, marketed under the Poly4 name:

The Woodsmith mine is set to ramp up to 5mn tonnes per year by the end of the decade and go to 13mn tonnes a couple of years thereafter, depending on market demand. The risk of oversupply is clear. 

For a breakdown of the growth aspirations compared to industry leader Mosaic, where the challenges are in the product and where the business is headed in the future, become an Upstream Ag Professional member today:

This week, ag company Deveron announced its Q3 2023 results. I won’t dive into the results themselves, but I think they’re worth highlighting because of the macro insight they can shed into carbon markets.

In 2021 Deveron announced a “first of its kind platform to provide a scalable and streamlined process of collecting, analyzing, and sharing in-field soil carbon data to support the development of carbon programs” along with an “initial enterprise customer in the United States.”

In 2022, they announced another enterprise customer.

When looking at their investor deck it becomes apparent that these enterprise customers are likely Yara (Agoro) and Bayer. Both of them have announced large carbon-based efforts over the past two years, and both of them seem to be hitting road blocks with uptake.

Deveron acquired A&L Labs in 2022, one of the largest soil testing labs in North America, which further delivers insight into how soil testing is progressing.

Over the past 18+ months Deveron has forecasted more carbon-based soil testing. If carbon credits are increasing, so will soil testing demands beyond fertility testing.

But it simply isn’t coming to fruition:

Soil fertility testing activity saw a strong 21% increase, however this was largely offset by declines in soil carbon collection, testing volumes and revenue resulting in modest overall growth for the period.

Ongoing variability in carbon markets slowed Deveron's organic growth rate in the quarter as the adoption of carbon programs was slower than the market originally indicated. With this continued volatility in underlying carbon markets, the Company plans to scale back its network investment in carbon.

I highlighted Deveron’s results because I believe they can be a bellwether or basic directional arrow for how things are trending in the carbon market.

The commentary from Deveron was not surprising given the sentiment surrounding carbon programs of the last 12 months, however, they can be a notable indicator of when/if things ever pick up.

With an estimated 6 Billion Bushels being used for Ethanol production next year, Continuum Ag has set their sights on helping the industry SCORE (Carbon Intensity Score) over a billion bushels in 2024.  The Billion Bushel Challenge initiative helps support the Continuum Ag’s mission and vision as a company, to help a million farmers improve their profitability via improved soil health. 

Useful carbon-related resources for those interested:

5. Rock, Paper, Scissors - Software is Feeding the World

This is an excellent breakdown of enhanced rock weathering by my friend Rhishi Pethe.

Net sales for John Deere’s production and precision agriculture business were down 6% to $6.97 billion in the fourth quarter. The strong 26.4% operating margin was primarily influenced by price realization, positive currency translation, and favorable production costs. They are forecasting lower margins and lower sales in 2024.

Deere stock was down >5% after the earnings. Not necessarily because of the 4th quarter performance but because of the guidance for 2024.

7. FMC Investor Day 2023 Highlights and Analysis - Upstream Ag Professional

FMC Corporation, heavily reliant on its diamide business which contributes $3.35 billion (58% of total revenue) from insecticides, is actively defending this segment through innovation in formulations and manufacturing.

This defense is crucial in light of skepticism from entities like Blue Orca Capital and impending patent expirations. Notably, key diamide products Chlorantraniliprole and Cyantraniliprole generated about $2.1 billion in 2022.

To diversify and drive sustainable growth, FMC is expanding beyond insecticides by integrating plant health molecules into new product categories. FMC is ambitiously targeting its Plant Health business to reach $2 billion in revenue by 2033, up from $234 million in 2022, requiring a 20% compound annual growth rate. This aligns with the industry's trend towards integrated pest management solutions.

Additionally, FMC is enhancing technical support for growers and adapting its market strategy to facilitate product adoption, though this approach presents challenges in balancing distributor relationships.

For deeper analysis, images, and a breakdown of the FMC business, become an Upstream Ag Professional member today:

Key Themes from Q3 2023 Agribusiness Results

  1. Continued Destocking for Crop Protection Companies

  2. Corporate Dynamics

    1. Syngenta IPO on Hold

    2. Bayer Corporate Restructure

    3. FMC Battling Short Seller

  3. Fertilizer Earnings Tighten

1. Continued Destocking

One central theme was the continued destocking challenges for crop protection companies.

FMC had its investor day this week, where they shared some data illustrating just how large of a correction this was, with the data showing upwards of a 20% drop in crop protection sales globally:

If we look back at Q2 commentary from companies like FMC and Corteva, both organizations anticipated it subsiding within the next quarter.

That turned out not to be the case, with most major crop protection companies’ volumes shrinking a small amount (eg: Bayer) to some companies like FMC shrinking upwards of almost 30% year over year in Q3, and some even larger drops in regional business units, such as 65% in UPL’s North American business.

And they anticipated it for another two quarters, potentially alleviating towards the middle of 2024.

From FMC CEO Mark Douglas:

I would say next year Q1 is going to be more difficult because the inventory had not reset so Q1, 2023 was a pretty good quarter kind of flattish to 2022. That's not going to be the case. We're going to see that inventory reset continue in Latin America, likely in Europe as well, and maybe even a little bit in the US. We'll see how we go through Q4. I think things will start to change in Q2 as we start to lack the industry reset. And then I expect the industry to move forward in the second half of the year.

Commentary from Nutrien reinforces the channel is still apprehensive, too. Jeff Tarsi, President of Nutrien Ag Solution’s stated the following on their investor call:

We look from supplier side of things, as Ken said, we will be very selective and opportunistic on our purchases in the fourth quarter. And I do think he used the word normalizing. I do think that the purchases, supply demand has normalized over the last 12 months and growers, they are not as keen to purchase ahead of time right now because they are not as worried about supply and inventory from that standpoint.

Looking at Q2 results, I poorly thought through two important aspects surrounding a rebounding of purchases by the channel:

  1. A lot of the reason for increased inventory levels within the channel/farm was from uncertainty surrounding supply and product availability in post-COVID. As the certainty of supply grew, it should have been obvious that purchases would not immediately rebound after just one quarter.

  2. Elevated interest rates actually incentivize the channel to target lower-than-normal inventory levels so they can better manage their cost of capital.

2022 was the peak of the cycle. This means we are likely to see the new crop protection baseline at around the same crop protection revenue as 2019, and there won’t be a rebound to 2022 highs, but a slow progress back towards that number over the course of several years, likely close to the ~3% CAGR.

FMC has a view similar to this:

It is our view that when the global destocking ends and channel inventories have been reset, there will not be a “snap-back” restocking period. Rather, we expect that the crop protection market will grow from that reset inventory base at more historical growth rates.

Future Implications

Companies like FMC are committed to changes in their business structure in Brazil, and it seems likely that they won’t be the only major player to manage costs in their business in the coming 12-18 months.

Ironically, at its Investor Day, FMC highlighted the fact they would be hiring more technical staff to get closer to the grower.

Grower sales representatives have been a trend in parts of North America for close to a decade, primarily as a mechanism to more directly influence the grower, generate demand, and sell novel products. It has another benefit, though: deeper farmer insight. Some of the commentaries have been that farmers held more on farm than was anticipated, and given the nature of the business, this is tough to track through the distributor—however, a swath of technical grower salespeople can deliver more data points to better understand the market dynamics in a ground-up fashion.

Leveraging technology is another component to watch. Historically, once a product is sold into the channel, there is a loss of visibility outside lagging sales reports, general conversations (this is likely to ramp up, too), or end-of-season POG (product on the ground) data from various market intelligence companies. This is a huge gap. Software can help support this by connecting the manufacturer to the distributor or manufacturer. There is nuance to what these organizations would want to share, but there are natural benefits to the distributor along with the potential to incentivize these groups as well.

For full access to Upstream Ag Professional Highlights and Analysis, along with the full Key Themes Breakdown, become an Upstream Ag Professional Member today:

Non-Ag Article

This is a classic article by renowned venture capitalist Bill Gurley that I re-read this week.

I think the applicability to agriculture is the consideration of how once you change the various dynamics— convenience, cost structure, information access etc, with a technology, what are the 2nd and 3rd order implications of that and how does that impact adoption, product utilization and your business long term?

Other Ag Articles