Embracing innovation: AgTech trends

Karol FlureKarol Aure-Flynn, Wells Fargo Sector Analyst, Specialty and Non-Grain Crops sector

Innovation is the hallmark of farming. Small and large farmers and other businesses throughout the agriculture value chain, from first stage processors to final packagers, are among the greatest innovators in history. The old adage, “necessity is the mother of invention”, was born out of the farming culture where crops and food items must be produced at a price that the market can support throughout cycles of commodity boom and bust.

Like many of my colleagues in Wells Fargo’s Food and Agribusiness Industry Advisors Group, I cut my professional teeth as entry-level labor on our family-owned farm that produced table grapes. Since those days, I’ve worked hands-on in production in orchard development, dryland grain farming, and beef cattle production, in addition to my industry involvement in research and strategic consulting. While margins in these disparate businesses varied, I’ve seen countless strategic and ad hoc innovations driven by both growth and survival.

While farmers and ranchers often are forced to create inventive “on-the-spot” fixes when faced with temperamental equipment and impending weather challenges, it’s their adoption of new technology that demonstrates their appetite for continuous improvement. Technology adoption in the agribusiness sector holds a special place in my heart because of my former experience as an entrepreneur. Building a start-up systems integrator of Global Positioning System/Geographic Information System (GPS/GIS) in the late 1990s provided me with invaluable life lessons. While I found that raising money in the unromantic agriculture space set against a backdrop of dot.com start-ups was exhilarating, I also learned some brutal lessons specific to the cost of product and market development.

AgTech is blossoming

Fast forward 20 years, and investments in technologies targeting the agriculture industry now have a growing track record and strong momentum, and the agriculture industry continues to rapidly adopt new tools and techniques. From a banker’s perspective, keeping pace with investment activity and market adoption of technology is imperative to understanding the customer.

While technology is not new to agriculture (think mechanization, cotton ginning/picking, refrigeration, synthetic fertilizers), “AgTech” is a new moniker in the industry. Innovation is required for greater efficiency and productivity along with regulatory compliance. And, AgTech addresses these requirements through an ever-expanding stable of enabling technologies including advanced plant and animal breeding, advancements in inputs (fertilizer, micronutrient, and pest management), Internet of Things (IoT) connectivity, robotics, and global positioning.

Farmers and food processors are utilizing these tools to extract measurable improvements in food safety, traceability, food security, logistics and distribution, livestock handling ethics, resource management with water and soil stewardship, and automation of labor intensive activities. For a fragmented industry with many subsectors and national security overtones, the ability to collect, aggregate, and mine data attracts a range of customers. As a result, AgTech companies have seen an increase in investor interest as they begin to scale operations.

In 2016, approximately $3.23 billion was invested in AgTech by 670 unique investors. The chart below illustrates the various industry subsectors in which investment activity has occurred.

AgTech Sub-sectors

Ag Tech Sub-sectors

Source: Wells Fargo

Market adoption

Within the start-up I founded in the late 90s, we debated the perils of being early to market. The reality is that the early stage adopters provide clues as to market needs, but speed of adoption is complicated. Moving from one stage of product development to the next is not always a straight line, but given the benefit of time, can start to resemble one. Market adoption of advanced seed genetics is a prime example. Introduced in the mid-1990s, activity was driven by farmers’ pursuit of higher crop yields and lower production costs. More than twenty years later, the story is complicated by regulations, public opinion, and a tangled web of startups and acquisitions. Supported by strong science, management time savings, and other tangible benefits, market adoption of genetically engineered crop varieties has now plateaued at 92 – 94% of planted acres for corn, soybeans, and cotton.1

The adoption of GPS-related technologies demonstrates another example of pervasive innovation. GPS-enabled precision agriculture is defined as the use of various tools to understand variability and direct precision placement of inputs. Starter technologies provided initial savings and hooked users on a series of next-steps. Soil and yield mapping turned out to be precursors to variable rate application of fertilizer or even precision placement of specialized seeds. Over the past decade, the adoption of variable rate application in grains, oilseeds, and even peanuts, has increased significantly as a percentage of total crop-planted acres. Within this group, it turns out that other socio-economic factors, such as farm size, crop diversification, and management structure can also be predictive in adoption.

Percent of Crop Planted Acres

Source: USDA, Economic Research Service estimates using data from the Agricultural Resource Management Survey (ARMS) Phase II.

Adoption of variable-rate application technology (VRT) by crop

Specialty crop and agribusiness processors are clamoring for answers in a challenging environment and dealing with the frustrations of market-readiness. The cycle of technology development and adoption in the agribusiness sector can be lengthy. To illustrate this point, examine a broad overview of California’s processing tomato industry, which produces more than 90% of the U.S. processed tomatoes and nearly half of the world’s total processed tomato tonnage.2 Yields and efficiencies in California’s tomato processing industry remained in lockstep with technology development and implementation, but the steps were decades in the making. The California Tomato Growers Association was one of the first to provide their grower membership with electronic tagging for real-time assessment of load weights and preliminary harvest quality testing.

Simplification of Technology Adoption

Source: Wells Fargo

Product development

Product development often lags need, and the market adoption cycle can be fickle. The question for the developers and investors in early-stage companies becomes how to start faster, develop smarter, and get to market sooner. In the 1990’s, my company’s prospective customers were willing to do field tests and “prove-it-to-me” trials. Today, these same early adopters are willing to take more risk with closer collaboration at earlier stages. And, the corporate appetite for investing in AgTech is also increasing with a growing number of companies creating their own Venture Capital funds. There could be a number of reasons for this:

  • Belief that earlier stage deals will be of benefit by hastening access to new technology
  • Belief that there is little choice given the direction of the industry and the need for rapid progress
  • The desire to gain competitive footholds

Growth in AgTech Corporate Participation

Source: CB Insights

Broaden horizons, deepen relationships

The forces that drive innovation in agriculture will continue to respond to the growing worldwide demand for safe and inexpensive food, and will mirror the speed of technology adoption in a broader social context. In other words, technology is becoming the ubiquitous background to farming practices. I believe that financial providers to the agribusiness industry must recognize a number of trends and risks:

  1. Climate change is creating challenges globally within the agribusiness industry
  2. Creativity and innovation require an understanding of the risks and rewards, including the costs of research and development, regulatory oversight, and time to market for new products
  3. Investment in AgTech requires a combination of capital, process management, and applied knowledge that brings together stakeholders with disparate views
  4. Early stage investments in emerging technologies are required in order to stay ahead of current competitors and new entrants

These trends are providing farmers, finance lenders, supply chain, and consumers with a unique opportunity to embrace innovation like never before. However, in order to be successful, each will have to forge new relationships, remain informed, and extend their knowledge base.

So, who is poised to gain the most?

  1. Those that can manage complex project development in biological systems environment?
  2. Those that can manage disparate perspectives amongst collaborative teams?
  3. Those that can promote the quickest incremental gains to real-life application?
  4. Those who can forge relationships up and down the value chain, thereby including outside perspective in product development and delivery?

Conclusion

Agriculture will always have a close relationship to innovation. Raising the bar for efficiency and productivity is critical for an environment with scarce resources and declining margins, and the complexities of food production, consumer responsiveness, and global trade are unforgiving. Therefore, continual invention, development, and adoption of technologies is a given in the food and agribusiness sectors. I am grateful for my experiences in early AgTech, and continue to delight in technology companies’ creativity as they work to address the industry challenges and agribusinesses embrace the innovations.

1. USDA, Economic Research Service
2. California Tomato Growers Association

 
 
Karol Aure-FlynnKarol Aure-Flynn is a Vice President and Sector Analyst within the Food and Agribusiness Industry Advisory group focused on the Specialty and Non-Grain Crops sector.

Karol joined Wells Fargo and the Food and Agribusiness Advisors team in 2016. She formerly worked as Director of Business Development for Young’s Commercial Transfer, California’s largest independent agricultural transportation company. Prior, she spent several years as a senior member of Entira’s strategy consulting staff. Before Entira, Karol served as an Executive Director for Rabobank International’s Food & Agribusiness Advisory and Research group covering North American grains and oilseeds.

Karol’s background also includes production agriculture experience with table grapes, almonds, figs, dry land grains, and beef. She is recognized as a pioneer in the precision agriculture industry through the founding of Precision Farming Enterprises, an early GPS/GIS systems integrator based in Davis, California.

Karol holds an undergraduate degree is from Stanford University and completed her M.B.A. at University of California, Davis with an emphasis in finance and agricultural management.
Karol is active in her community serving on St. Anne’s School Advisory, and various leadership positions with the Ducor 4-H chapter of Tulare County 4-H. She previously held long term board positions with Sequoia Riverlands Trust, a regional land trust and conservation program, and Community Services Employment Services (CSET). Karol’s family operates Flynn Cattle Company, a Tulare County ranching and farming company with roots dating back to 1874.