Can digital farming deliver on its promise?

Precision Ag has been the hot topic in the Agtech sector, particularly with the acquisition of the first “Ag Unicorn” Climate Corp by Monsanto and the subsequent gold rush of new digital ag startups. As farmers face lowering commodity prices and squeezed farm margins, a plethora of startups are now attempting to persuade farmers they can deliver more value per acre. In doing so, these early innovators hope to convince investors that they can get the attention of the other “Big 6” players and rapidly grow onto millions of acres with software-like margins.

Turning Investor Interest into Market Traction

Silicon Valley investors have been at the forefront of this expansion, bringing expertise in Big Data and IoT (the Internet of Things) with low-cost mobile platforms and novel business models, linked to broad access to innovation capital and talent. It is an intoxicating mix for a traditional industry like Agriculture. However, Agtech is also following a well-trodden and proven formula – riding the cost curves of other industries (Life Sciences, for example) to adapt and innovate for the farm and food industries.

Precision Ag is not an overnight phenomenon – established industry players like John Deere and IBM have been engaged in smart-farm equipment development and software integration for large-scale farms for years, and more recently web and mobile-based tools. However, it is novel that VCs and entrepreneurs have now turned their attention and talent in disruptive high tech to Agriculture in such a concentrated fashion. In fact, industry source AgFunder expects the Agtech investment trend to top $3B in 2016.

Digital and precision Ag companies easily make up the largest segment of Agtech deals by number. However, the jury is out on whether this wave of innovation will lead to strong market adoption. Farmers demand a step change in value; only startups delivering on a clear value promise will be able to scale and drive profitability. After all, it’s a sobering counterpoint when considering the adoption rate of new technology by farmers – self-steering tractors and combines, for example, are less than 20 percent adopted after a decade or more of effort.

Digging into Ag Data

Precision Ag is about improving the key decisions farmers make about planting, fertilization, crop protection, and irrigation on the inputs, as well as yield and quality outputs at harvest. The farmer traditionally relied on experience and historical knowledge to undertake these steps according to the schedule for each season. Unprecedented low-cost access to real-time data, particularly on weather and soil/environmental conditions, is changing the farmer’s ability to both digest information and to automate via internet-connected farm equipment, devices and infrastructure. This is profound when considered alongside the trend in increasing farm acreages with the number of 5,000+ acre farms growing over 150 percent in the last 30 years. Farms are getting larger, and with less labor engaged in Ag, real-time decision support and automation will grow.

Of course with more data comes the challenge of making sense of it, and acting upon it in a timely manner. A major area of focus for the first wave of digital Ag companies has been around data visualization tools. Focused on satellite and aerial imagery (deployed by aircraft and drones) and application to weather prediction, variable-rate fertilizer application early on, these tools have now extended to water usage and even crop protection indicators. However, because these startups access needed information from public sources like USGS soil maps and commercially available sources including farmer machinery data, they also run the risk of “me too” products and have difficulty differentiating their offers to farmers thanks to corresponding pricing pressure.

Another key trend has been accessing machine data from the farmers’ equipment to drive greater precision in planting, topographical mapping and soil data. This was recently underlined by the Monsanto-Precision Planning /John Deere deal over data. With a rapidly growing list of providers and solutions, the landscape is both rich but potentially confusing for the farmer trying to decide if this latest wave of the data revolution can deliver on-farm value. It also underlines a fundamental challenge – getting to farmer customers cost effectively and retaining their business once earned. The traditional Ag players will likely play a major role in the emerging distribution models for the new kids on the block.

Taking the Next Step

In this context, it is important to understand where the next generation of precision Ag companies can create and capture value. At Finistere, our thesis is that whatever the startup is focusing on—be it irrigation, on-farm automation or fertilizer application—it is paramount to demonstrate economic utility, as well as improved functionality or ease of use. Whether it is time and efficiency created through automation, access to mobile platforms that can be used in the field, or ubiquitous data access, improved functionality is a key feature of precision Ag for the farmer.

However, for the farmer trying to make sense of the myriad of solutions, the demonstrated ability for a precision Ag solution set to deliver true utility on a non-linear, scalable basis is the ultimate selling point. Utility is simply economic gain per acre farmed. The accepted benchmark in the Ag industry is that the farmer expects $3 of gain for every $1 invested.

With companies hyping their claims to “millions of acres” under management, the question these companies need to answer is what can they sustainably charge farmers for these services based on the utility created per acre? Answering this question will help determine winners and losers in the space. Seed companies are able to charge $25 and more per acre. It is no mistake that a key reason for the success of traits is demonstrable yield/cost benefit. So far, data visualization companies have not been able to command this kind of pricing.

The challenge is clear for the precision Ag startup – not just to capture acres, but to show farmers there is significant value embedded in the data that they can unlock. With dozens of companies funded in 2013-15, it will be intriguing to see how many of the new digital Ag players can survive a likely Series B funding crunch in 2016. Delivering high value to farmers will likely be key.