By Cornelius Zeeman & Gavin van der Berg,
Fairtree Portfolio Manager & Equity Analyst
It is safe to say that the data-driven fourth industrial revolution is well underway. Newsfeeds are flooded with developments related to artificial intelligence, automation and connectivity, together with the companies enabling these fascinating innovations. As has been the case over the last two centuries, the agriculture industry looks well-placed to benefit from this economy-wide innovation. Precision agriculture is the science of improving crop yields and assisting management decisions using high-technology sensor and analysis tools.
A brief history of agricultural innovation.
To briefly summarise the waves of technological and scientific innovation experienced within the agricultural sector, there are four noteworthy developments. The first development occurred in the middle of the 18th century, which saw the steel plow and other horse-powered machines reduce the amount of labour required to work arable land. Thereafter, the internal combustion engine came along early in the 20th century, giving rise to the tractor and kickstarting significant multi-decade mechanical innovation. Post World War II, the use of fertilisers, herbicides and pesticides became a universal best practice. Lastly, genetically modified organisms, known as GMOs, were developed in the second half of the 19th century. These allowed for the planting of drought and pest-resistant seeds. The effect of these innovations can be observed in the long-term yield per acre improvements shown in Graph 1 below.
Graph 1: US corn yield (tons/acre)
Source: United States Department of Agriculture
Precision agriculture.
Today we are experiencing what appears to be the fifth wave of development within the agricultural sector. One leg relates to automation and the other to information mapping and variable rate application. Both have been ideals for a long period, but the technology required, or lack thereof, has hindered development. Despite being first theorised in the 1980s, it has taken four decades of smaller technological advances to allow for the implementation of variable rate application at scale, and we are still in the early stages of adoption.
The smaller technological advances referred to above include the widespread adoption of GPS systems, together with improved measurement and connectivity capabilities. The combination of this has allowed farmers to capture important information relating to their production efficiency. Image 1 below, an example of John Deere’s field view within the John Deer Operations Center™, is a nice illustration of how data is captured and made accessible to farmers. Areas coloured in red indicate below-average yields, with green indicating above-average yields.
Image 1: John Deere Operations Center™ field view
Source: John Deere
Variable rate fertiliser application is a good example of a system developed to take advantage of this growth in available data. Working in tandem with advanced machinery, the insights provided by information maps allow farmers the opportunity to vary the amount of fertiliser applied within a field. Application can be increased in areas where production has been below average and decreased in areas where production has been above average, with the goal of maximising profitability.
Machine vision and learning are also exciting prospects. Not only do they allow for improvements in general automation and the potential for autonomy, but also for more precise application of inputs such as fertiliser and herbicides. John Deere’s See & Spray™ technology clearly exemplifies the use case. It uses sensors and complex programming to differentiate between precious crops and pesty weeds. It then selectively applies herbicides targeting weeds only. The effect of this is a considerable reduction in the overall volume of herbicide required – 70% to 90% reduction according to some reports! The cherry on top is that the crops which farmers intend to keep healthy have reduced exposure to these harmful chemicals. Impressive, especially when considering that this is done while the sprayer is travelling at 12 mph.
Image 2: Variable rate herbicide application
Source: Medium.com
The opportunity.
Per hectare yield growth has always been top of mind. Over the years, farmers have adopted the mantra of “more with more”. Bigger tractors, faster field preparation and planting. More fertiliser, better growth. More pesticides & herbicides, better plant health. In this way, precision agriculture is different – it creates the opportunity to do “more with less”.
John Deere has pegged the incremental farmer value-added opportunity from precision equipment at $150bn, driven by expanding revenue via higher yields while decreasing input costs. While we don’t place too much emphasis on the exact number, assessing the use cases leads us to believe that the optimism surrounding precision agriculture is well-founded.
Conclusion.
It is worth mentioning that a key hurdle to increased adoption of precision agriculture is the high upfront cost associated with the equipment. To deal with this, pilot programmes showcasing the potential profit of this technology, and subscription-based models, are being explored. Operating within a concentrated industry with various barriers to entry, we would argue that the agriculture equipment OEMs are well placed to capture a significant portion of this value added to their customers over time.
The first two waves of agricultural innovation were industrial in nature and the last two were biological. The latest wave of innovation is data-driven, and as big tech has pointed out; data is a force to be reckoned with. This further supports the long tail of potential growth, throughout the business cycle, lying in wait for the agriculture equipment market.
Disclaimer:
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