For several decades a growing global population and an expanding middle class with an appetite for meat, dairy, and high caloric foods, has increased the demand for processed foods and agricultural crops. As a result, the agriculture input industry—farming resources such as chemicals and seeds—have enjoyed tremendous growth.
But growth is now slowing.
While the population is still increasing, the change in population growth around the world is slowing. Developed countries have already reached peak consumption of meat, and an increase in wealth will not drive meat consumption up any higher. In addition, in a variety of geographies, the perception of meat is changing and many regard vegetarian diets as healthier as well as better for the planet. Grain crops used for biofuels production have also slowed as cheaper oil and alternative energy sources become more economic.
The year 2016 marks the third year of agricultural commodity bear market. This has put severe earnings pressure on all parts of the agriculture supply market as farmers try to cut input costs to compensate for low commodity prices. Consumers are also placing more scrutiny on food safety and quality by reducing their acceptance of many crop nutrition and protection chemicals. Food producers and retailers are responding to society’s concerns about agrochemicals in foods by setting pesticide residue thresholds 20 to 50 percent below legal requirements.
The agriculture input industry faces several developments that challenge the decades-old growth story which focuses on selling input materials in bulk and producing in high-intensity cropping systems. Instead new business models will be needed to meet the demand slowdown and complexity of regulatory and consumer requirements. Ingredient and food transparency, driven by increased consumer focus, will impact the entire supply system.
In other industries, robotics, artificial intelligence, sensing, and big data analytics have all been used successfully. For example, Royal Dutch Shell is using “data-driven oilfields” to bring down the cost of drilling. The data is then compared with thousands of other locations around the world to help the company’s geologists make more accurate recommendations about where to drill.
In agriculture, digitization is so far happening in niches with small tech start-ups developing innovative technologies, including drone-based surveillance systems (HoneyComb, PrecisionHawk, and Mavrx), satellite imaging (Google and CubeSats), decision support (Farmers Business Network, Trimble, and ITK), and robotics. Even Monsanto’s Climate Corporation digital platform only covers 30 to 40 million hectares—about 2 percent of the world’s crop land.
The Power of a Digital Platform
Establishing a digital service offering in agriculture will be a game changer, allowing access to vast portions of the most intensively used global crop land and compiling large data analytics to better understand the nuances and vagaries of agricultural systems. A service platform would enable agribusiness companies to commercialize their intellectual properties and integrate customers onto their platform.
Digitization has the power to quickly destroy well-established business models. For example, one emerging game changer is technology that can improve food safety by tracking food from farm to table or by detecting pathogens and allergens before they reach consumers. Similar developments have already taken place in other industries as business models shifted from product sales to all-encompassing solutions and operating platforms.
The rationale is simple. Large platforms attract more users, which in turn accelerates the growth of the platform. In digital farming, the first company to develop an appealing integrated platform and business model will capitalize on economies of scale and establish a dominant position. The established agricultural players are not guaranteed their place and will be competing against outside-the-industry firms such as Google, Microsoft, and Amazon Cloud.
The automotive industry has proven that size alone will not prepare companies for what is to come. Disruptive trends developed from small and new-to-the-industry firms and Silicon Valley tech giants—think electric cars and autonomous driving—quickly turned out to be game changers that forced the incumbent car companies to rethink their business strategies.
Leave a Reply