By Saeculum Research
- Caution: Every part of the agriculture industry faces headwinds. Declining crop prices have decimated farmers and agricultural machinery firms. With less cash on hand, many farmers are moving away from expensive GMO seeds—which place pressure on the bottom lines of agribusinesses. How are firms like Monsanto and Syngenta responding? For one, they are teaming up—which is less a sign of strength and more an indicator of vulnerability. They are also turning to the emerging field of tech-driven farming as their next big source of revenue. In the years to come, farmers likely will come to depend on services like prescriptive planting to get the most out of their harvests.
- Go long on chemical-heavy agribusinesses. Many farmers are moving away from GMO seeds—or are shopping around for the best deal, which has led to a race to the bottom among seed-producing agribusinesses. Chemical-heavy agribusinesses, on the other hand, may see increased demand. Why? Fewer GMO crops means that farmers must now use more pesticides and herbicides to achieve the same level of protection that they were getting from their seeds. What’s more, many chemical-centric firms like Dow and Bayer derive a relatively small share of their revenue (less than one-quarter) from farming, which shields them from the inherent volatility of the cyclical agriculture market.
- Mark down organic producers as a solid long-term play. The U.S. organic food market has transformed from a niche into a bona fide industry, exploding from just $3.6 billion in 1997 to $43.3 billion in 2015. This growth has been accompanied by a surge in producers: The Agricultural Marketing Service finds that the number of domestic certified organic producers has risen nearly 300 percent since 2002. It’s no wonder: Organic farmers enjoy profit margins up to 35 percent greater than their non-organic counterparts, according to a long-term study. Due to strong demand, companies like General Mills are even paying farmers to enter organic production.
- Take note of the myriad technological devices revolutionizing the farm. Prescriptive planting systems—which tell farmers where, when, and how to plant—have garnered plenty of attention as farming’s future. But the technology does not end there. For less than $1,000, farmers can buy an agricultural drone from 3D Robotics that captures detailed images of crop fields—no remote pilot required. Thanks to advances in robotic lettuce picking, an F. Poulsen lettuce bot is now no more expensive than the cost of human labor. All told, Goldman Sachs estimates that advances in agriculture technology could boost yields by 70 percent by 2050.
Earlier this month, Bayer orchestrated the biggest takeover of 2016 when it agreed to buy rival Monsanto for $66 billion. This is only the latest in a string of deals poised to create a new “big three” in the agriculture world.
While many observers worry that these mergers will squash competition, the truth is that so-called “agribusinesses” are trying to retain some semblance of control in a cost-constrained, demand-starved market. Firms focused on seed production in particular will be hit hard by a widespread movement away from GMO crops. In the years ahead, the emerging field of technological farming may represent the industry’s most promising growth opportunity.
The agriculture industry includes several tiers of players. The largest entities are agribusinesses like Monsanto and Dow Chemical, which compete in the $100 billion global market for crop seeds and pesticides. Monsanto leads the way thanks to its flagship “Roundup Ready” seeds and pesticides—as well as its lucrative licensing of genetic seed technology. Other entrants include agricultural equipment manufacturers like Deere & Company, CNH Industrial, and Japan’s Kubota Corporation. And then there are the farmers themselves, who comprise a small and shrinking portion of the U.S. workforce. (See: “The Future of Agriculture: Graying, but Also Greening.”)
Over the past few years, the single biggest headwind facing the industry has been plunging commodity prices. Since their mid-2012 peak, corn futures have dropped by nearly 60 percent, while soybean futures have fallen by nearly half. The U.S. Department of Agriculture (USDA) projects domestic net farm income to fall to $72 billion in 2016, down 42 percent from 2013. A further drag on farm profits has been rising seed costs: Soybean seeds today cost 305 percent more than they did in 1996, while soybean crop prices per bushel have gained only 31 percent during that time. These cost pressures have hurt farmers and equipment manufacturers like Deere, which in Q3 2016 reported its lowest quarterly “agriculture and turf” category sales since 2008.
To save money, many farmers are avoiding expensive GMO seeds in favor of natural products. Private regional seed suppliers like Albert Lea Seed and Beck’s Hybrids have reported surging demand for non-GMO seeds. Even after factoring in the added cost of chemicals, going natural is often cheaper. Farmer Kyle Stackhouse estimates that he spends about $93 per acre on natural soybean seeds and chemicals combined—versus $107 for GMO soybean seeds and chemicals. Some farmers are even mixing GMO and non-GMO varieties, looking for a combination that both cuts cost and bolsters yield.
What’s more, many GMO strains are losing efficacy, making them a less-appealing buy. Genetically enhanced crops are engineered to withstand invasive species. But back in 2013, insecticide sales began surging because a common rootworm-targeting gene in one brand of Monsanto seed had lost its effect. Meanwhile, so-called “super weeds” like waterhemp and palmer amaranth have grown resistant to herbicides. The effect: The average soybean farmer has only seen 4 percent growth in crop yield per acre over the past decade.
But the movement away from GMOs goes deeper than cost. Farmers are also responding to heightened consumer demand for natural products. In their youth, Boomers flocked away from Big Food and toward authentic, organic brands. In the years since, their tastes have gone mainstream: “Fresh” and “authentic” have turned into calling cards for health-conscious Millennials. Additionally, attentive Xer and Millennial parents are paying more for organic baby food in order to give their kids the very best. (See: “Nothing’s Too Good for My Baby.”) This trend is particularly evident in Europe: Just last year, a whopping 19 European countries banned GMO crops outright. In an overall climate of declining prices, organic food is resisting the overall trend toward lower prices—and generates high margins for efficient producers.
This shift away from GMOs hammers the profit margins of seed-centric agribusinesses like Monsanto, a company that earns 33 cents out of every dollar that its biotech products save farmers in chemical and labor costs. Poised to benefit are chemical-centric firms like Dow that are seeing heightened demand for pesticides and herbicides.
How are agribusinesses adjusting to this new cost-constrained, all-natural environment? The largest are scaling up. In addition to the Bayer-Monsanto deal, China National Chemical Corporation plans to acquire Syngenta for $42 billion. Meanwhile, Dow and DuPont are pursuing a $130 billion megamerger. To be sure, each merger still has to pass muster with Justice Department regulators before becoming official.
While plenty of observers worry that the moves would threaten competition, they are actually a defensive measure showcasing the industry’s weakness. A recent Quartz article warns that we will soon see “the biggest farm-business oligopoly in history.” Other forecasters are wary that consolidation will hurt independent seed suppliers that license genetic technology from agribusinesses. But mergers may be the only way that Big Ag can survive the double whammy of diminishing farmer purchasing power and falling demand for GMO seeds. Research firm Sanford C. Bernstein projects that companies likely will be unable to raise seed prices more than inflation over the next three to five years. That type of cost pressure will be tough to withstand—or near-impossible if the mergers are blocked.
Led by Monsanto, the industry is turning its attention to the nascent field of tech-driven farming as its next big revenue stream. With “prescriptive planting,” farmers receive detailed, actionable information on soil and weather conditions. Over the past four years, Monsanto has spent more than $1 billion in acquisitions to build its tech arm—which company executives expect to generate hundreds of millions in annual revenue by the end of the decade. Agricultural machinery companies are getting in on the action as well: CNH Industrial recently unveiled a prototype of an autonomous tractor that operates using cameras, radar, and GPS.
To be sure, tech-driven farming is a long way from going mainstream. Many farmers today simply do not have the cash to invest. More fundamentally, plenty are skeptical of handing over their proprietary information to a conglomerate. As we’ve mentioned before (see: “Merchants Buy Into Personalized Pricing”), retailers use personalized pricing to squeeze more money out of shoppers who regularly buy certain products. If DuPont learns that a particular farm cannot function without a certain fertilizer, suddenly it has the leverage to charge that farm more for it.
But in the long run, technology has the potential to be a game-changer for farmers and agribusinesses alike. The most optimistic forecasters see prescriptive planting as an innovation on par with the invention of the mechanized tractor and GMO seeds. In the early days of tech-driven farming, these systems were just a source of frustration, according to agriculture expert Dennis Buckmaster: “There were the pieces of the puzzle and nobody had the wherewithal to pull them together.” But now that companies like Monsanto are developing a central framework for these Big Data systems, farmers are poised to reap the benefits.
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