June 8, 2017

By Michael Helmstetter, CEO, TechAccel

The only constant is change. Yet, for decades now, the agriculture industry has been defying this principle by pursuing a course of unsustainable consolidation. The biggest ag players have left critical challenges unanswered while producers have weathered a brutal downturn in the commodities market.

These stressors have already given rise to a boom in agtech over the past few years. And while the first agtech boom has failed to deliver change in a number of important ways, the underlying conditions remain ripe for disruption. Smarter capital is now flowing into companies with the agility, talent, and technology to drive the second wave of agtech innovation.

To identify the companies with bright futures in the space, first you have to understand the current industry trends, the shortcomings that held up the first agtech boom and finally, the forces that will drive the next round of disruption. Here is our take on the top three trends that are currently reshaping the agriculture industry: consolidation, depressed commodity prices, and changing patterns of global food consumption.

Consolidation

There has been a rash of recent mergers in the ag space: first, the $130 billion merger of Dow and Dupont; then Bayer and Monsanto for $62 billion; finally, ChemChina and Syngenta for $43 billion. It is likely that by year’s end, the number of big ag players will be reduced from six to just three.

In the wake of each of these mega-mergers, you can expect the global ag giants to go silent for a period while working on internal integrations. This means a freeze on acquisitions, significant cuts in R&D spends, the release of redundant personnel, and other cost-cutting measures.

Depressed Commodity Prices

A year and a half ago, A. Gary Shilling summed up the downturn in the commodities market with this chilling observation in BloombergView:

“The price of everything that is grown or pulled out of the ground—from oil and gas to sugar and copper—has declined 46 percent since early 2011, causing bankruptcies and industry consolidation.”

Though some analysts are expecting a rally in 2017, commodity prices are still the top concern for 95 percent of ag lenders. If commodities remain depressed, the conditions will continue to stifle innovations rooted in new crop uses, such as increasing biomass of energy crops and exploring new uses for corn stover.

Moreover, the push to consolidate is being felt not just by global seed and chemical giants, but by the producers themselves. The harder it becomes to make a profit selling commodities, the harder it is for farmers and landowners to recruit the next generation to work their farms. This exacerbates greater consolidation of land away from family farms.

Changing Patterns of Global Food Consumption

Though commodity prices remain in doubt, no one doubts that demand for food is rising. There continues to be more people to feed as the world population expands, the overall wealth of the world continues to increase, and more food choices are made available.

But with these choices comes the potential to shift global demands. While North American and European meat consumption trends down, Asia’s consumption trends upward. If China’s demand increases, there could be massive food displacement. Meanwhile, popular acceptance of more ‘exotic’ foods, such as quinoa and agave, in U.S. markets indicates that consumers are becoming more informed and experimental in their food choices.

Cusp of a New Era

Each of these trends is a strain on the ag industry in its current form. However, stressors create opportunities. When ag giants begin to tighten their belts as part of the mega-merger game, they let go valuable talent. Spin-offs and startups like Benson Hill Biosystems, Agrivida and even TechAccel have all emerged with the help of former big-ag talent.

And when big ag hits the brakes on R&D, private equity steps in to fill the gaps. Venture capitalists from both coasts are now fully engaged in the agtech space. Even Tyson Foods recently set up a $150-million corporate venture fund to invest in agtech, and researchers at land-grant universities are growing hungrier for early-stage capital in the face of big ag austerity and cuts in state and federal funding.

The money is flowing in from investors, both close to and far removed from the agriculture industry. This breadth of interest reflects the fact that producers, feeling the pinch of consolidation and low prices, are looking to technology to help them do more with less. Yet the first wave of agtech failed to leverage big data and the Internet of Things (IoT) in a way that drove value for farmers. To understand where agtech is heading, we have to consider the shortcomings of the first agtech boom.

What Busted the First AgTech Boom

One of the watchwords of the first agtech boom was ‘precision ag’: the application of remote sensing technology and big-data analytics to sub-field crop management. The most-hyped form of precision ag was drone technology. Unfortunately, the glut of drone-based companies and stand-alone sensor companies relied too heavily on what they saw as inherently valuable tech, neglecting the practical application and usability of their products. A shakeout in this market is to be expected, with the most useful concepts surviving intense consolidation.

When oil prices were soaring about $100 per barrel, a great deal of attention was given to biomass and lignocellulosic plays. Acres were set aside for ethanol and biodiesel, and the concept of algal biofuel took off. But the market for these expensive, high-value products has suffered throughout the commodity downturn. With the price of natural gas at lows, ag-derived energy will continue to struggle.

Most promising of all the innovations that drove the first agtech boom, digital platforms intended to create real-time, actionable insights for farmers. This didn’t happen in 2016, as companies failed to prove the value of their platforms in a world of razor-thin profit margins. Consolidations and shakeouts are likely to continue, as companies either go belly-up, or like Conservis and Climate Corp are repurposed if they don’t figure out how to clearly link analytics to insights and results.

The Innovations Defining the Second AgTech Boom

1. Gene Editing. If there is one reason we believe that big-data platforms will take off in 2017, it is CRISPR/Cas9. Dramatically simpler and more adaptable than previous gene-editing techniques, CRISPR/Cas9 is nothing short of a sea-change in the field of trait selection. We expect regulation of, and investment in, this technology to heat up fast as companies rely on AI platforms to translate advances in gene editing into automated decision support and precision analytics capabilities.

2. IoT Resource Conservancy. As climate change creates more severe and unpredictable weather patterns, resource conservation will be a must. If companies can figure out how to provide producers with actionable insights through intuitive UX, we can expect farmers to establish new best practices in water management, soil health, and waste recycling based on data they receive from remote sensors and interpret with the help of AI. This could extend to a greater investment in greenhouse agriculture and other closed-loop systems in which IoT networks continuously optimize water, lighting, and energy in a controlled environment.

3. Plants as Production Systems. Companies like Agrivida and Phyllotech are reimagining the way we use plants to create non-traditional products and compounds at lower costs and with less manufacturing expense. As producers push toward higher-yield crops to meet growing global demand, the amount of leftover biomass will grow exponentially. While biofuels don’t look feasible in the short term, it’s hard to predict what possibility this new generation of plant-based chemicals and higher-value intermediaries will unlock.

The Secret to Spotting Success

It’s easy to be overwhelmed by the range of innovations looking to solve the ag industry’s most pressing issues. The shortcomings of the first agtech boom can be boiled down to a failure to understand what farmers really need. To understand that, you’ve got to get your boots dirty. Agriculture can’t be reduced to a data problem just waiting on the right algorithm to solve it and companies that don’t go out into the field and listen to farmers about what farmers want and need will not succeed.