I have been getting excited about a new industry, hot in the venture capital community, that applies technology to farming – AgTech – and have done a bit of research on how the market is evolving.
This field seems very interesting to me for many reasons, and I would love to talk more about it with members who have some experience or opinions about it. I’ve opened up a Framework Forum thread on AgTech, so please drop me a line!
Key Takeaways
- Agricultural Technology – AgTech – is a hot area for investment due to projected unmet demand for food in a more populous, more affluent world.
- AgTech comprises many solutions. Solutions which apply present technology to improving present farming practices will likely grow rapidly over the next two years. Those that adapt present technology to create new farming practices will likely face slower growth due to cost of capital disadvantages compared to traditional farms. Those which are developing new technologies to create new farming practices will take the longest to mature.
- We believe that government policy considerations and economic cycle fluctuations have the potential to either spur or retard short-term adoption.
Overview
AgTech is a broad field that applies technology – especially software and hardware technology – to the field of farming. AgTech is an industry that encompasses diverse solutions to almost every step in the food production process. We believe there are three classes of AgTech innovation that we’ll call “Tech Assisted Farming,” “New Farming,” and “Revolutionary Farming.”
Tech Assisted Farming is the application of current technology to aid current farming techniques. Examples are:
- Water Management: Systems designed to maximize plant yield through efficient watering (e.g., Hortau)
- Plant / Soil Analytics: Services to analyze soil quality and plant health (e.g., Trace Genomics)
- Sensors: IoT devices to measure the health and growth of plants (e.g., Phytech)
- Advanced Machinery: Drones to monitor crops, robots to pick them (e.g., FarmBot)
- Predictive Analytics: Weather forecasting and other big data tasks applied to agricultural settings (e.g., aWhere)
- Grocery Supply Chain Management: Food quality / safety tracking (e.g., Park City Group)
Monitoring tomatoes (Phytech)
New Farming is the application of current technology to develop new agricultural techniques. An excellent example is Indoor and Vertical farming (e.g., Mirai), which uses LED lighting, sensors, and automation to effectively stack farming plots on top of one another indoors.
“Mirai” means “future” in Japanese. This farm is housed in an abandoned semiconductor fabrication facility.
Revolutionary Farming is the development of new technology to develop new agricultural products such as Sustainable Proteins (e.g., Memphis Meats), which cultures meat products in a laboratory.
No animals were harmed in this hamburger
Mechanical tractors in the 1920s and the Post-War Green Revolution allowed humans to increase farm productivity and to significantly increase crop yields. However, over the past generation, increases in crop yields have slowed and are now roughly only half of what is necessary to meet projected 2050 consumption demand. In addition, the effects of climate change on soil moisture levels may create stress on yields, to say nothing of as projections for the increased severity of droughts and more numerous incidents of crop-damaging floods.
In the face of almost unavoidable unmet demand for products that satisfy the lowest level of Maslow’s hierarchy of needs, entrepreneurs, technologists, and investors have realized that Information Age solutions can profitably be applied to Bronze Age problems. The AgTech gold rush began in 2013, when Monsanto’s purchase of agricultural data company The Climate Corporation for $930 million drew attention to potential in the space. In 2017, two AgTech investments (Indigo Agriculture, a microbial crop technology start-up and Plenty, a vertical farming company) raised $200 million each – double the entire AgTech investment spend in 2012.
Drivers of and Risks to Widespread Adoption
Different areas of AgTech have specific drivers and risks associated with them; the dynamics behind the production of cultured meat, for instance, is very different from the dynamics behind drone-based crop inspection. As such, an analysis of all of them is beyond the scope of this brief article. However, we believe there are two macro factors you might not consider immediately when thinking of food production, that nonetheless have the potential to affect many corners of AgTech. These factors – government policy and fluctuations in the economic cycle – fit into both driver and risk categories.
US government policy initiated in the Nixon Administration subsidized farmers’ economic losses when they overproduced rather than subsidizing farmers to cut supply by leaving fields fallow. For 50 years, the result of this policy has been a surplus of certain grains that ripple through the entire food value chain.
With food prices low, farmers whose capital costs are relatively high – such as many engaged in AgTech methods – need concomitant increases in efficiency just to keep on par with farmers whose capital costs are low – such as traditional farmers. To the extent that AgTech innovations create a higher capital cost hurdle to clear for farmers, it will be difficult for AgTech innovations to come into the mainstream and we would expect the most capital-intensive AgTech areas to be the most disadvantaged.
If agricultural subsidies are restructured to encourage AgTech innovations such as was done to encourage electric vehicles and renewable energy in years past, we believe the boom in AgTech will strengthen significantly. However, if subsidy structures remain trapped in the Vietnam Era, capital-intensive areas of AgTech will face a headwind.
Moving to economic effects, if the cycle is booming and wages are high, the price difference between a traditionally farmed item and the product of a more expensive AgTech process may seem relatively small to a consumer. A consumer may, in fact, be drawn to purchase the AgTech products simply out of a sense of novelty. However, in the case of an economic downturn, high-end supermarket chains and packaged consumer goods manufacturers learned during the past downturn, shoppers are happy to switch to a cheaper generic brand or non-organic alternative to save money on their weekly shopping trips.
If the economy booms, expect AgTech to boom.
Implementation Timeline
For Tech Assisted Farming, there are few barriers to rapid adoption of these technologies over the next 24 months, especially ones that can demonstrate an immediate cost efficiency.
New Farming projects are sexy and garner media attention, but high capital costs put them at a disadvantage compared to other producers in all but niche applications. We believe growth in this area will be slower over the next two years.
Revolutionary Farming is extremely capital intensive and still requires a long runway of scientific research before it can be commercialized. Time-to-money for these projects is best measured in decades in our opinion.