Precision Agriculture: A Retailer s Perspective

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1 Precision Agriculture: A Retailer s Perspective by Luke Brummel Economist, Farm Supply Inside this Issue Setting the Stage...2 Precision Agriculture Services the Basics...2 Alternative Business Models...3 Major Challenges...3 Geographic Variability...5 Competition...6 Data Ownership...7 Staying Ahead of the Curve...7 A Flash in the Pan?...8 Concluding Thoughts...8 Key Points: Local grain and farm supply retailers are all still struggling to keep abreast of the latest precision ag technology and to figure out how best to position their companies to gain a competitive edge. Many retailers are striving to help their customer-members manage the huge volumes of data being generated by the latest models of farm machinery and equipment. The retailers highest value-added services are those where they assist growers in collecting all the available data from a crop year and then scrubbing the data so that they may be used to formulate prescriptionbased recommendations. As they look to strengthen and expand their menus of precision ag services, the two biggest issues for agribusiness retailers are what services to offer and how much to charge for them. Operating within the fast-changing technological environment surrounding precision ag, agribusiness retailers continually face difficult decisions about whether, and if so how, to adjust their investment and resource allocation strategies. Staying ahead of the new technological advancements is essential but also a major challenge. This knowledge can be gleaned by attending industry trade shows, in-person meetings with manufacturers, or peer-to-peer roundtables. Precision agriculture programs can be difficult to benchmark as both tangible and intangible benefits are assessed. Among local retailers, the consensus view holds that, following a sharp fall in commodity prices, managing margins will become even more important. Precision agriculture will provide the data enabling growers to make profit maximizing resource allocation decisions. Going forward, data aggregation, data privacy and data sharing agreements will likely become critical to the success of precision agriculture programs. This is the second of two reports covering precision agriculture. The first was entitled, Precision Agriculture Technological Alchemy, and was issued in January It focused on the innovations, services, products, and practices that define precision agriculture. This second report examines the role and efforts of grain and farm supply retailers to develop precision ag services designed to improve their competitive position within the agribusiness industry. 1

2 Setting the Stage Precision agriculture is reshaping the future of crop production. With the steady stream of new technological breakthroughs and innovations in precision ag, new farming practices and techniques are evolving to facilitate better analysis and more accurate crop plans. It s not an exaggeration to say that crop production today is undergoing a technological revolution. Our earlier report entitled, Precision Agriculture - Technological Alchemy provided an overview of this phenomenon. The objective of this report is to examine how the grain and farm supply retailers are positioning themselves vis-à-vis precision ag. Toward this end, we visited eight Midwestern grain and farm supply retailers last year to investigate precision agriculture s role within their companies. In selecting which companies to visit, we chose those with wellestablished precision ag programs and that are regarded as thought-leaders in this rapidly evolving field. In an effort to understand the main challenges faced by these companies and how they are addressing them, we interviewed general managers (GMs) in some cases; and agronomy managers (AMs) and supporting staff in others. While all of the companies that we spoke with have many years of precision agriculture experience and expertise under their belts, they are all still striving to keep abreast of the latest technological developments and to figure out how best to position their companies to gain a competitive edge. Finding the right mix of products and services and the right team to support and market precision agriculture remains a moving target. For coops and other agribusinesses, the potential benefits of precision agriculture are wide ranging. Custom applications can be done more efficiently by use of guidance and overlap controls. Equipment deployment and logistics can be managed more efficiently via the use of telematics, automatic inventory monitoring and machinery GPS tracking. Application data can yield insights into supply and demand forecasting for inputs such as fertilizer, pesticides and seed. Agribusiness companies should be able to harness and manage these customer-generated data streams and then use them to drive enterprise resource management, both internally and for their customers. Revenue generation and customer loyalty remain the two biggest benefits to precision ag programs. Precision Agriculture Services the Basics All of the retailers whom we interviewed expressed a keen interest in continuing and strengthening their programs with additional precision agriculture offerings. Many retailers reported growing interest among their customermembers in precision ag products and services. In general, the grain and farm supply retailers provide their customer-members with two different kinds of precision agriculture services. The first involves equipment sales, maintenance, and tech-support. The second involves agronomic data collection and interpretation. However, many retailers have questions about where precision ag is headed and how best to position themselves to benefit from the changes. Those companies that have been early adopters of precision agriculture programs have typically been involved in precision ag equipment sales often as a dealer for Ag Leader, Raven, Trimble or other brands of precision ag equipment. They also provide tech support for the equipment they sell, and sometimes also for the equipment brands they don t sell. Precision agriculture is a highly data-intensive undertaking. Many retailers are striving to help their customer-members manage the huge volumes of data being generated by the latest models of farm machinery and equipment. In addition, many retailers recently have begun to assist their customer-members in utilizing imagery data and in-season crop monitoring, including tissue and soil sampling and analysis. In general, the retailers highest value-added services are those where they assist growers in collecting all the available data from a crop year and then scrubbing the data so that they can be used to formulate prescription-based recommendations. In fact, this is the end game for many precision ag programs. These prescriptions unlock the proper amounts, locations and placement of crop inputs to optimize crop yields. 2

3 Alternative Business Models Retailers have used two different approaches or business models in developing their data management capabilities. Some have developed their own precision agriculture programs entirely in-house, while others have chosen to use existing, out-of-the-box solutions. Creating a unique in-house precision agriculture program is not an easy task. The development of prescription algorithms and in-house data centers comes with its own set of resource constraints. Few coops have the resources or expertise to develop a precision agriculture product from the ground up. Those few who have made the investment have been in the precision agriculture space for many years and have proven track records. They can, and do, market themselves as unique providers of precision ag services and have scoured the resource base to find the right mix of people and products to serve their customers. Having created their own proven, unique products, these retailers can provide customers with fast response times to inquiries and tech support. One such retailer in Iowa has developed its own system to house and analyze precision agriculture data, and it also has its own internal tech support and, as such, is much more self-reliant. In contrast, many retailers today have opted to leverage the expertise developed by others in the industry. Generally, they rely on an outside vendor like Monsanto or a federated cooperative for precision agriculture/ agronomic services and employ internal staff to customize, market, and sell those products and services to their customer-members. This approach allows the local retailer to spend less time on developing the product and focus instead on marketing the developed system. A North Dakota local cooperative, for example, has enrolled in the Monsanto Integrated Farming Systems (IFS) program and is marketing the IFS program to its customers for seed recommendations. They continue to provide other agronomic prescriptions and variable rate fertilizer applications, but they can also leverage the Monsanto program upon customer enrollment. Similarly, retailers coops rely on Land O Lakes Winfield program which uses years of imagery and yield data to develop agronomic prescriptions. Retailers utilize LOL s marketing plan and leverage LOL s technology to provide recommendations to their producer-customers. As growers have become more interested and engaged in precision agriculture, some companies have adapted their business models accordingly. In the early stages, retailers had to cajole reluctant customers into purchasing the precision ag services that they were selling. More recently, however, as commodity prices climbed, growers have become much more willing to expand their utilization of precision ag services and now look to their local retailers as a source for equipment recommendations, software, data management and analysis. As precision ag products and services have grown in popularity, so have the available choices in equipment and software. Many retailers are now dealers in precision agriculture application equipment, software, monitors, and tech support. Major Challenges Agribusiness companies that are actively engaged in precision agriculture face an ever-changing technological environment new seed varieties, new equipment, and new protocols. Within this setting, the biggest challenge for retailers is to maintain and enhance their customers trust even as they strive to find the right balance of products, services and personnel. Moreover, many retailers are still grappling with what services to offer and how much to charge for those services. Which Services to Provide? All the retailers in our interviews had their own strong opinions about what precision ag products or services were most important to their members. Tech-support is very high on everyone s list. Growers often need new precision ag equipment, and they frequently complain that their current equipment is not getting the expected level of support from the manufacturers. Many retailers are well positioned to fill the gap between what techsupport customers expect to get from the equipment dealerships and what they actually receive. Another frequently mentioned problem is staying on top of version 3

4 updates for a variety of systems. Many retailers own several different brands of machinery for use in custom applications, and have thus become proficient in diagnosing problems and providing solutions and training to their customers. Consequently, growers today often look to their local retailers for technical knowhow and solutions in specking a new piece of farm equipment or troubleshooting a problem with their current model. Many retailers are questioning how far they should go in troubleshooting systems that they don t support, i.e., farm equipment or precision ag systems not sold in house. Where they draw the line typically depends on the retailer s relationship with the local dealerships. When those relationships are good, which tends to be the exception and not the rule, the retailer will then work in tandem with the equipment dealer to troubleshoot and provide techsupport. In some cases, the retailer would have a solution already in place and could pass the information on to the dealer or vice versa. Often, however, those relationships are rocky, with dealers blaming the local retailer for setting up or calibrating a system incorrectly or the retailer blaming the dealership for the same infraction. This fingerpointing causes confusion and mistrust on the part of growers and can undermine the effectiveness of precision agriculture practices and programs. For tech-support and installation, the growers generally will choose whoever can get there first and get the problem fixed right the first time. Some local retailers view tech support on equipment as a business line that is too far removed from their core competency. They prefer to send customers to the equipment dealer for troubleshooting or tech-support, 2014 The Mosaic Company Precision agriculture utilizes many layers of data to optimize crop production. A. Grid sampling, guided by GPS, provides more accurate soil test data. B. Variable rate fertilizer applications can improve efficiency. C. Variable rate seed, variety changes and starter fertilizer can adjust for soil properties and productivity D. Crop scouting with new digital technologies improves field records. E. On-the-go yield monitors can quickly track variability in the field. while they focus instead on providing prescriptions and data packages. However, many of the GMs and AMs whom we interviewed believe that their precision ag programs should provide the whole suite of tech support, data analysis and equipment in order to retain the customer and create the loyalty that will be needed when commodity prices tumble and margins compress. Some product offerings were born out of necessity. For example, in some rural areas, communications networks lack the bandwidth they need to deliver the efficient, speedy services that urban dwellers take for granted. To facilitate better communications with its customers, one retailer bought an Internet Protocol (IP) company and made some investments to improve the communications infrastructure. Although the IP acquisition isn t a core business for the retailer, the company and its customer base have realized value in increased data mobility via the internet. This is an example of seeking out niche opportunities to provide value. 4

5 How much to Charge? Another challenge for retailers is how to price precision ag products and services. How much should they charge for these services? How should they explain these charges and billings to customers? And in turn, where should they deploy the next dollar of investment in developing these services? When first launching their precision agriculture services, some retailers provided these services free of charge to customers on the grounds that these free services would enhance the retailer s position as trusted advisor. This approach has fallen out of fashion, however. As customers demands for additional services grew, so did the retailer s need and costs for new equipment and resources. Retailers who had given away services as an added value found that they then had a much harder time recouping costs and introducing a new pricing schedule than they would otherwise have had, had they started charging at the onset for their use. Adjusting prices is always a challenge. However, once customers have obtained proven value from the services, several retailers suggested that it was then easier for them to raise their prices. They also agreed that a price hike was easier to pass on to customers than charging them for services that they had received free of charge in the past. At present, all the retailers we interviewed price their precision ag products and services on a per-acre basis. If the grower s site-specific farm data are available, this pricing strategy can be refined further to bushels per acre or cents per bushel. The basic idea is to focus on how these services will bolster the customer s bottom line. Retailers have found that marketing to the grower in terms of value and margin rather than costs allows for better information flows and enhances customer loyalty. This marketing approach has proved to be especially effective in recent years as farm revenues have been bolstered by high crop prices. While growers are keenly aware that the costs of crop inputs have increased in recent years, this new marketing approach shifts the focus away from costs and toward the bottom line, in an effort to ease growers concerns. Going forward, this perspective will likely become even more important as growers margins compress in the face of escalating grain stocks and lower crop prices. Science-based, data-driven, and proven results will make the next generation of farmer ever more conscious of the implications of his or her production decisions. Retailers will likely have to grapple with ways in which to provide the most value with their precision ag programs at the lowest costs as growers search for the best value in a compressed margin environment. Many retailers are trying to figure out how to benchmark their precision ag programs against other programs in order to gauge their progress, shortcomings, and successes. But such benchmarking has proved to be a major challenge because, while many benefits of these programs are tangible and can be quantified in terms of dollars and cents, other benefits are much harder to value e.g., customer loyalty. All of the retailers whom we visited mentioned the potential benefits of benchmarking, but none has been able to develop usable benchmarking standards. Geographic Variability Customers interests and needs for precision ag services vary from one region to the next. In the Corn Belt, growers are interested in a wide range of precision ag products, and generally are willing to try different techniques in order to find the right product mix. In the West, growers tend to be more reserved and less willing to adopt a certain practice until it has been tested and proven by a neighbor. For example, a grower in Iowa may be more inclined to make a $25 per acre investment in precision agriculture products and services given the potential overall return of $ an acre. However, producers in the western region may have trouble committing to a $25 per acre investment when the overall returns per acre may be in the $ range. Crop mix also appears to influence the decision whether to utilize more precision ag services. Not only does the amount of acreage in a particular crop matter, but also the potential yield. Wheat growers typically utilize fewer precision ag products and services than corn or 5

6 soybean growers. This is due partly to the availability of services and products specifically designed for each of the cropping systems, but it also has to do with weather variability and the likely return on investment for each crop. Dry land wheat acres in Western Kansas have much different economics than do irrigated corn acres in the same region or in the Corn Belt. Many retailers in the dry land areas of the Western Corn Belt have developed only a limited number of precision ag options, including variable rate fertilizer applicators. Retailers in this region generally prefer to develop relationships with third party consultants rather than devote the time and resources required to build their own internal precision agriculture departments. These retailers then sell inputs and variable rate applications based on third party crop consultant recommendations or prescriptions. Competition The GMs and AMs whom we interviewed all regard precision ag as an opportunity for gaining a competitive advantage within the industry. At the same time, other agribusiness companies, including wholesalers/ manufactures, view precision ag similarly and would like to create or expand their own franchises. For all, information is power, but the major farm equipment and crop input manufacturers aspire to gain control of the data being generated by the precision ag systems, as it would be invaluable in streamlining and fine tuning the agricultural supply chains. Collecting a wide range of precision agricultural data for benchmarking purposes promises to be a key to unlocking the huge potential benefits to the production agriculture industry. The ability to analyze data streams covering millions of acres will allow for improved recommendations and prescriptions, while also providing value to many different aspects of the grower supply chain. But to get there, the precision ag data streams will have to be collected, aggregated, classified, and homogenized into a standard format before they will be useful for benchmarking. At this point, it s unclear who will be in charge ultimately. But several different players are scrambling to maneuver and position themselves to acquire precision agriculture data, including local and GMs and AMs whom we interviewed all regard precision ag as an opportunity for gaining a competitive advantage within the industry. federated coops, private companies, third-party vendors, and open-data alliances. The John Deere Company recently announced that it will begin data transfers from its My John Deere Platform with select vendors. In other words, this platform will serve as the data warehouse/ cloud for growers data that other third party venues may use for wireless data transfer. Deere s announcement also specifies that the company will use the data to provide better services and product development for its customers. Anonymizing production data for benchmarking purposes is a requirement of use of Deere s system. AGCO and DuPont Pioneer have also collaborated on a similar project to seamlessly transfer data between equipment and Encirca services, a wholefarm decision solutions offering from Pioneer. Agricultural retailers are unsure whether services like those offered by John Deere or AGCO represent a competitive threat or opportunity for them. For years, they have been the trusted advisors of growers, whereas farm equipment dealers have been suppliers of equipment rather than data collection depots. Growers today have many choices for wireless data transfer, but many equipment manufacturers have made it easy to buy equipment already outfitted with the data-transfer capability straight from the factory. Monsanto has taken a different approach to gather grower data, leveraging the boots-on-the-ground experience of retailers and other advisors to gather important production data and submit it to the company for seed recommendations. It remains to be seen whether Monsanto will be able to extend its 6

7 IFS program beyond seed recommendations to crop nutrients and other inputs. Private crop consultants and neighboring retailers add to the highly competitive landscape within precision agriculture. Grower margins are likely to tighten as commodity stocks recover from the drought-plagued levels of the last few seasons. As margins tighten, growers likely will shop for the most cost efficient products and services, placing additional pressure on retailers to be price competitive. From either the private company s or the retailer s perspective, precision ag technology solutions are generally cheaper to buy than to build. This is highlighted in both sectors by the numerous mergers and acquisitions within the precision ag industry whether it is by utilizing a Winfield Solutions program, acquiring a weather forecasting company, or partnering with other vendors for products outside of one s core value statement. In the case of mergers or acquisitions, it would appear that those companies with the deepest pockets will be the most agile in tailoring their programs. As a result, it will become increasingly important for companies to identify the newest sources of value in the precision ag industry to provide a unique product and maintain their competitiveness. Data Ownership Data ownership is currently one of the hottest topics in precision agriculture. The crop producer is not only the primary collection agent for the data generated by his farm equipment, but also the owner of that data. Growers generally look to their local retailers for expertise in managing the data streams generated by their precision ag equipment and also in using them to develop crop prescriptions. However, growers are also wary about the security of their data, not wanting them to fall into the wrong hands where they could be used to harm their best interests. Some retailers have begun to use well-defined contractual data agreements to allay their customers concerns about data security. Going forward, privacy issues and privacy agreements are likely to gain traction and be used more frequently. Solutions mitigating the gray areas where data ownership shifts or evolves from the producers to entities that have provided valuedadded services likely will become increasingly important in the scope of data privacy. Retailers are also exploring other options for addressing growers concerns about data security. One promising approach is to offer in-house precision ag programs that rely on third party equipment such as Raven Slingshot or other telematics software that do not require data sharing. Such an approach may provide a more comfortable option for growers, alleviating their concerns about data security. Third party associations (e.g., Open Ag Data Alliance and Ag Gateway) are also on the horizon as an option to anonymize data and allow for benchmarking. These services would essentially be cloud-based products that allow producers to homogenize and define how their data will be shared and used somewhat akin to a data clearinghouse. Such an option where the service provider is a layer removed from the crop advisor, seed salesman or equipment provider are likely to appeal to those who have strong data privacy concerns. Staying Ahead of the Curve Retailers are continually looking for the next big innovation in precision agriculture. Considering the proliferation of new innovations, retailer GMs and their boards must keep track of how the industry is evolving and decide where to deploy capital to earn the highest return on their investment. Against this backdrop, retailers with well-established programs are striving to identify which new products or services will keep them ahead of the curve while also providing the most value for their customers. The next step is to figure out whether they have the benchstrength to deliver these new products or services; and if not, where they can get the needed resources. Generally, this knowledge can be gleaned from attending industry meeting such as the Info Ag, a conference which showcases many of the latest precision agriculture 7

8 technologies. Mining the ideas and experiences of others in the industry from different market areas was mentioned by several retailers as a way to improve programs. Industry roundtables can also bring retailers from several different regions together to discuss challenges within their programs and discuss future plans. A Flash in the Pan? Some skeptics question whether the current interest in precision agriculture is the result of industry hype and will eventually fade. After all, they point out, growers interest and utilization of precision ag practices and technology expanded largely in response to the escalation of commodity prices. But the agricultural markets are inherently cyclical, and commodity prices will eventually recede and indeed they already appear to be heading lower. We asked the GMs and AMs whom we interviewed what the future of precision agriculture programs would look like if commodity prices were to fall drastically. While no one has a crystal ball, the consensus view is that, following a sharp fall in commodity prices, managing margins will become even more important. Precision agriculture will provide the data needed to make profitmaximizing resource allocation decisions, and as such precision ag products and services are expected to become even more important in the event of commodity price erosion. Concluding Thoughts Precision agriculture is likely to shape the future of production agriculture. It will help growers increase efficiency and will likely unleash the power to streamline the supporting supply chain moving forward. However, while the potential benefits of precision agriculture are vast, so are the challenges. Going forward, continued pressure will mount on pricing, data availability, data sharing agreements and resource allocation. The potential for more regulation from environmental agencies and the streamlining of insurance data collection will likely play a role in the growers adoption and utilization of precision ag services. Those retailers who do the best job in addressing and overcoming the challenges inherent in precision agriculture will be the best positioned to secure the customer relationship and the profit opportunities therein. CoBank s Knowledge Exchange Division welcomes readers comments and suggestions. Please send them to KEDRESEARCH@cobank.com. Disclaimer: The information contained in this report has been compiled from what CoBank regards as reliable sources but is provided for general informational purposes only and is not advice. CoBank does not make any representation or warranty regarding the content, and disclaims any responsibility for the information, materials, third-party opinions, and data included in this report. In no event will CoBank be liable for any decision made or actions taken by the user while relying on information contained in this report. 8