Ag Tech Sunday - Data and Digital Infrastructure as Assets

By: "Farm Tender" News
Ag Company News
Nov 02, 2019
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By Shane Thomas

In 1988, Arie de Gues wrote that, "The ability to learn faster than your competitors may be the only sustainable competitive advantage." While this might not be entirely the case, it is a significant component of competitive advantage today. Rate of learning and speed at which you can deploy learned insights into executable strategies and tactics can be competitive differentiators, however, it isn't simply about reading books or failing fast and learning from your mistakes, it's about capturing more (& better) information and being able to differentiate product or service offerings based on those unique insights. With that in mind I wanted to talk about how digital infrastructure can support this capability within organizations and increase the velocity of growth.

Tangible assets are necessary in farming and ag retail. These physical assets are what enable ag businesses to ensure farmers can access crop inputs, store their production or assist with their overall business operations. And I don't foresee this changing significantly at any point in the future. We need the physical assets, but what I do foresee changing is the retails that can best lay the digital fabric under their physical assets, will be the bigger forces in ag retail in the future.

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There is an aura of anxiety around what the future of ag retail will look like, what a retail business may look like and what's real or what's noise. The truth? Ag retail isn't going anywhere. It will simply evolve: some familiar companies, some new companies, new go-to-markets and through multi channel methods such as e-commerce and "ambient tech" methods. I've discussed ag retail in regards to what "The Future of Ag Retail" could look like and how the "Re Engineering of Ag Retail" is happening today. However, the more I have these conversations with ag industry professionals, the more it reinforces that historic perceptions and conventional wisdom is hindering the ability to visualize what's necessary to progress forward. Let me explain.

When many retail professionals and executives think about investing and servicing their customer, they think in traditional ways: they think about the physical assets. This is what they know, this is what is important, and they are right. But it misses the evolution: digital assets will be a necessary part of their infrastructure to service their farm customers. For those that do, they don't view it to anywhere near the same type of importance, or worth anywhere near the same need for investment.

Data and Digital Infrastructure as Part of Strategy

Because of the capitalization intensity of ag retail, continued capital expenditure is an important part of being successful in ag retail. Heck, capital expenditure, better stated as the allocation of capital (what the dollars get spent on) is one of the single most important roles of a CEO and their executive team in any business. Capital allocation (including R&D expenditure) is core to any business strategy. So when I think about what is going to make the retail of the future successful, my mind doesn't go to a "digital strategy", it goes to a capital allocation strategy, of which some deployment of that capital each year goes to building digital infrastructure out, or physical infrastructure that doesn't necessarily have direct return on invested capital, but enables the retail to service their customer or create value added products for their farm customer through data acquisition (eg: sensors) or help them better manage their business through advanced insights. This could, and in many cases should also include partnering with the right organization to enable their systems to be able to access data, acquire data, crunch data, utilize data or otherwise and may include a subsidization strategy. The problem? The perception by and large is that digital infrastructure isn't a required asset today, but it should be.

I had a conversation with a USA colleague earlier this year around capital expenditure and we got to talking about the amount they spend each year, and while we didn't get into the specifics, my assumption based on their size is that it would be in $12million/yr range. I did ask what they were spending on partnerships in the digital space or on digital assets to support their farm customers or otherwise and this individual said well under $200,000/yr. This means, if my assumptions are correct, they are investing <1.5% of their cap ex into a space that is expanding at 15% CAGR in just one segment of "digital ag" (this doesn't include the other opportunities for digital ag). Organizations like Bayer are investing millions each year into Climate Corp, Corteva is allocating 8.3% of their R&D budget into Granular/Encirca (after massive up front expenditure) and retail behemoth Nutrien is spending >$100million/year, which is a meaningful portion of their capital expenditure! Even when looking at traditional retail organizations like Wal Mart or Loblaws, there is a large emphasis on shifting resources to technology and investment in digitally capable staff.

Changing the Conventional Perspective

I had a conversation with the individual about a thought I had to help optimize their supply chain and their comment back to me was "Yeah, that's a great idea, but that would take data". The person was right, but that shouldn't be an inherent road block.

I said "Of course it takes data! The data gods aren't going to simply drop the data down into your lap! You have to be the company that prioritizes investment to collect and earns the right to collect it."

So why do these physical assets get prioritized so nonchalantly above all else? Lets use seed treaters as an example. First off, there needs to be investment in physical assets, these are necessary to support farmers, but they get prioritized not only because of comfort, but because they can associate real forecasts and costs to the physical asset. Retails can say if we put in this seed treater, we can reasonably sell a specific number of units of seed treatment at x% margin and get a return above our hurdle rate in x number of years. Tangible. With digital you are making a more intangible assumption and investment in an unknown future, which is tough to go back to your board of directors and say:

"We are spending this here because we THINK we can obtain enough information to decrease costs here or support sales there", but that's where having a vision worked into a long term plan can help.

Here are 3 things to consider about digital infrastructure:

1. It scales and it compounds making it better over time. It appreciates while physical assets depreciate.

2. It's permeable, going beyond one product segment and enhancing the entirety of the retail business. It can help service all product lines for the farmer and support all cost centres.

3. It's differentiated: a seed treater is only an incrementally competitive advantage; data and digital infrastructure can differentiate at an order of magnitude above what physical assets can, if used correctly.

An investment in data and digital infrastructure to optimize your supply chain for example helps on the forecasting and purchasing side of the business which manages inventory, which frees up working capital and cuts storage costs. It helps manage distribution/shipping costs. It helps increase sales because product will be where it needs to be when it needs to be there…and again, this isn't just for seed treatment for example, this is across the entirety of the ag retails portfolio.

There are even retails capturing vast amounts of data today, but aren't necessarily leveraging it. Having data and owning data are great! But data is only worth something when it is put to use in one or more ways. Whether this is through an analytics platform investment itself or identifying a partner to approach it with, it can help unlock the value of many of practices already being done today.

Conclusion

The most successful ag retails in the coming decades will be the ones that adapt their capital allocation strategy, R&D spend and their expense budgets to prioritize investments and partnerships in digital assets that can be used in unison with their physical assets to better support the farmer of the future. Physical assets will always be there, but adding digital infrastructure as the filament to reinforce those assets needs to be apart of any retails strategic discussions to remain competitive and thrive.

https://www.shaneagronomy.com/