PARIS SCIENCES & LETTRES (PSL)
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The Kodak moment for agriculture giants?

AgTech investments are booming. While large seed and agriculture chemical companies are still top R&D investors, they are losing momentum and seem actually busier consolidating and buying startup or even their own shares. Are they running out of ideas?

8
November 2017
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Executive Resume

Global venture investment in AgTech which targets food and agriculture has surged from around $500mn in 2012 to a peak of $4.4bn in the first half of 2017. By contrast, internal R&D spending by the traditional leaders in agriculture inputs has been in decline for years. First, the agriculture inputs industry is maturing. But the subjacent trend is the slow exhaustion of technologies that have driven productivity growth throughout the 20th Century, as shown by a brief review of three key drivers of 20th Century agriculture productivity – fertilizer, crop protection, and genetically modified seeds. Major players in these markets are aggressively fighting to maintain their positions. They are also cautious not to innovate away from their core technological capabilities. Innovation is increasingly being sourced from outside.

Something big is happening in AgTech. Global venture investment in technologies which targets food and agriculture has surged from around $500mn in 2012 to a peak of $4.4bn in the first half of 2017, according to AgFunder.

This momentum contrasts sharply with the concave curves of corporate R&D numbers. Internal R&D spending by the traditional leaders in agriculture inputs has been in decline for years. Internal R&D investment by the four of the Big Six agriculture input companies – Monsanto, Bayer, Syngenta and DuPont – that breakout agriculture-related R&D declined by 3% in 2014-2016 (Dow and BASF do not breakout agriculture-related R&D). DuPont, Monsanto, Syngenta all reduced R&D spend by 10% or more while only Bayer increased investment according to their annual reports. This decline in part reflects lower commodity prices. Yet, Monsanto spent almost three times more on share buybacks than on R&D from 2014 until Bayer’s acquisition proposal in July 2016. Giants are not running out of cash. Are they running out of ideas?

Playing defense

Reality is a bit more complicated as three trends play out.

First, the agriculture inputs industry is maturing. Of the six largest seed and agriculture chemical companies, which collectively account for more them 62% of global seed sales and 74%of global crop protection sales, five are in the midst of consolidation. Whereas consolidation internally makes organizational sense (reducing operating costs, accessing new markets, etc.), collectively, these mergers reflect an industry-wide trend: a shortage of growth opportunities. Overall, the big picture reveals a foreboding a decline in R&D.

The second related trend is the slow exhaustion of technologies that have driven productivity growth throughout the 20th Century. For the past 50-100 years, gains in yield and production efficiency have grown steadily. Since the widespread adoption of maize hybrids in the 1940s, U.S. yields have increased fivefold according to USDA data. Tractors have become bigger and implements wider. But if we take a closer look, it is clear that most of the progress is done.

Why? A brief review of three key drivers of 20th Century agriculture productivity tells an important part of the story.

Fertilizer

Since 1950, global fertilizer consumption has increased tenfold. Related, the amount of fertilizer used per unit of grain produced has increased 4.5 times since 1961, according to FAO data. The increase in fertilizer usage has facilitated the adoption of higher yielding hybrids, which require more soil nutrients. However, as more farmers globally have adopted fertilizer, often to the point of excess, the scope for significant productivity gains from applying more fertilizer has plateaued. Moreover, sustainability of current practices is limited by a high dependency on fossil fuels. The time is now to find alternatives to the intensive use of fertilizer.

Crop protection

Insects and weeds continually adapt to the pesticides and chemicals engineered to kill them. Effective crop protection, therefore, requires innovation and new modes of action to be control weeds and pests. Yet, the discovery of new modes of action has slowed considerably. For example, no herbicides with novel modes of action have been introduced in the past 25 years. There are many reasons for this. First, in large markets such as the US and Brazil, the prevalence of glyphosate resistant GM crops shrank the market for all other herbicides. The last round of industry consolidation, which led to the rise of the Big Six, also led to R&D cost cutting and less emphasis on the development of novel molecules. Further, many of the best molecular target sites have been used, which makes new developments relatively more challenging. Lastly, the cost of bringing a new molecule to market is increasingly high: according to a 2016 report for CropLife, an industry body, bringing a new crop protection product to market costs $285mn – 55% more than at the turn of the century

As a result, putting proverbial old wine into new bottles in the form of reformulating off patent chemicals was a more attractive means for chemical makers to milk profitability.

Genetically modified seeds

In the past 50 years the one notable discontinuity in agriculture has been the introduction of genetically modified traits, which have offered an obvious binary improvement. The two most successful traits across a variety of crops are Bt, which protects against the moth family, and glyphosate herbicide resistance. Both eased crop management for farmers, reduced non-seed input costs and, in the case of Bt, provide built-in insurance against pest infestation. However, the string for GM has largely been played out. According to the ISAAA, GM’s own industry body, global production of GM crops is flat or declining.

The very factors that led to GM’s success now shackle it. For consumers, negative public perception has made GM almost a toxic word; in developed countries, supermarket shelves are now filled with “non-GMO” brands which command premium prices. Commercially, GM is dependent upon regulatory approvals, which have prevented traits from becoming commoditized, even as patents expired. However, this has limited GM’s adoption in crops beyond corn, soy and cotton.

Innovation is increasingly being sourced from outside, rather than from within formidable R&D-driven organizations.

The story of declining marginal innovation is similar for technological progress in other critical drivers of productivity such as mechanization and breeding. Major players in these markets are aggressively fighting to maintain their positions, while emerging technologies from outside threaten their established business models. Investing heavily in new technologies that could cannibalize or distract from today’s profit centers are big risks for multi-billion dollar businesses. “Big company scientists are busy fighting fires and do not have time to develop transformative innovations,” said William Aimutis, Cargill’s Global Director of External Innovation. No wonder why additional investments in these technologies are marginal.

Change from the outside, not within

The future is elsewhere. Corporate giants know it. But they are cautious not to innovate away from their core technological capabilities. Innovation is increasingly being sourced from outside, rather than from within formidable R&D-driven organizations. In a way, the very notion of “external innovation” says it all. Monsanto is still the largest investor in agriculture research, but it is increasingly spending its cash purchasing other companies (and the concomitant ideas, talent and culture) in lieu of further investment in internal R&D. All of the Big Six agriculture input companies have formed in-house venture capital arms and most have also invested in outside funds.

An optimistic read of the landscape might interpret these paths to open innovation and ecosystem dynamics as a new state of mind within corporate headquarters. But the sudden frenzy for funding and purchasing startups also reveals that these mammoth organizations are not positioned to develop breakthrough technologies (even when they should have an inbuilt advantage). Perhaps they are currently too focused internally, managing the real cultural and organizational complications that are the byproduct of mergers.

Some insiders, however, are more pessimistic: the big agriculture input companies “are not running out of ideas, but are running out of time. They are having a Kodak Moment. The decay is coming fast and the main issue is culture,” says Victor Friedberg, co-founder and managing partner of S2G Ventures.

The cruel truth is that the very nature of tomorrow’s technologies is different. It is not just a question of culture and capabilities. A completely new reality of a farmer’s field is emerging, that is enabled by data analytics, artificial intelligence and designer organisms. Smaller players have entered the game. Not all of them will be bought by the big ones. A new competition has emerged, that should prove fascinating to observe.

(To be continued.)

Matthew Beckwith
AgTech Consultant