Precision Agriculture Bears Fruit for Farmers, Generates Profits for Select Companies

December 19th, 2012 by

Three companies that have invested heavily in precision agriculture – helping farmers employ new technologies when deciding what to plant, when to plant, how to irrigate and fertilize on a micro-level within fields, monitor crop growth and determine how to harvest as efficiently as possible – are poised to reap the rewards in the form of double-digit earnings growth in the coming years.

In Shakespeare’s play, Romeo and Juliet, Juliet asked, “What’s in a name?” But in the case of precision agriculture, the name says it all. Precision agriculture is a growing movement in farming that produces higher crop yields, lower costs, and more environmentally friendly practices. It involves the use of global-positioning satellites (GPS), database management, and digital imagery, among other things, to make farming more exact and productive.

The scope of precision agriculture extends from planting to harvesting. For instance, intelligent seeding systems prevent errors by making adjustments during planting and keeping precise records of which seeds are planted in which rows. New 3D imaging is improving irrigation techniques, directing the flow of water to crops with more precision. And various technologies enable fertilizer to be applied with great precision (ah, there’s that word again), minimizing the environmental impact and maximizing crop yields.

We think that three companies whose proprietary products and services relate to precision agriculture – namely, Deere & Co. (DE.N), Monsanto (MON.N), and Trimble Navigation (TRMB.O) – could generate double-digit earnings growth over the next several years in the precision-agriculture segments of their business. In the process, their products and services are contributing to the steady growth of precision agriculture.

The demand for food

Why is precision agriculture so important? Simply put, farming feeds the world’s 7 billion people, whose numbers continue to grow. The world’s population should reach 9 billion by 2050 and possibly 10 billion by the end of the century, according to the United Nations. Much of this growth is fueled by developing countries. For example, Africa’s population is projected to triple, from 1 billion today to 3.6 billion by 2100.

What’s more, the world’s people are becoming more affluent and eating more. Citizens in countries like China and India are consuming more meat and dairy products, and the livestock that are the source of meat and dairy products in turn are consuming enormous amounts of feed crops like corn and wheat. (Beef cattle, for instance, normally consume four to eight pounds of grain per day.) Also, the production of biofuels such as ethanol that rely on corn as a component is growing. All this has contributed to a 45% rise in global food prices since 2006, according to the International Monetary Fund.

Also, as developing nations in South America, Africa, and Asia expand their farming, their relatively inefficient (and sometimes primitive) agricultural methods are straining natural resources. In some parts of the world, entire forests are being razed for farming, and if current practices continue, a land area larger than the United States – 2.5 billion acres – will be cleared by 2050, according to Proceedings of the National Academy of Sciences, a trade journal.

Trading pitchforks for iPhones

The bottom line: food shortages and rising food prices for a burgeoning global population could become a critical issue and a source of international unrest in the decades ahead. In fact, it’s already a critical issue. For instance, high food prices played a part in the Arab Spring uprising in 2011. Meanwhile, arable land is finite, so squeezing higher crop yields from a limited amount of land is vital. In response, farmers are increasingly adopting precision-agriculture techniques to grow more food. Only recently have those techniques reached a level of accuracy, utility, and ease of use that broadly appeal to and benefit farmers, who have often been stereotyped, rightly or wrongly, as resistant to change.

Today, though, farmers are as likely to wield an iPhone as they work in their fields as they are to clutch a pitchfork. Using data from field sensors and satellite images, they receive a constant flow of information about their crops and can make adjustments on the fly to manage their farms better, in the exact locations needed.

The key to precision agriculture is the fact that technology and data allow for greater customization and flexibility in farming – what Wall Street analysts call a “site-specific” approach. For years farmers have treated their farmland as a single unit, watering and fertilizing it en masse. But farmland can contain subtle variations in soil type, moisture, and nutrients. In turn, these soil variations can lead to variations in crop yield if the land is farmed uniformly in the traditional way.

However, precision-agriculture technology and data permit farmers to break farmland into small chunks for analysis, into areas as small as a few meters. (Most farmers, however, limit these breakdowns to one-acre increments.) The whole process begins before a single seed is planted. Farmers test the soil composition of individual fields, measuring various qualities of the soil, such as the levels of phosphorus, nitrogen, and potassium. This is often done using digital-information systems that combine maps, statistical analysis, and database technology. Farmers can then determine the planting methods, fertilizer treatments, and seed varieties that will work best in each field.

Once farmers are ready to put the seeds in the ground, they use planting equipment that can be programmed to plant at variable rates and reprogrammed to correct any mistakes along the way. New precision-planting technology helps farmers perfect the spacing of seeds and achieve an optimum planting depth, giving crops stronger root systems. And as the equipment plants the seeds, data is stored on exactly what’s planted and where. In the future that equipment, we believe, will be able to do much more, such as plant multiple varieties of hybrid seeds in a single field.

As crops grow, they must be watered, of course. Previously, irrigation was mainly accomplished by the traditional central-pivot method – hoses mounted on trusses that roll around fields, indiscriminately sprinkling water on the crops below. Now, variable-rate irrigation is gaining favor. In this process, farmers use topographic maps and soil-density analysis to learn where water happens to flow and collect in a field. This information is then uploaded to a Global Positioning System (GPS) satellite connected to the sprinkler system, which regulates the flow of water from each sprinkler head accordingly. The result: an average 15% reduction in water use and savings of $40 to $110 per 10,000 square meters of farmland, according to The Economist. Or in the parlance of one agricultural journalist, “More crops from fewer drops.”

Fertilize only where needed

Applying fertilizer to crops has likewise become more efficient. Metaphorically, the modern application of fertilizer is not unlike painting a living room. Until recently farmers were slapping down a base coat of fertilizer using broad rollers. Now, though, using variable-rate application technology, they paint with more fine-tipped brushes, i.e., automated sprayers, to apply fertilizer only where it’s needed. Some farmers report their fertilizer costs have been reduced by 5-15% as a result.

Once farmers plant, water, and fertilize the seeds, they monitor crop growth. That process has advanced greatly in sophistication: no longer do they just simply examine an ear of corn by peeling back the husk. Today’s farmers can enter their observations on crop growth in one field in an information system connected to GPS technology, which compares it with data from other fields to pinpoint where more moisture or more protection from infesting diseases or pests is needed.

Come harvest time, data is reaped along with the crops. Digital sensors on harvesting combines gather information on things like fuel use and the grain-flow rate and beam it to the farmer’s handheld device, his office, or even an agricultural conglomerate’s corporate headquarters. The interior of today’s combines resembles an airplane cockpit, replete with cameras, digital controls, computers, and GPS devices, according to The Wall Street Journal. Some combines can be operated without a driver, controlled remotely from the quiet confines of the farm office.

Yield maps guide farmers

When the harvest is completed, farmers not only have a crop but a mountain of data known as a yield map. That map can be used to apply the lessons learned from one harvest to future harvests. In effect, farmland is transformed into a living laboratory, where data helps increase farming efficiency and profitability. For example, at corn’s current price approaching $7.50 per bushel, if each acre of a 3,000-acre farm yields 10 more bushels, it generates an extra $225,000 in revenue for the farmer, thanks largely to the wonders of precision agriculture.

Precision agriculture is rewarding its early adopters financially. For every ten farmers who have embraced precision-agriculture technology, eight report that it has made them more money, according to the Precision Ag Institute, an industry group. These farmers say they now make $5 to $9 more per acre than before, depending on the crop and region.

The rise of precision agriculture partly explains why U.S. farm exports have grown by 63% over the past five years and why the Department of Agriculture projects that domestic farmland for the eight major crops of corn, sorghum, barley, oats, wheat, rice, cotton, and soybeans should total 251 million acres in 2012, the second-highest level in the past 10 years.

These firms could benefit

As we see it, three companies that offer farm equipment, seeds, technology, or services appear to be particularly well positioned to benefit from the growth of precision agriculture:

Deere & Co: a leading manufacturer of farm equipment, including tractors and combines. The company recently introduced its FarmSight system, an innovative software platform that helps farmers manage their equipment fleets from planting time to harvest. FarmSight collects data from Deere’s machines in the field and deposits that data for farmers’ analysis on a Web portal, dubbed MyJohnDeere. In our judgment, Deere’s stable, highly competent leadership is one reason the company has been able to consistently develop innovations such as FarmSight throughout its history: since its foundation in 1837, Deere has had only nine chief executive officers. The company has dominated the U.S. and Canadian farm-equipment market and is making a push into international markets. Twenty years ago, it had two factories outside of the United States. Now, it has nine, in Brazil, China, Germany, India, and Mexico. Much of the company’s recent growth has come from its versatile 8R tractor line, which is designed for use on all types of farms worldwide. Current CEO Samuel Allen likes to say that 8R tractors employ more software code than the Space Shuttle did.

Monsanto: a major producer of bioengineered seeds and herbicides. The company is expanding its agricultural products and services to include planting prescriptions, application technology, and maintenance advice. Its recent acquisition of Precision Planting, whose technologies can be retrofitted in tractors, is an important part of that expansion. The $250 million acquisition augments Monsanto’s recently launched Integrated Farming System, which brings together advanced seed genetics, precision-agriculture practices, and the latest software to boost crop yields. Monsanto delivered earnings growth of 25% in its 2012 fiscal year over the previous year’s level.

Trimble Navigation Ltd.: a provider of GPS services to a variety of industries. We consider Trimble the technology leader in precision agriculture. The company recently launched its portable WM-Topo survey system, which the farmer can take by hand into hard-to-reach areas, such as ditches that are inaccessible by trucks or tractors. Farmers can use the information gathered by WM-Topo to make better decisions about using water in their fields. The company’s technology also includes the popular TrueGuide System for fleets of GPS-guided vehicles, which improves harvest efficiency, and the Connected Farm System, which enables farmers to integrate their accounting data and farming data and identify the most profitable farming practices. Finally, Trimble’s satellite-imaging technology is so powerful it can home in on a speck of farmland as tiny as an inch and a half, compared with a “mere” four inches with competitors’ technology.

Disclosure: As of November 30, 2012, Turner held shares of all three companies mentioned above in client accounts.

 

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