DE - Will The Convergence Between Artificial Intelligence And Precision Agriculture Lower Farming Costs?
2023-08-10 03:35:00 ET
Summary
- After input costs rose 80-250% during the supply chain shocks associated with the coronavirus crisis and the Ukraine War,[1] crop production costs hit record levels in 2022.
- Coupled with labor shortages,[3] net farm income in the US is likely to drop 18% this year, according to U.S. Department of Agriculture (USDA) forecasts.
- Moreover, because US crop yields have plateaued during the past five to six years, farmers are seeking innovative ways to lower costs and improve profitability.
By Daniel Maguire, ACA, Research Associate
Crop production in the US is facing significant cost pressures. After input costs rose 80-250% during the supply chain shocks associated with the coronavirus crisis and the Ukraine War, [1] crop production costs hit record levels in 2022. [2]
Coupled with labor shortages, [3] net farm income in the US is likely to drop 18% this year, according to U.S. Department of Agriculture (USDA) forecasts .[4]
Moreover, because US crop yields have plateaued during the past five to six years, as shown below, farmers are seeking innovative ways to lower costs and improve profitability.
Source: ARK Investment Management LLC, 2023, based on data from USDA as of July 12, 2023.
Forecasts are inherently limited and cannot be relied upon. For informational purposes only and should not be considered investment advice or a recommendation to buy, sell, or hold any particular security.
According to our research, Artificial Intelligence ((AI)) and Precision Agriculture ((AG)) have the potential to reduce annual agricultural operating costs by more than 22% globally.
AGCO Corporation ( AGCO ), CNH Industrial ( CNHI ), Deere & Company ( DE ), and Komatsu ( KMTUY ), among other companies, are creating innovative solutions to boost farm productivity.
Last year, Deere announced [5] plans to launch a fully autonomous corn and soybean production system by 2030 - beginning with the Autonomous 8R Tractor.
According to our research, the company’s precision ag tools - particularly the ExactShot Planter and See and Spray Ultimate Sprayer - will play important roles in boosting farm productivity.
The combination of See and Spray Ultimate Sprayer, ExactShot Planter, and autonomous technology should lower several agricultural costs.
First, the amount of seed, fertilizer, and chemicals involved in farming could drop by ~27%, a reduction driven largely by a 60% [6] decline in starter fertilizer - which accounts for ~3% of operating costs - and a 67-80% [7] decline in herbicide costs - which accounts for ~12% of operating costs. [8]
Second, as autonomous technology takes over in-field work from humans, we estimate that labor costs, which account for ~8% of operating costs, could drop ~85%. Finally, our research suggests that predictive maintenance and more efficient field passes could reduce fuel, lubricant, electricity, and repairs by ~20%.
The combination of AI and Precision Ag could reduce the operating costs of farming corn, soybean, and wheat in the US by 26%, 31%, and 31%, respectively, on a per-acre basis, as shown below. [8]
Source: ARK Investment Management LLC, 2023, based on data from USDA as of July 12, 2023.
Forecasts are inherently limited and cannot be relied upon. For informational purposes only and should not be considered investment advice or a recommendation to buy, sell, or hold any particular security. Past performance is not indicative of future results.
ARK also estimates that 75-80% of farms will adopt these solutions globally, with different adoption rates based on factors like farm size, connectivity, and cultural differences. [9]
As agricultural companies leverage the various technologies and shift toward usage-based business models - reducing up-front capital costs and enabling per-acre charges - if 75% of farms were to adopt them, we believe worldwide farming operating costs could drop 22%. Potentially accelerating adoption, companies like Starlink ( STRLK ) are boosting rural connectivity with low-earth orbit satellite solutions. [10]
ARK’s research suggests that AI and Precision Ag tools operating at scale could reduce operating costs as a percent of sales from 42% to 33%, potentially creating a global serviceable market of ~$67 billion, as shown below.
If the use of autonomous technology were to proliferate, agricultural companies potentially could generate recurring revenue streams with software-as-a-service-like margins. [11]
Source: ARK Investment Management LLC, 2023, based on data from USDA as of July 12, 2023.
Forecasts are inherently limited and cannot be relied upon. For informational purposes only and should not be considered investment advice or a recommendation to buy, sell, or hold any particular security. Past performance is not indicative of future results.
While this analysis has focused on operating costs, autonomous solutions also could maximize crop yields by reducing dependency on human labor during nocturnal hours or critical agronomic periods. [12]
Usually, farmers urgently need labor-dependent machinery to make field passes, which often proves difficult because of labor scarcity. Autonomous technologies can address that problem for farmers and significantly increase the potential for improved crop yield.
In 2022, the average corn yield in the US was ~180 bushels per acre, [13] ~40% below the 10-year average of the National Corn Growers Association (NCGA) Competition Winning Yield, which was ~510 bushels per acre, as shown below.
In our view, integrating autonomous solutions with the gene editing of seeds and the precise application of fertilizer/herbicide could nearly triple crop yields and push them toward the winning yields in this competition.
Source: ARK Investment Management LLC, 2023, based on data from NCGA as of July 12, 2023. [14]
For informational purposes only and should not be considered investment advice or a recommendation to buy, sell, or hold any particular security. Past performance is not indicative of future results.
We believe AI and Precision Ag could introduce the most meaningful innovations to agriculture since the tractor 100 years ago. [15] In our view, they should enhance farm profitability, decrease food prices, and satisfy the globe’s increasing demand for crops, increasing the efficiency and sustainability of farming worldwide during the next five to ten years.
1. Fiocco, D.et al. 2023. “ Agtech: Breaking down the farmer adoption dilemma .” McKinsey & Company.
2. U.S. Senate Committee on Agriculture, Nutrition, and Forestry. 2023. “ Revisiting Farm Production Expenses .”
3. USDA. 2023a. “ Farm Labor. ” USDA. See also Bear Flag. 2021. “A ddressing the Farm Labor Shortage Through Automation .” Bear Flag.
4. USDA. 2023b. “ 2023 Farm Sector Income Forecast .” USDA.
5. Paukner, M. 2022. “ Deere: Fully Autonomous Corn, Soybean Production System Planned by 2030 .” Precision Farming Dealer.
6. Deere & Company. 2023. “ John Deere Debuts New Planting Technology & Electric Excavator During CES 2023 Keynote .” John Deere.
7. Deere & Company. 2022b. “ Deere launches See & Spray ™ Ultimate: in-season targeted spray technology combined with a dual product solution system for corn, soybeans, and cotton.” John Deere. See also Scalcup, L. 2022. “Texas Grower Puts John Deere’s See and Spray Technology to the Test.” AgWeb.
8. Note: Currently, the See & Spray Ultimate Sprayer does not apply to wheat. We believe that Deere is focusing on corn and soybean for the purpose of training and that this should extend out to wheat, as well as other row crops. See also USDA. 2023c. “ Commodity Costs and Returns ”. USDA.
9. In Asia for example, traditional farming practices generally are passed down through generations and deeply ingrained in farming communities. While innovation can help improve the productivity of these methods, adoption rates tend to be slower as greater support systems are required. See also Asian Bank Development. 2021. “ Transforming Agriculture in Asia .” ABD.
10. Starlink. 2023. “Starlink is ideal for rural locations, and farmers in Australia are putting it to good use.” Twitter .
11. Our research suggests that agricultural companies could generate revenue by taking a percentage of the cost savings enabled by these technologies. This mirrors the Accountable Care Organizations ((ACO)) model, where ACOs claim 40%-100% of cost savings under a set target while ensuring that healthcare quality is maintained. See McKinsey. 2020. “ The math of ACOs .” McKinsey.
12. A "critical agronomic period" refers to a specific and limited timeframe during which certain agricultural activities must be conducted for optimal crop growth and yields.
13. USDA. 2023c. “ Commodity Costs and Returns ”. USDA.
14. NCGA. 2023. “ National Corn Yield Contest .” NCGA.
15. For details on the impact of the tractor on agricultural productivity, see Korus, S. 2020. “ What We Can Learn from Automation in the Agriculture Industry .” ARK Investment Management LLC.
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Will The Convergence Between Artificial Intelligence And Precision Agriculture Lower Farming Costs?