Agtech – Precision Agriculture Systems and Services – Industry performance

This article is a part of a multi-part series covering the Agriculture technology (AgTech) industry as a whole. To view the previous articles, click here.

This article looks at Precision Agriculture Systems and Services (PASS), a sub-segment of the AgTech industry as a whole. Although the previous two blogs in this series have looked at the AgTech industry in its entirety, as we dive into the numbers we will segment it out to offer more detailed context. This article will present the overall performance of the PASS industry, including external drivers, current performance, industry outlook, and the industry life cycle.

PASS definition

PASS¹ includes software and consulting services that gather, track and evaluate agricultural data. The technology is usually used in aggregation with other systems, such as harvesting or field-input machinery. In short, PASS’s function is to try and maximize production efficiencies. Commonly, the software is packaged as individual units, generally sold to downstream markets. However, what is becoming increasingly common is for PASS to be integrated into third-party products such as farm machinery.

PASS industry at a glance

The PASS industry² is made up of 2,155 businesses, bringing in roughly US$1.8b a year in revenue, which flows down to US$412m in profit (23% margin). Top line revenue is currently growing (2012-2017) at 6.0% p.a. and is expected to grow at roughly 12.8% over the next 5 years (2017-2022)². These positive growth rates are largely due to an increasing demand from crop farmers, aiming to maximize production efficiencies, as they strive to meet growing global demand.

Key external drivers

Demand from agribusiness – agribusiness is a very old, established industry within the USA. The industry includes businesses that engage in or directly benefit from agricultural activities. The agribusinesses segment that is the most applicable to PASS includes farmers and companies that supply goods and services to farms.
The demand for agricultural machinery – manufacturers of agricultural machinery, for example, tractors and balers, represent a key downstream market for third-party developers within the PASS industry. This includes PASS companies who can not only manufacture new equipment but can also install PASS tech into farmers existing products.
Price of electronic components – electronic components impact the overall cost of PASS tech, and thus its perceived benefit. Semiconductors are integral to the development of PASS tech. The cost outlook for this is positive, with the price of semiconductors and electrical components as a whole forecasted to decline.
Technological change for the industry – PASS is technological-based in nature and innovations in GPS, software designs and user interfaces influence competition levels and downstream demand. The bigger they grow, the wider the word will spread.
Government assistance for the industry – as the agribusiness industry is particularly important for the US economy as a whole, the government provides assistance to farmers in the form of subsidies. In turn, this increases access to capital for investments into PASS. More so, as the government pushes to be more efficient, its support of PASS tech is likely to increase.

Current performance

Several US crops, for example, corn, is relied on by most of the world for the production of food. But as consumers always want more for less, in particular with respect to food products, US crop farmers are under huge pressure to maximize and increase daily yields through efficient production. The PASS industry assists in this effort and is becoming more noticed. The use of 21st century tech can help farmers reduce production costs, increase yields and thus generate higher profit. The adoption of PASS tech has been relatively slow compared with other emerging industries, largely due to farmers delaying the adoption. Like most tech advancements, the unknown scares people and no one wants to move first. However, recent data suggests adoption rates are increasing, and farmers recommending the benefits to other farmers is the best form of marketing. Revenue in the PASS industry has been growing at 6.0% p.a. over the last 5 years and was forcasted to reach US$1.8b by the end of 2017. Positive growth is forecasted to continue year on year, reaching 8.8% in 2017 alone, painting a good picture for the industry going forward.

Industry outlook

As the efficiencies realized through PASS techniques become more common, farmers will need to adopt industry norms or get overtaken by competitors. As awareness of PASS tech benefits continues to grow, this should translate into higher earnings for the industry as a whole. However, not everything is positive, and there are some risks ahead. Agribusiness as a whole has seen short-term declines in revenue numbers, which could have negative or positive impacts on PASS, depending on how farmers assess the cause of this decline. More so, agribusiness equipment is pricey, and farmers do not replace their big-ticket equipment every year. In fact, farmers will not replace these until the asset has been fully depreciated. Despite the risks, IBISWorld is still bullish, forecasting industry revenue to grow at an annualized 12.7% p.a. to reach an estimated $3.2 billion by 2022.

Industry life cycle

The PASS industry has all the signs of an expanding industry. While some farmers have been willing to adopt this tech, smaller farms that lack capital have been slower off the mark. Lack of education, in regards to the benefits of PASS tech, also remains a barrier. The technological infrastructure required to support PASS is also constantly expanding, providing many opportunities for future growth and added efficiencies.

Summary

Overall, PASS industry performance is promising, and it has experienced solid growth rates over the last five years. We expect these trends to continue, as early adopters spread the word about increased yields and higher profits. Macroeconomic indicators are also encouraging, with the demand for large crops, like corn, on the increase. Key external drivers such as government assistance for the industry, technological change, price of electronic components and demand agricultural machinery manufacturing have all contributed to these positive headwinds, and paint an even brighter picture for the industry as a whole moving forward.

Sources

What is precision agriculture? – Definition from WhatIs.com, WhatIs.com, http://whatis.techtarget.com/definition/precision-agriculture-precision-farming (last visited Mar 4, 2018).
Precision Agriculture Systems & Services – US Market Research Report, Precision Agriculture Systems & Services (US) – Industry Report, https://www.ibisworld.com/industry-trends/specialized-market-research-reports/technology/scientific-systems-devices/precision-agriculture-systems-services.html (last visited Mar 4, 2018)

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Nate Nead

Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC, a middle-marketing M&A and capital advisory firm. Nate works with corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He holds Series 79, 82 & 63 FINRA licenses and has facilitated numerous successful engagements across various verticals. Four Points Capital Partners, LLC a member of FINRA and SIPC. Nate resides in Seattle, Washington. Check the background of this Broker-Dealer and its registered investment professionals on FINRA's BrokerCheck.