From traditional farming to industrialized farming to digital farming – Can AGCO harvest the digital revolution to transform the industry?

How can agriculture benefit from the digital revolution?

Worth $3.2 trillion, the agricultural sector is one of the world’s biggest industries in terms of GDP [1]. Yet, beyond its economic size, the agriculture industry has widespread social and environmental impacts as it defines millions of people’s lives and has an important role in mitigating environmental damage [2].

With current demographic developments, the role of agriculture will grow even further. For instance, a recent study by McKinsey & Company has estimated crop demand to increase by more than 100% until 2050 [3]. In order to meet increasing demand, the industry has been rushing towards fertilizers, biotechnology, and genetically modified crops, thereby often neglecting environmental implications. However, a recent disruption of the agriculture industry is being trigged by digital farming technologies that will influence agriculture worldwide by growing the supply through ecological intensification (maximizing farming yields with no negative environmental impact) [4].

 
What is digital farming and how does it affect the current agriculture industry?

“By combining the power of a farmer’s instinct with cutting-edge technologies such as satellite imagery, variable application algorithms, high-tech sensors, mobile applications or GPS, a farmer can make better informed choices that lead to higher yields and a lower environmental impact” [5].

The digital revolution is influencing the entire value chain of agriculture. For instance, suppliers of seeds and fertilizers, e.g. Bayer, started to invest in computerized farming services that can measure plant progress and the effect of pesticides or genetically modified seeds in real-time through remote sensing [6]. But also on the other end of the value chain, can farmers now obtain a numerous climatic parameters from satellite imagery and almost real-time data on rainfall, temperature, evaporation, vegetation, etc. [7].

The biggest leap-change trigged by digital transformation, however, can be seen at the manufacturers of agricultural machinery. Intelligent machines are becoming the heart of the digital revolution in farming by combining and integrating the above mentioned innovations. This practice of applying telemetry, sensors, data, satellite positioning and other technologies is referred to as ‘precision farming’ for a square-foot precise treatment of farmland [8].

One of the leaders in precision farming is AGCO – the world’s largest pure-play agricultural machinery manufacturer (home to the brands Fendt, Massey Ferguson, Valtra, and Challenger). The video below briefly illustrates AGCO’s approach to precision farming.

 

 

How is precision farming transforming AGCO’s business?

AGCO’s investments in its FUSE technology to enable precision farming and even autonomous driverless farming seem like a logical move. Looking however into the industry dynamics and company history, this represents the largest paradigm shift undertook by the company.
Traditionally, AGCO manufactured agricultural equipment such as tractors, engines, harvesters, planters, and other applications. However a shift down the value chain into farm management systems and closer farmer integration is imposing significant challenges for a traditional company like AGCO.

Having worked for AGCO, I was able to experience myself firsthand what it means changing an old entrenched manufacturing company into a provider of digital hardware and software and how difficult it is as transformation is required throughout the entire organization.
Key issues are for instance:

• the R&D and innovation department trying to shift from focusing on machine performance towards cooperating with farm management startups (e.g. building up the AGCO AgCommand telemetry system [9])
• the manufacturing department rethinking design and operations of a tractor to fit new applications and technologies into the machine
• the sales department trying to establish new revenue models to cover losses from fewer machinery sales (due to increased efficiencies) by licensing or selling software systems
• the sales reps needing to acquire new skills in teaching and educating customers about the benefits of precision farming vs. simply pushing new tractors

Yet, a quick transition and absorption of the digital transformation will be a key success factor going forward. First of all, precision farming will have a high lock-in effect of customers by connecting both the required hardware and software (e.g. system only possible to run with AGCO equipment). Second, it will also provide an opportunity for creating network effects by collecting and aggregating data across all farmers.

 

Outlook

As the transformation to digital farming is still in its infancy, the outcome and implications are not yet foreseeable. Growth rates for precision farming are expected to be around 13%, yet, as overall crop yields are expected to increase with digital farming, demand for fertilizers, pesticides or seeds is expected to decline thereby adversely affecting companies like Bayer or Monsanto [10].
Also the more societal implications are still hard to assess. This trend could drive a further wedge between the competitiveness of large multinational farming conglomerates and small local farmers. It is also unclear yet, to what degree digital farming can help 3^rd world countries in reducing food shortages as it requires a strong existing infrastructure and access to capital.

Yet, farming will look completely different within the next 10-15 years.

 

Word Count: 797 (excluding footnotes)

 

Footnotes:

[1] World DataBank, “World Development Indicators: Agriculture, value added (current US$), The World Bank Group, accessed November 2016.

[2] M. Rivera-Ferre, “The future of agriculture – Agricultural knowledge for economically, socially and environmentally sustainable development,” EMBO Reports 9(11), (2008): 1061-1066, Wiley Online Library, accessed November 2016.

[3] L. Goedde, M. Horii, & S. Sanghvi, “Global agriculture’s many opportunities,” McKinsey & Company, McKinsey on Investing Number 2 (Summer 2015).

[4] T. Roberts, “The Role of Fertilizer in Growing the World’s Food,” Better Crops 93, (2009), IPNI, accessed November 2016.

[5] “Digital farming in practice: preparing the ground for the future of agriculture in Europe,” press release, June 29, 2016, on CEMA website, http://cema-agri.org/publication/digital-farming-practice-preparing-ground-future-agriculture-europe, accessed November 2016.

[6] Crop Science Bayer, “Digital Farming: Bit by Bit,” https://www.cropscience.bayer.com/en/stories/2014/digital-farming-bit-by-bit, accessed November 2016

[7] U. Deichmann, A. Goyal, & D. Mishra, “Will Digital Technologies Transform Agriculture in Developing Countries?”, Development Research Group Environment and Energy Team, World Bank Group, Policy Research Working Paper #7669 (May 2016).

[8] The New Economy, “AGCO leads the way for precision farming,” http://www.theneweconomy.com/technology/agco-leads-the-way-for-precision-farming, accessed November 2016.

[9] MutualMobile, “AGCO and Mutual Mobile Lead Next Generation of Connected Agriculture,” https://mutualmobile.com/press-releases/agco-mutual-mobile-lead-next-generation-connected-agriculture, accessed November 2016.

[10] M. Raman, “How Digital Farming Could Hurt Bayer, Monsanto,” Benzinga Newswires, May 4, 2016, http://search.proquest.com.ezp-prod1.hul.harvard.edu/docview/1786641363?rfr_id=info%3Axri%2Fsid%3Aprimo, accessed November 2016.