Transcript
One hundred and fifty years ago, agriculture still dominated employment as it had for thousands of years. And it remained the foundation of wealth in nearly every economy. Then suddenly, a wave of automation combined with biology and chemistry to create a farming revolution which enabled a tiny fraction of the population to deliver vastly more than the majority had formerly produced. This was carried to even greater heights in the last 30 years of the 20th century as the green revolution and globalization combined to deliver every conceivable treat to the world’s wealthy, while providing basic nourishment to even the world’s poorest.
Unfortunately, recent trends threaten to halt or even reverse this progress. These range from demography to geopolitical conflict to dysfunctional policy decisions. Fortunately, advances in AI and so-called precision agriculture seem poised to address these problems. Consider the facts. As recently highlighted by McKinsey & Company, crop production in the U.S. is facing significant cost pressures. Specifically input costs rose 80-to-250% for various crops from 2019 to 2022.
This was due to supply chain shocks associated with the coronavirus pandemic as well as the Ukraine War. As a result, crop production costs hit record levels in 2022. According to U.S. Department of Agriculture, these cost increases coupled with acute labor shortages and high interest rates, are forecasted to reduce farm income in the U.S. by 18% in 2023. Furthermore, because U.S. crop yields have plateaued during the past five to six years, as shown in the printable Trends issue, farmers have been actively seeking new ways to lower costs and improve profitability.
According to new research by ARK Investment Management, the combination of Artificial Intelligence and so-called Precision Agriculture has the potential to reduce annual agricultural operating costs by more than 22% globally. Right now, the two biggest players in Precision Agriculture are John Deere and CNH Industrial, which produces the Case and New Holland brands. And both have added to their vast experience in farm equipment via acquisitions of leaders in state-of-the art technologies.
Other major players in this space include AGCO Corporation and Komatsu. In 2022, Deere announced plans to launch a fully autonomous corn and soybean production system, based on data from USDA as of July 12, 2023. by 2030 - beginning with its Autonomous 8R Tractor. According to ARK, Deere’s precision agriculture tools including the ExactShot Planter and the See and Spray Ultimate Sprayer - will play important roles in boosting farm productivity and lowering key agricultural costs.
In an industry with narrow margins, the direct impact of advanced technology on three cost drivers could be huge. First, the quantity of seed, fertilizer, and chemicals involved in farming could drop by about 27%. This is driven largely by a reduction of 67-to-80% in herbicide costs, which accounts for about 12% of operating costs. In addition, there is a 60% reduction in “starter fertilizer,” which accounts for roughly 3% of operating costs.
Second, as autonomous technology takes over infield work from humans, ARK estimates that labor costs, which accounts for about 8% of farm operating costs could drop by 85%. Finally, ARK’s research suggests that predictive maintenance on equipment coupled with more efficient passes through the fields could reduce fuel, lubricant, electricity, and repairs by 20%.
As shown in the printable Trends issue a combination of AI and Precision Agriculture technology could reduce the operating costs of farming corn, soybeans, and wheat in the U.S. by 26%, 31%, and 31%, respectively, on a per-acre basis. Given this trend, we offer the following forecasts for your consideration.
First, the farm labor shortage will pose an increasing threat to agriculture, across the OECD countries. Immigration restrictions, an aging population and reindustrialization will reduce the number of people interested in farm labor. The business of farming will adapt to this crisis by adopting advanced technology over the next two decades. Second, by the early 2030s, precision agriculture will transform high volume commodity farming of crops like wheat, soybeans and corn.
ARK focused on these targets because they represent the biggest volumes and are already poised to benefit from the technologies that are close to cost-effective deployment. Third, in addition to simply improving margins, autonomous farming solutions will maximize crop yields by addressing human labor deficits during nocturnal hours and critical agronomic periods. At such times, farmers urgently need to make field passes in order to maximize yields, but this often proves difficult because of labor scarcity.
Unlike today’s labor-dependent machinery, autonomous technologies can work 24/7, significantly increasing the potential for improved crop yield. In 2022, the average corn yield in the U.S. was roughly 180 bushels per acre. However, at roughly 510 bushels per acre, the 10-year average for winners of the annual National Corn Growers Association (or NCGA) Competition was 2.8 times higher. According to ARK, integrating autonomous farming solutions with gene-edited seeds and precise application of fertilizer & herbicide could nearly triple crop yields and push the average toward the yields of the competition winners.
Fourth, once these technologies become cost-effective for American and European farmers, 75-to-80% of farms will adopt these solutions, globally. As equipment costs come down and vendors embrace business models which reduce up-front capital costs, adoption will accelerate. According to ARK, if 75% of farms were to adopt autonomous and precision agricultural technology, worldwide farm operating costs could drop by 22%, potentially creating a global annual market of $67 billion for this technology.
This represents a huge opportunity for vendors like John Deere, CNH Industrial, Komatsu and AGCO which have developed a comprehensive “tech stack.” And, Fifth, by 2035, robotics and AI will also transform the industrialized world’s orchards and vegetable farms. Prototype machines which plant, nurture and harvest delicate crops have made big progress in recent years as machine vision and mechanical manipulators have improved.
However, it will take another decade, or so, for these systems to achieve levels of reliability and cost, which will trigger mass adoption of these system even in the United States. However, this process could be accelerated by subsidies or by extreme shortages of migrant labor.
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