Agtech look ahead for 2023

English economist and demographer Thomas Malthus warned in 1798 that the human population would outpace the ability to feed itself and result in dramatic corrections. Through innovations such as the plow, private property, and fertilizers, the unanticipated factor of technological innovation thankfully proved his predictions false.

Global agriculture production is again under scrutiny, less for concern for population growth and more for its land use, costs, productivity, and overall contribution to a warming planet and environmental degradation. Latin America will play an enormous role in guiding the industry to its next (seemingly paradoxical) chapter, defined by higher yield crops using less land while serving more people. Technology will be the key factor in this transition.

Agriculture drives much of Latin American commerce. Brazil is the world’s third largest agricultural exporter after the United States and the European Union, led by sugar and soybean along with beef and cattle (of which they are the global leader). Latin America overall accounts for 16% of total global food and agricultural production. Net exports in agriculture are 4% and are projected to increase to 19% before 2030. In order to keep up with growing global demand, it is estimated that agricultural production will have to grow 80% by 2050 to meet an expected population increase of more than 35%. This challenge sets the stage for a generation of breakout entrepreneurs to find ways to get more from the same plots, tools, and seeds. 

The Latin American agriculture industry has a few unique features which demand considered solutions. Principally, the region has a proliferation of small-scale farmers (<5 hectares). This raises the complexity of adoption of innovative solutions for startups, unlike more consolidated markets like the United States where 96% of production is handled among industrial giants, in other words, the innovations need far fewer customers to reach a similar scale of impact. Smallholder farms represent nearly 40% of agricultural output across Brazil and Mexico, and close to 60% in Central America resulting in barriers to scale and affordability. Startups are often challenged to meet a deep enough need for a large enough pool of paying customers with operational challenges that range across three major themes: 1) pre-farm gates which include R&D, inputs, and equipment. 2) on-arm premises includes harvesting, resource management, livestock, and staff. 3) post-farm includes sales, logistics, distribution, and commercialization.

This article aims to look to the year ahead, offering predictions and considerations for the agtech ecosystem in Latin America.

 

Looking to 2023 

 

Dry times 

The threats of drying aquifers and longer periods between rains in Monterrey, MX have thrust water management, conservation, and usage to the forefront of the global climate priority list, especially for our largest industrial consumers across agriculture, consumer goods, and heavy industry. 2023 is the year of water innovation partnership, investment, and acceleration from corporations in Latin America at every phase of the value chain. For employees, household and last mile retail rainwater capture solutions are to be subsidized by employers much like solar panels (i.e. Isla Urbana). Credit and offsetting platforms to complement in house process improvements will be supported by platforms such as Kilimo and Waterplan, while on-site hardware such as Capta Hydro will see increased adoption for industrial players. Boards will apply pressure, and leadership will look to internal and external innovations to prove they are treating the resource as a scarcity. In certain countries, this will be aided by legislation being advanced in Mexican courts currently. 

Platforms, not products

The proliferation of specific and highly technical solutions targeting a highly distributed and cash-conscious agriculture sector in Latin America is begging for aggregation. The challenge for entrepreneurs serving the long tail of farmers in Latin America is that their needs are diverse and crop specific, resulting in a choice between serving a small portion of farms with their hardest problem, or a large share of farms with a grab bag of solutions. This offers an opportunity for crop-agnostic aggregator platforms, marketplaces, and SaaS solutions which avoid marriage to any of the three phases outlined in the introduction, and instead bias towards ease, integration, and optionality, and be rewarded with network effects. The vast majority of farms in Latin America do not have in-house technical expertise; large Brazilian and Argentinian operations with tech advisors or “tecnificados” are the exception. Regardless of size, owners should not be expected to work across multiple platforms and solutions in order to meet the demand for increasing yields and cost saving. Brazil-based Leaf is a leading example of the demand for this approach with their platform that unifies APIs for farmers. We have observed a similar trend in the B2B wellness space, but instead of farmers, we are empathetic to HR executives, who often bias towards a single platform solution.

Follow the yields

Malthus did not anticipate what private property and technique would do for crop yields. I expect that we will be similarly amazed once innovations in crop yields reach adoption maturity across Latin American producers. These precision agriculture solutions will continue to reach into the long tail of farmers while serving more complex crop types. Recent innovations include remote crop monitoring and equipment deployment, IoT sensors that direct every drop and seed for highly-specific irrigation and fertilization, and fleet analytics for machinery. The challenge is who will pay for the solutions, and whether or not the technology has reached a commercial maturity to enable broader adoption. Satellite imagery may be the first to break this barrier with higher resolution imagery coupled with lower launch costs. Driving down adoption costs and customer education will be critical barriers to improving life time value of farmers, if they don’t see the value quickly, they don’t use it, they churn and don’t come back. 

To give a sense of the diversity of approaches for solving the yield problem: Instacrops is a virtual farm advisory platform that provides predictive crop information to improve crops and maximize yields at the irrigation and fertilizer level while Botanical Solutions makes low-cost pesticides and SpaceAG is a crop management agtech that uses remote sensing to digitize and analyze harvest data. Beeflow installs hives, encourages the attraction between flowers and bees, and ensures pollination at low temperatures. Demetria has taken the crop specific approach, using artificial intelligence to determine the taste and quality of green coffee beans before they enter the roasting process. All of these solutions, however innovative, will be measured by their ability to help farmers improve their cost and production efficiencies quickly, especially if there is a significant learning curve for the operators.

The lending levee breaks 

Access to capital has long limited the growth potential of small and medium size farms in Latin America, with traditional commercial and development banks lacking both the data to understand their creditworthiness and the models to efficiently deploy and monitor loans with payback periods which would more closely track seasonal rains than fiscal quarters. Agtech/fintechs leader like TerraMagna, and earlier stage platforms like Agree, and Verqor seek to improve accessibility and loan size for their farmer partners but have been challenged to secure sufficient on book lending to meet their growing waitlists. Even amidst rising interest rates, I expect we will see multiple debt facilities secured across major leading agtech lending platforms enabling them to accelerate deployment and utility due to the mounting wait lists of potential high quality clients across the region. This increased deployment will begin to spin the flywheel of risk data among lenders seeking to better understand their farmer clients.

  Acquisitions and big player activity

I anticipate the macroeconomic context will slow M&A activity in the LATAM due to growing cost of capital and public market volatility, with exceptions among smaller scale strategic purchases similar to Agrosmarts purchase of Boosteragro in 2020. That being said, with large multinational incumbents continuing to make investments and encourage the ecosystem such as Bayer´s Agtech LATAM program, 2023 may be the year that these big players take lessons from the major payment processors efforts in recent years to support open banking efforts in the region through partnerships and small investments across multiple players. We finally expect to see LATAM agtech unicorn Frubana and soonicorns Agrofy or ProducePay set the valuation high water mark following their successful funding rounds in 2022.

 

Challenges to consider 

 

Country risk

While Argentina is the second largest exporter of agricultural goods in Latin America and host to some of its most promising startups, 2023 will continue to be a challenging period for fundraising due to the high inflation risk impacting any peso denominated revenues and multiples stability on the side of the investors. An additionally heightened risk for agriculture-focused fintechs with lending services. In the short run, I expect this leads Argentina based startups to continue diversifying operations regionally to their Brazilian neighbors, and in some cases move north to Colombia and Mexico.

Move away from direct to farmer solutions 

In the short run, solutions that succeed will likely be where the end player is not a farmer, but instead, the distributors, logistics operators, and bulk buyers. We have seen several agtechs struggle to scale in acquiring farmer customers efficiently, convincing them to pay for services without an immediate measurable impact to their business is even harder. We have observed a similar trend in the residential solar space where customers are in most cases more accessible than farmers. In this segment, lowered costs and improved quality across solutions such as IoT and satellite imaging will be critical to scaling the accessibility of products and services for smaller scale production farms.

Not all crops are the same

It is critical that founders identify their solution both across the three operation themes mentioned in the introduction, but also recognize that these themes are often crop specific, successful agtechs in Latin America know exactly how to target those businesses, recognizing that small batch coffee production in Colombia is dramatically different operationally and culturally than soybeans in Brazil. Not all regions are the same, Brazil is very technical and advanced, with 1-2 hectare crops and a greater technology adoption than the typically smaller, fragmented, and family-operated coffee producers that focus on manual cultivation methods. Solutions that do not adapt their GTM and solutions to these specific crop cycles and operator needs will be challenged to scale among tight margin farm operations

Government leadership 

Latin America’s rapidly growing startups are often individual success stories or incubated within larger corporations, in other regions governments play a larger role in accelerating their opportunity. In comparison, Israel invests 4.9% of its annual gross domestic product in research and development of new products, South Korea invests 4.5%, and the United States puts in 2.8%. LATAM trails in comparison, with a region-wide average of just 0.6% according to the World Bank. Although government involvement by no means determines commercial success or scale, it can enable early stage innovations to gain traction before taking on dilutive capital while offering the investment community signals that the country is open to innovation. So far, this has not been the case in most of Latin America.

 

If we could wave a magic wand…  

 

Let’s imagine if we could wave a magic wand over the Latin American agriculture sector that might provide a tailwind for startups and technologists. The average age of farm operators in LATAM is 53 years old, with Mexico having the highest average age among the three largest regional producers at 56 years old. As many of these farms are independently owned and operated, the training of the next generation of farmer-operators is already underway. This generation are digital natives, with widespread social network adoption, a facility with digital tools, and recognition of their utility. There is an opportunity for a LATAM-based NGO or global player such as the World Food Program to develop alongside the startup and incumbent platform players (i.e. Google) an ag-hacker academy for next generation farm owners. The purpose would be to introduce these leaders to the available tools, collaborate on implementation, and build community between farmers across the continent who are adopting these solutions. For the young operators who don’t flock to the cities, there will be an opportunity to catalyze innovation within the family business to adopt new solutions and identify a continental-wide sales channel for the startups struggling to identify customers.

 

Let’s get to work

Latin America is the global breadbasket and will be expected to spearhead its transformation to a more planet conscious, high yield, low land use industry capable of feeding a growing population. While the challenges that have slowed the growth of early pioneers in the space, their experience, product maturity, and trust among a highly fragmented industry will be a tailwind. The next generation of growers, distributors, and financiers each have a foundational role to play in ensuring the success of the innovators in agtech working overtime to keep Malthus at bay.