Description

All amounts in Canadian (unless otherwise stated).

Agriculture is one of the last sectors of the U.S. economy that is generally not digital. Understanding that, investors have been chasing AgTech ideas in recent years, such as farm robotics, soil sensors and providers of satellite and drone imagery. Despite the promise, these new technologies have not enjoyed widespread adoption in the U.S.  

AgTech has not seen impressive adoption because the solutions don’t address a major “pain point” of farms and can’t demonstrate a solid payback period. We have to wonder: could there be an area in agriculture with a pain point that can be addressed with a tech solution and can that solution offer farms a compelling payback? 

Here’s one: a large pain point for farms is how to determine the optimal fertilizer to maximize yield and minimize cost. Precision agriculture is $65 B, which is a large market. It’s especially painful for farms because the fertilizer companies (and seed companies) generally provide biased recommendations, promoting the buying of more of their fertilizer (and seed).

Several companies are working on unbiased software tools (data insights) for soil. Our favorite is Deveron (“FARM” on Canada’s Venture Exchange).

GREAT BUSINESS

Deveron arguably has a great business because it is the provider of soil sampling and soil analytics to over 600,000 acres in Canada (5 provinces; 60% of sales) and the Midwest (10 states; 40% of sales). The data is unbiased and provides a relatively fast payback, which solves the “pain point”. A farm typically gets a payback (through higher yield and less fertilizer) within three years. Yield increase can be 10-30% and cost (fertilizer) decrease can exceed 10%.

Soil sampling generally runs at 60% GM, and soil analytics (data insights) runs at 90% GM. The data insights have such high margin because the scripts can be downloaded over the Internet to the farmer’s planter or fertilizer spreader. In particular, Deveron’s data team (12-14 team members) is special because it operates as a hub-spoke. The company divides agricultural zones into regionalized zones, monitoring special parameters and benchmarks. The goal is to develop a customized “exercise program for a farm” so that the farm doesn’t get sick and thrives in the long run.

MANAGEMENT

CEO David MacMillan is a relatively young CEO but has been with the company since the beginning when it was envisioned by merchant bank Greencastle (still a large shareholder). Many of the U.S. executives come from a family background in farming (thus, they “speak farm”). The company attracted Chairman Bill Linton, former CFO of Rogers Communications, who has been personally buying shares. Insiders own about 25%, which aligns favorably with minority shareholders.

“SECRET SAUCE”

Deveron’s secret sauce is arguably its distribution network. Farming is an insular industry where farmers are loath to work with anyone outside of their family, church or local network. Deveron forms partnerships with various ag groups and acquires agronomists. Perhaps similar to how CPAs are generally well trusted by small businesses, agronomists are highly trusted by farms. Agronomists also often have multi-decade relationships with farms. By owning networks of agronomists, Deveron gets trusted distribution onto farms for soil sampling.

Once on the farm, Deveron can upsell data plans. Deveron’s eventual goal is to generate $5+ per acre for soil sampling and $5+ per acre for soil data plans. Deveron has made three acquisitions, including "Better Harvest" in Dumas, TX in May 2020. The acquisition added 110K acres for less than one times sales. In recent months, Deveron has evaluated about 50 agronomist groups for potential purchase. There are hundreds of small agronomist groups in North America.

LIKE AN OCTOPUS

A great business can sometimes be described as an “octopus”. An octopus has eight arms and legs working together in concert. These arms and legs for Deveron include: 1) acquire agronomists at one times sales (two-year payback to Deveron) to do soil sampling, 2) form partnerships with ag groups to do their soil sampling, 3) over time, add new sampling methods (new revenue streams) like tissue sampling, drones, and soil sensors, 4) upsell and offer more data plans (e.g. soil variability tool), 5) raise the prices for these data plans, 6) offer special data certifications (e.g. carbon capture credits), 7) benefit from a growing industry (more farms buy more data; the penetration rate increases for digital solutions on farms), 8) eventually offer “full farm advisory” (e.g. in the future, help farms with refinancing and insurance). That’s eight arms and legs, like an octopus.

COMPETITIVE RISK

In addition to the major fertilizer and seed companies, Deveron faces extreme competition from many software companies, including SoilOptix, The Climate Corp (acquired by Monsanto in 2013, has the FieldView app), AgSolver (acquired by EFC Systems in 2017; 110+ employees), Agrian (acquired by Telus Agriculture in 2020; has 1 B acres in “compliance check”, 90+ employees), Farmer’s Edge Labs (raised $104 M), and Decisive Farming (acquired by Telus Agriculture in 2019). In addition, Farmer Business Network (FBN), which has raised $570 M, is a giant with 20,000 farms as members. FBN provides analytics on hundreds of farm inputs (e.g. seeds) and could go deeper (unclear) into soil analytics.

LOW RISK OF DISRUPTION

Soil sampling hasn’t changed much in recent decades. Farms generally perform soil sampling every 1-3 years. Per interviews with a few agronomists, I learned that soil testing labs are relatively standard across North America. While soil sampling is unlikely to be disrupted, new practices in soil testing could appear over time. Eventually, inorganic tests (pH, P, K, Mg, etc.) could become less popular, and biological tests (e.g. microorganism counts) could become more popular.

TARGET PRICE

Deveron is on 600K acres now and is seeking to double (both organically and inorganically) to 1.2 M acres by end of 2021. Eventually by 2030, Deveron could be on 10 M acres (only 2.5% of addressable North American farmland of 400 M acres). At $5/acre for soil sampling and $5/acre for data plans (a total of $10/acre) that’s $100 M in sales. With its 75-80% long-term GM, Deveron could be valued as a leading B2B SaaS company (perhaps 10+ times sales). As a check, the median U.S. B2B SaaS currently trades at 19.0 times (!) forward sales. That would imply a unicorn, a $1+ B valuation. With a current market cap of $32 M, that valuation represents 33X upside by 2030 (this decade).

RISKS

Deveron faces high execution risk. Today, Deveron is a very small company with a headcount of only 26 (plus seasonal workers for data collection). The headcount is expected to increase to 36 shortly (especially adding account reps).

To invest in Deveron is to have high opportunity cost. Instead of playing this game of attempting to pick a future leader in software for soil, an investor could simply buy Deere (a clear leader in ag equipment) or invest directly in farmland (has yielded +10% historically, slightly ahead of the S&P 500).

Catalyst

Each arm and leg of the octopus shows signs of working.

Soil sampling acreage grows to 1.2 M and eventually to 10 M. Data plans are effectively sold into that acreage.

Continued earnings growth.