Why AgTech might be the tail that wags the Agriculture GDP dog
Agriculture is a key component of the US economy. According to the US Department of Agriculture (USDA), agriculture, food, and related industries contributed $1.05 trillion to US gross domestic product (GDP) in 2017. Farm output alone was $132.8 billion, or about 1% of US GDP. But that’s not the whole story. The USDA also reports that in 2018, there were 22 million full and part-time jobs related to agriculture and food sectors, or 11% of total US employment. Food service (places where we eat and drink) is the largest segment with 12.8 million jobs. So agriculture’s overall economic contribution to the US economy is 1% of GDP and 22 million jobs.
Let’s drill down into the largest ag producing state and the economics of ag and AgTech in California. In 2018, the statewide crop production in California was almost $50 billion and California grows many of the most valuable crops in the world. Over two-thirds of fruits and nuts and one-third of the vegetables in the US are grown in California. Ten food products represented over $1 billion each in 2018 — dairy products, grapes, almonds, cattle, pistachios, strawberries, lettuce, floriculture, tomatoes, and oranges were all in the $1B+ club.
In addition to the farming itself, there is a complete ecosystem that California provides to help support agriculture. Equipment dealers sell, lease, and service capital equipment to help with planting, harvesting, and applications of things like pesticide and fertilizer. Pest control advisors and crop advisors provide recommendations for treating pests and optimizing crop yield. The California statewide education system, which includes the UC and CSU systems, produce students and startups annually that are ready to work and help solve some of the toughest ag challenges. The junior college system includes over 100 campuses, many in agricultural communities, that link the UC research community with local farming communities via the UC Co-op Extension, a network of subject matter experts that surface the problems farmers are literally seeing in the field(s) so that researchers at Universities can prioritize the right problems based on actual farmer input.
How big is the AgTech opportunity? It’s huge because the 3 biggest problems — labor, food safety, and water — all require a lot of innovation to either improve or replace existing solutions. I’m going to start by diving down and looking at labor challenges for California strawberry growers only. Then we’ll extrapolate those numbers to overall California irrigated agriculture. This analysis will not cover the water or food safety challenges — both require AgTech solutions as well and will be covered in future posts.
Let’s start with a look at strawberry economics for California farmers. The California Strawberry Commission collects data from strawberry farmers annually. For 2019, they found that 25,704 strawberry acres were planted statewide. The UC Davis Ag and Natural Resources (UC ANR) team and Cooperative Extension team did an analysis of strawberry economics in 2016. UC ANR found that strawberries make an average of $70,000 per acre per year in revenue from strawberry sales.
UC ANR also found that harvest labor is the single largest cost at $34,524/acre. Hand weeding is $1,642/acre. Planting (including plants, not just labor) costs $4,007/acre. Installing drip tape is $1,638/acre. Labor costs for just those 4 items for strawberries totals $41,811/acre/year. Automating 20% of the labor used to grow and harvest strawberries would mean over $8,000/acre/year would be used to pay for AgTech automation solutions. At that amount, AgTech automation would generate $205,632,000 in revenue per year for just California strawberries.
It’s worth noting that an increasing number of AgTech startups are selling as-a-service or subscription offerings where the farmer does not buy equipment but instead buys the solution on a per-acre or per-yield amount metric. This has advantages for the farmer (less capital outlays) and for the AgTech startups (recurring revenue — good for a predictable revenue business model and better for valuations). My prediction is this trend toward XaaS (X = anything-as-a-service) will accelerate the next several years and will be a dominant go-to market approach for small to medium-sized farmers.
It’s a more open question about large operators — will they want to own the equipment since they can drive economies of scale smaller operators cannot or will they prefer the XaaS option? I think startup operators will figure out it’s in their best interest to work hard to make the economics for all segments favor one approach and XaaS is likely to be the winner for many of them. I also believe those that move towards XaaS will win more than their share of competitive situations against those selling capital equipment, which will accelerate XaaS adoption. Based on the high probability that XaaS emerges as a growing and accelerating trend, I’m going to use XaaS as the primary business model for the rest of this analysis.
So now that we’ve settled on XaaS as the primary go-to market option, let’s go back to the AgTech economic analysis. Now that we have determined that strawberry automation can replace labor and become a $200M+ market opportunity, the obvious next question is how does the math play out for all California crops. We’ll address that here, with a separate post to follow for all US crops (there’s some complexity into widening the lens that far which I’ll cover in a follow-up post).
With 7.9 million (M) irrigated acres and $49.9 billion (B) in crop revenue, the revenue per acre figure across all irrigated land in California is $6,316. Obviously this absolute number varies significantly by crop type. As you would expect, for higher value crops, there is more opportunity for automation because there’s more revenue and more expenses that can be automated. That said, we can extrapolate the strawberry numbers to other crops by using the %s from the strawberry economics model and apply them to irrigated acreage for other crops.
If we assume 20% margin for all irrigated farm crop types in California, you get total expenses for those 7.9M irrigated acres of $5,053/acre ($39.9B total). Note that if margins are lower, there are actually more dollars that can be automated, so a higher margin actually reduces the AgTech opportunity. If we assume 20% of the expenses per acre can be automated for all irrigated acreage, that delivers a per acre total for AgTech automation of $1,011. Applying that to all the California irrigated acreage statewide, the annual revenue for AgTech would be $7.98B in annual recurring AgTech revenue.
Remember that the entire crop value for 2018 was $49.9B. So at $7.98B, AgTech GDP would represent 16% of the total crop value. In addition, AgTech would be by far the faster growing of those two GDP contributors. In fact, with the implementation of the Sustainable Groundwater Management Act (SGMA), agriculture is under pressure to remove (and is already removing) acreage from production in many counties to help stabilize groundwater resources. So ag GDP for California may actually decline statewide while AgTech GDP is growing.
So the total ag product GDP number that is around $50B and just the irrigated portion supports a potential AgTech number that is around $8B. The $50B is here now and needs to be invested in and prioritized as an economic driver for California. If it’s not prioritized, history has shown that the next set of farms can be grown in places like Arizona and Oregon or in other countries like Mexico. Similarly, AgTech companies can locate anywhere and support California sales and service operations remotely — from other states or other countries.
California leads in AgTech because it leads in agriculture. Continuing to invest in both will continue to keep both ag and AgTech solutions focused on California. Given the dramatic impact that the COVID-19 shutdown has had on some key California (and US) industry segments like hospitality, tourism, travel (business and personal), and events, now is a great time to invest in both ag and AgTech. Because of the nature of ag, both of these industries are considered essential in continuing to grow and provide food for much of the world. Both should also be considered key building blocks to reviving the CA economy. Both need investment and improvement and things will get better faster with government in a role of advocating and supporting each of them.
Executive Summary
I am going to be doing some deeper dives into this topic going forward. For now, as a starting point to get the discussion going, I wanted to put this initial set of analysis out. To me, it’s interesting that as big as the California ag industry is in aggregate (~$50B annually), AgTech can get to a double-digit % of ag GDP without any massively heroic assumptions. As laid out above, if automation is able to solve only 20% of ag costs for strawberry acreage related to labor for harvest, weeding, planting, and drip tape, it enables $205M in annual recurring revenue. Extrapolate that to all CA irrigated acreage and it’s a $7.9B annual recurring business — 16% of overall ag GDP.
A lot has to happen to capture that opportunity, and it will take years to happen. But clearly it is an opportunity with investing in. Keeping ag in California will help ensure that we keep AgTech in California — and not just the technologies, but the companies. If you’re born and raised as a 5th generation family farmer in California and see the potential for AgTech that I do, you want the AgTech solutions, companies, and jobs to be based in California. Hopefully this analysis is one step forward in helping policy makers re-orient their thinking around agriculture and AgTech.
