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Firms betting on ag tech in low price environment

Study estimates ag tech investments by agribusinesses and venture capital firms have surpassed $20 billion annually.

Study estimates ag tech investments by agribusinesses and venture capital firms have surpassed $20 billion annually.

A wave of start-up activity in agricultural technology (ag tech) has led to unprecedented levels of investments by agribusinesses and venture capital firms, yet more than 80% of executives say their investments are primarily intended to defend or enhance their core businesses rather than to create a new business.

These findings, presented in a new report by The Boston Consulting Group (BCG), suggest that agribusinesses must change the way they think about investing in early-stage agricultural technologies — not only regarding how much they invest but also where and how. The report, titled "Lessons from the Frontlines of the Agtech Revolution," was released Oct. 25.

The outlook for ag tech investments is of great interest to both industry participants and government regulators. Some of the largest agribusiness companies have announced plans to merge. The proposed combinations have raised questions about how greater market concentration will affect companies' incentives to innovate and the prices they charge farmers for their products and services.

Farmers are facing an especially difficult business environment as lower commodity prices have driven down net farm income to 65% of the peak reached in 2013. Investments in ag tech may be part of the solution to the current low price environment.

The report discusses a study conducted by BCG and AgFunder that sought to understand ag tech investment levels, priorities and strategies. The study included a survey of more than 50 executives at leading agribusinesses globally, including most of the world's largest agribusiness players, and, for comparison, 15 investment professionals at different ag tech-focused venture capital firms. The authors also conducted a detailed analysis of ag tech patent activity since 2010.

Among the study's key findings:

* In 2015, the combined ag tech investments of agribusiness companies and early-stage investments of venture capital firms totaled an estimated all-time high of $20-25 billion, which represents 4-7% of company revenues, depending on the agribusiness sector. Most respondents expect investment levels in 2016 to match or exceed last year's level.

* Three-quarters of executives cited a technology that fosters data-enabled agriculture as a top investment priority, with building Big Data and analytics capabilities as their key focus.

* Executives reported that their company's investment strategy is primarily defensive, evolutionary and conducted in house. A lack of internal capabilities is the most commonly cited obstacle to success.

"To survive and thrive in the next decade, agribusiness executives must understand the technologies that other players have prioritized and develop a strategy that leverages their company's unique competitive advantages," Decker Walker, BCG partner and report co-author, said. "They need the flexibility to pursue both offensive and defensive investments and must be open to taking nontraditional investment approaches."

BCG partner and report co-author Torsten Kurth added, "Our study shows that the major sources of revenues are changing, and new profit pools are being created. To emerge as the winners in this shifting landscape, companies must identify the most valuable technologies to pursue, given their capabilities, and think differently about their investment strategy."

Agribusiness executives believe that their unique competitive advantage in ag tech stems from their ability to provide scale and a path to market for new technologies. However, the survey findings indicate that agribusinesses' strategies and capabilities do not yet support the ambitions reflected by their high levels of investment. For example:

* Companies direct nearly two-thirds of their investments to in-house research and development, with smaller amounts invested externally through, for example, partnerships or licensing.

* Only 10% of investments are linked to building new capabilities, with the lion's share linked to an existing product or technology in the portfolio or targeted to achieving scale or strengthening an existing channel to market.

* When asked to identify their primary challenge, 36% of respondents cited a lack of internal capabilities or talent for scouting and developing technologies. Many respondents also cited the challenges of internal financial metrics, agreeing on investment priorities and a risk-averse company culture.

To rethink their ag tech investment strategy, agribusinesses need to start by considering customers' needs, not technologies. The report discusses a combination of six steps that offer a customer-focused, systematic approach to winning in the ag tech revolution.

A copy of the report can be downloaded at www.bcgperspectives.com.

BCG is a global management consulting firm and adviser on business strategy that partners with clients from the private, public and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges and transform their enterprises. Founded in 1963, BCG is a private company with 85 offices in 48 countries.

BCGperspectives.com features the latest thinking from BCG experts as well as from chief executive officers, academics and other leaders covering issues at the top of the senior management agenda.

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