Analysis: The State of AgTech in Australia

Australians are rightfully proud of our farming and agricultural industry. It’s long been a backbone of our economy and cultural identity, with our size and geography giving us a comparatively unfair advantage on a global scale. It continues to account for a large portion of our wealth and employment, contributing more than $60 billion to the economy and employing over 300,000 individuals (note, employment has decreased 7.4% over the past 5 years highlighting the impact of COVID-19 and recent seasonal volatility on the industry).¹ 

The importance of Australian AgTech 

Critical in bridging the gap on our ambitious agricultural growth targets, and ensuring future sustainability of the industry 

Looking to the future, our agricultural industry has the potential to become one of the most competitive, advanced, and efficient in the world. In 2019, the National Farmers’ Federation (NFF) set an ambitious target to grow the value of Australian agriculture from $60 billion to $100 billion by 2030.² That’s a growth rate of 4.5% a year, which is almost triple the 1.7% growth rate the industry has averaged over the past decade. 

However, 2 years into the roadmap and we’re off the mark, lagging in research, investment, and productivity gains. A recent Agribusiness Australia report found farmers were at least 6.3% below the growth rate required to hit the 2030 target.³ While this is partly due to lost exports from challenging climate conditions that have hampered production, and a deteriorating relationship with China, a large part is due to stagnant private investment in the sector. 

With the vast majority of Australian farms being owned and operated by families, the main sources of capital funding the industry have traditionally been debt and retained earnings.⁴ While these investments will remain important in the future, they have a limited capacity and will not be enough to bolster farm gate production – according to Agribusiness Australia’s State of the Industry Report, the sector needs a capital injection of $250 billion to achieve the 2030 target.⁵ Estimates by Port Jackson Partners and ANZ found debt and retained earnings can service half of the capital required to meet the 2030 target, leaving a gap of $125 billion.⁶ 

To bridge this gap, Australian agriculture needs to attract new investment from both domestic and foreign sources. Investment into AgTech – technology innovation, development, and adoption throughout the agriculture supply chain – will play a critical part in maximising food production and solidifying Australia’s position as a major exporter of agricultural produce. Without this increase in capital, Australia risks losing out to global competitors, and the long-term future of the industry will falter.

Challenges facing Australian AgTech 

The Australian AgTech industry is nascent, and growth is being stymied by a lack of capital investment 

Australia’s AgTech industry will be core to achieving growth in agricultural production and profitability. The wave of emerging technologies, such as machine learning, artificial intelligence, and robotics, will create a plethora of opportunities for farmers, consumers, entrepreneurs, and investors alike.  However, our market is lagging, and the lack of capital investment in the industry is making it difficult to commercialise and scale businesses.

On a global scale, investment into Australian AgTech is small, both in terms of investment volume and value. A study from the United States Studies Centre at the University of Sydney (2019) analysed the volume, value and makeup of AgTech investment in Australia compared to the rest of the world. The key insights are as follows:

• In 2017, 51 investments totalling $27 million were made into AgTech in Australia (across all investment types). This is substantially smaller than the 117 VC-only backed deals in the US, which totalled $1.27 billion
• From 2010-2017, there was a total VC investment of US$60 million into AgTech in Australia, which was slightly above the US$56 million of invested in Connecticut
• Per capita, investment in AgTech in the US is 50x greater than that in Australia
• The majority of AgTech investment in Australia is pooled into farm management software, sensing and IoT – 77% compared to only 13% globally. The remaining 23% of Australian AgTech investment is pooled into other agricultural production and supply chain technologies compared to 87% globally
• Australia is also lacking the large investments required to scale businesses and drive significant growth. In 2017, 85% of Australian AgTech investments were less than $1m compared to only 31% globally. On the contrary, the global AgTech industry is seeing larger deals at later stages of investment.

Investment funds are lagging in part due to the nature of AgTech as an industry itself, which is then amplified by cultural and geographical constraints faced in Australia e.g. limited connectivity. 

AgTech industry funding challenges – a disconnect between the traditional VC model and AgTech 

While VC and angel investment into AgTech is incredibly important – it’s the primary source of AgTech funding, representing 56% of all investments⁷, and is critical for growing businesses – there is a significant mismatch between the VC world and the AgTech world that is constraining investment. The traditional Silicon Valley VC model has been naturally optimised for investments into software. However, the enterprise model for software and agriculture almost lie on opposite ends of a spectrum meaning there are several key areas where agriculture does not fit into the standard VC template.

1. The agricultural innovation cycle is slow, and the stakes are high 

AgTech companies face greater complexities and longer lead times in their product development compared to other sectors. Farmers innovate and iterate every season, but a season is a long time, and seasons can vary  substantially year to year. Additionally, food and agriculture systems  are optimised to remove risk – a mistake in the input or production process can literally kill people. 

Compare this to software, where businesses can embrace risk and make quick decisions in rapidly evolving markets as embodied by Facebook’s mantra, “move fast and break things”. Software businesses release innovation as quickly as possible, iterating on an MVP in market. Even in the later stages when the business is scaling, they’re constantly pivoting and iterating to maintain product-market fit. They’re able to do this because the consequences of making errors are relatively small. For example, a bug in an app is usually a straight-forward, quick-fix that is rectified in the hands of consumers through a software upgrade. 

Hence, for a VC fund, an investment in software provides less risk, greater transparency, and the potential for quicker returns. 

2. The AgTech sales cycle is long and challenging as logistics outweighs technology for farmers

There are challenges in selling AgTech across each part of the value chain, but particularly when selling to farmers. Farmers naturally have a risk-avoidant mindset – they’re programmed to minimise risk and minimise disruption in their operations. There’s a lot of time and money in the logistics of farming, and if technology is going to get in the way of what needs to be done, then the potential uplift is irrelevant. 

Additionally, in agriculture, you’re dealing with people’s livelihoods. The decisions farmers make on a daily basis have a fundamental impact on their bank balance. For the most part, farmers can’t be cavalier about experimenting with new technology that may or may not work out for them.

3. The majority of AgTech start-ups in Australia are farm management point solutions, which are unlikely to provide VCs with the exit returns they desire

77% of AgTech investment in Australia is pooled into farm management software, sensing and IoT solutions⁸. Many of these are one-product companies providing point solutions that help farmers increase their yields / farm more efficiently, such as soil moisture sensors and aerial imagery ⁸. While these may generate a substantial impact for farmers, they’re unlikely to provide VC funds with the exit returns needed to justify their business model.

Take for example one of the most successful AgTech exits, the acquisition of Blue River Technologies by John Deere for US$305 million in 2017 ⁸. The Blue River Technologies ‘See & Spray’ tractor attachment uses computer vision to precisely spray herbicide only to weeds or fertiliser only onto each plant that needs it. ⁹ Even this revolutionary technology would have only generated US$30 million on exit if an investor owned 10%, comprising only one-seventh of an average sized US$200 million VC fund. 

This is not to throw a blanket statement that the whole VC model doesn’t work, there are elements of the VC model that are fundamental to the transformation agriculture has to make. However, to realise the true potential of technological innovation applied to agriculture, we need to find different ways to finance these companies. Either one of a few things needs to happen, ideally a combination of all:

• VCs need to structure their model differently. For example, an evergreen fund (an open-ended fund structure that doesn’t have a termination date) would allow for investments that align with the time it will take these business models to stick
• Government needs to intervene with measures that support the ecosystem at different stages i.e., not just incubator programs that focus on pre-seed / seed stages of investment
• We need to leverage alternative funding models that are more aligned to the period of time it’s going to take to make these business models profitable. Potential sources of investment include SPAC (special purpose acquisition companies) funding and growth funding (mutual fund that primarily invests in companies with above-average, long-term growth). For example, AgriChain, an Australian agricultural supply chain management platform built on blockchain technology, used cryptocurrency to raise capital. ¹⁰

References: 

1. ABS seasonally adjusted data: Agriculture, Forestry and Fishing (2021) 
2. National Farmers’ Federation, Talking 2030 (2019) 
3. AFR, Farmers Falling Behind Rest of the World and $100b Target (2020)
4. Deloitte report 
5. Agribusiness Australia, 2020 State of the Industry: Implications for the Australian Agriculture Sector (2020) 
6. ANZ, Greener Pastures: The Global Soft Commodity Opportunity for Australia and New Zealand (2012)
7. The United States Studies Centre at the University of Sydney https://www.ussc.edu.au/analysis/australian-agtech-opportunities-and-challenges-as-seen-from-a-us-venture-capital-perspective 
8. AgFunderNews, https://agfundernews.com/basic-farm-tech-tools-wont-provide-vc-with-exit-returns-they-need-but-theyre-still-investing-in-them.html 
9. Blue River Technology, https://bluerivertechnology.com/ 
10. AFR, Innovate and they will come but don’t delay, agtech experts warn (2021)

---