TECHNOLOGY IN AGRIBUSINESS OPPORTUNITIES TO DRIVE VALUE WHITE PAPER | AUGUST 2017 STANFORD VALUE CHAIN INNOVATION INITIATIVE GSB.STANFORD.EDU/R/VCII Table of Contents Executive Summary .......................................................................................................................3 Introduction ..................................................................................................................................4 1. Current Landscape and a Vision for 2030 ....................................................................................5 2. Technologies .............................................................................................................................6 2.1 Analytics ..............................................................................................................................8 2.2 Automation ..........................................................................................................................9 2.3 Business and Operations Management ....................................................................................9 2.4 Capability Building Tools ......................................................................................................10 2.5 Marketplaces ......................................................................................................................10 2.6 Product and Process Innovations...........................................................................................11 2.7 Resource Utilization Improvement .........................................................................................11 3. Opportunities ..........................................................................................................................12 3.1 Future Technology Enablers ..................................................................................................12 3.1.A Artificial Intelligence ..................................................................................................12 3.1.B System Design Solutions ............................................................................................12 3.1.C System Orchestration Technology ................................................................................13 3.2 Investments in Future Technology Enablers ...........................................................................14 4. Conclusion ..............................................................................................................................16 Authors and Acknowledgements ....................................................................................................17 Citations .....................................................................................................................................18 TECHNOLOGY IN AGRIBUSINESS – 2 Executive Summary In this white paper, we examine how new technology will drive value in the evolving agribusiness value chain. We address three areas of value creation: operational excellence, supply chain orchestration, and transparency. We show how future technology developments will contribute to these sources of value and how they will transform the structure of the agribusiness value chain. We show how advancements in artificial intelligence, system design solutions, and orchestration technologies can facilitate intelligent food production and how they’ll enable the development of new business models. As a result, food systems will be more productive, efficient, sustainable, inclusive, transparent, and resilient. The use of new technology is necessary to move the world’s agriculture to a more productive path. Over the next few decades, a rising global population will put great pressure on food systems. While the overall demand for food is expected to be met over this timeframe, it is unclear whether it can be met in a sustainable manner. Agriculture is a major contributor to greenhouse gas emissions, a significant consumer of freshwater resources, and it uses 11 percent of the world’s land area. Agribusiness is a major employer in developing countries, and yet the proportion of farmers is declining both in developing and developed economies, leading to the potential for social disruption. Technological innovation is one lever that can address some of the environmental, social, and economic challenges and opportunities in the growing food and beverage industry. As has historically been the case, technology can serve as an enabler for improvements in food system productivity and welfare. Advancements in areas such as seed and food bioengineering, information and communication technology platforms, and robotics present new opportunities to produce food in smarter ways. For such innovations to succeed and scale, however, other factors such as business regulation, workforce development, public sector governance, and trade and tax policies will also be important. TECHNOLOGY IN AGRIBUSINESS – 3 Introduction Baby salad greens in the United States come primarily from California, which can mean that consumers in other states may have to wait for days before receiving their produce.1 The value chain that culminates in a nutritious salad is complex and requires multiple resources from water, fertilizer, and fuel to machines, vehicles, and human capital. We can envision an entirely different value chain by 2030, with salad greens (and other food products) sourced in local communities, grown in indoor farms stacked many layers high. Whether using aeroponics, a technology involving spraying water and nutrients on plant roots that is used for greens,2 or technologies not yet developed that can be applied to other foods, we can imagine a world where food is increasingly grown closer to home, generating benefits of freshness, lower environmental footprint, and higher productivity and efficiency. This value chain structure creates new challenges, such as increased demand for skilled jobs in indoor farming and in new industries that service this new model of production as well as a lower demand for unskilled farm laborers and long-haul truck drivers. The Food and Agriculture Organization (FAO) of the United Nations (UN) estimates that global demand for food will rise by 50 percent between 2012 and 20503 to feed a population of almost 10 billion4 with rising income levels.5 Further, a rapid rate of urbanization is expected in the coming years, with approximately 66 percent of the world’s population expected to live in urban areas by 2050, compared to 54 percent in 2014.6 The FAO report suggests that the rising demand for food can be met, but it is unclear to what extent this can be done in a sustainable and inclusive manner.7 The next 10-15 years will likely see rapid changes in the food system, driven by changing consumer demand, technological advances, trade dynamics, and other factors. To achieve the United Nations Sustainable Development Goal number two, to “end hunger, achieve food security and improved nutrition, and promote sustainable agriculture” by 2030,8 the FAO is calling for more productive, efficient, sustainable, inclusive, transparent, and resilient food systems.9 The FAO has discussed promoting agribusiness development through various initiatives aimed at resolving critical factors across the agriculture value chain to mobilize private sector investment that improves productivity and efficiency.10 The agricultural value chain is the sequence of activities and participants engaged in the value-adding process of transforming agricultural goods from inputs — such as seeds, animals, and fertilizer — into food that ultimately reaches consumers.11 Stakeholders currently operate within an often-fragmented value chain that has undergone rapid changes to meet the emerging challenges and opportunities of the food economy. Opportunities exist for technology to help strengthen agribusiness value chains. While technology is by no means a panacea, it is useful to examine the opportunities it offers in a world where Internet connectivity and mobile phone adoption has accelerated the global flow of information and where advances in automation, artificial intelligence, and continuous monitoring are expected to increase. Human capital combined with technology has historically driven productivity improvements and welfare.12 In this paper we examine the role technology can play in achieving a more productive, efficient, sustainable, inclusive, transparent, and resilient food system. The paper is focused on the conversion of inputs for agricultural production into finished goods. We do not examine the processes that take place after finished goods are produced — namely, food retailing and final delivery to consumers — since technologies used for retailing and consumer delivery are similar to those used in other industries. In Section 1, we discuss the current agribusiness landscape and a vision for improvements that can be pursued in the next 10-15 years. In Section 2, we assess the role technology is currently playing to fill gaps between the present and future state, using a framework of three value drivers. Section 3 explores unmet needs that future technologies can potentially address. Finally, Section 4 discusses factors that can foster successful deployment of technology and key limitations. TECHNOLOGY IN AGRIBUSINESS – 4 Table 1: Focus of Research: Converting Agricultural Inputs Into Finished Goods Inputs for Farming Storage Processing/ Retail/Consumer Agricultural Production Manufacturing Delivery (Not included in this research) Seeds, fertilizers, farming Planting, growing, and/or Storage and warehousing of Packing or processing of Selling and delivering equipment, animals, and other harvesting food products farmed products farmed goods into finished finished goods to consumers products that serve as inputs products for sale to via physical, online, or to the production of food customer omnichannel markets Supply Chain Management: The orchestration of activities involved in buying, conversion, and logistics13 1. Current Landscape and a Vision for 2030 The food and agriculture industry has experienced increasing disruption in recent years. Consumer behavior and trends are continually evolving and influencing markets. For example, calorie, protein, and oil intake per capita are continuing to grow and are linked with rising incomes, particularly in developing regions.14 Growing segments of consumers around the world are demanding more local, healthy, and sustainably grown food, with natural ingredients and simpler ingredient labels. The global health food and drink market has been forecast to achieve $1 trillion in sales by 2017.15 Key challenges in today’s agribusiness value chains often surround the following value drivers: (1) operational excellence (i.e., improving productivity, efficiency and quality), (2) supply chain orchestration, and (3) transparency. Much of the improvement in operational excellence will come from developing countries with a prevalence of smallholder farms that produce significantly lower average yields than farms in developed countries.16 It is estimated that 80 percent of the needed output growth will come from improved productivity and the remainder will be delivered by expanding farmland.17 Operational excellence will also help meet the increasing demand for animal products and tackle the global challenge of food waste. One-third of food produced for human consumption is being wasted each year, with developing countries experiencing more waste at post-harvest and processing, and developed countries experiencing more waste in retail and end consumption.18 We argue that technology will help eliminate waste, enable greater investment, increase productivity and meet rising demand. With respect to supply chain orchestration, one of the biggest issues facing countries remains the imbalance of food. Millions have access to excess calories while millions of people are experiencing or are at risk of hunger. In 2007 and 2008, the world experienced a food crisis with a severe rise in the FAO’s world food price index.19 Prices spiked again in 2011,20 highlighting the fact that the global food and agricultural system can be highly vulnerable and signaling stress across the agribusiness value chain. Food supply chains can be long, and several market intermediaries can be involved, some of which do not add significant value. Access to markets can also be challenging for buyers and sellers along the value chain. Finally, in terms of transparency, food supply chains face many challenges with respect to monitoring for product safety,21 social and environmental responsibility,22 and other factors. Data quality can also be weak,23,24 posing a challenge in generating actionable insights. TECHNOLOGY IN AGRIBUSINESS – 5 Table 2: Driving Value in Agribusiness Value Current Challenges VISION FOR 2030: Drivers Productive, efficient, inclusive, sustainable, transparent, resilient value chains • Gaps in yield between developing and • Yields improved and less water/land/energy/pesticide used developed countries25 per ton of food. Outcome: demand for food is sustainably met, and food is affordable. Operational Excellence • Food waste along the value chain26 • Less food waste along the value chain • Inefficient access to capital and insurance27 • Efficient capital markets and insurance • Food insecurity, with calorie excesses and shortages coexisting28 • Food security improved • Long supply chains with high environmental impact29 • Greater local production Frictionless markets for non-local production Supply Chain • Costly first and last mile delivery30,31 • More efficient first and last mile delivery Orchestration • Market intermediaries that do not generate value32 • Greater disintermediation Emergence of higher value-added intermediaries • Buyers and sellers face limited access to markets in developing • Buyers and sellers better connected economies33 • Opaque supply chains: Uncertainty regarding inventory, • Transparent and traceable supply chains food safety, labor conditions, environmental impact, other conditions34,35 Transparency • Poor data:36 Low quality, frequency, and timeliness of data • Connected value chain that collects data in real time for used throughout the value chain, including data used in inputs actionable insights design, farming, storage, manufacturing, and logistics There is an opportunity for agribusiness value chains to efficiently respond to changing demands in the next 10-15 years. The table above describes a future vision for a better functioning value chain, one in which demand for food is met in a productive, efficient, inclusive, sustainable, transparent, and resilient manner. Technology can act as one of the key enablers to achieve this vision and has a role to play with respect to the value drivers of operational excellence, supply chain orchestration, and transparency. For example, productivity and gains in efficiency can be achieved with the help of automation (e.g., self-driving tractors), product technology innovation (e.g., bioengineering of better seeds), and analytics (e.g., precision farming analytics that improve yields). Supply chain orchestration can be improved through platforms that better connect buyers and sellers (e.g., online marketplaces). Improved transparency can come from new monitoring technologies (e.g., satellite mapping). 2. Technologies Each of the three broad categories of value drivers in agribusiness can be improved during the next 15 years. In this section, we explore improvements that can be facilitated by the use of technology, assuming other factors needed to affect transformation — discussed later — are in place. In Table 3, we present technology categories that can affect one or more challenges. While there are many approaches to categorization, the framework in the table enables us to align technologies with specific challenges. Following the table, we discuss each technology with case examples. TECHNOLOGY IN AGRIBUSINESS – 6 Table 3: Technology Applications Value Current Challenges Vision for 2030 Technology Drivers Applications • Gaps in yield between developing • Yields improved and less water/ • Analytics and developed countries land/energy/pesticide used per ton Artificial intelligence* of food. Outcome: demand for food Automation is sustainably met, and food is Business & operations management affordable . Capability building tools Product and process innovations (e.g., engineered seeds, meat and other food) Operational Resource utilization improvement Excellence • Food waste along the • Less food waste along the • Marketplaces (for waste) value chain value chain Product and process innovations (e.g., produce with extended shelf life) • Inefficient access to capital • Efficient capital and insurance • Marketplaces (for capital and insurance) and insurance markets • Food insecurity, with calorie • Food security improved • Marketplaces (e.g., secondary markets) excesses and shortages coexisting Resource utilization improvement (e.g., indoor farming) • Long supply chains with high • Greater local production • Analytics environmental impact Frictionless markets for Artificial intelligence* non-local production Marketplaces (e.g. digital farmer marketplaces) Resource utilization improvement (e.g., indoor farming, 3D printing) Supply System design solutions* System efficiency solutions* Chain Orchestration • Costly first and last mile delivery • More efficient first and last • Resource utilization improvement mile delivery (e.g., shared transportation platforms) • Market intermediaries that do • Greater disintermediation • Marketplaces not generate value Emergence of higher value-add intermediaries • Buyers and sellers face limited • Buyers and sellers better connected • Marketplaces access to markets • Opaque supply chains: Uncertainty • Transparent and traceable • Analytics regarding inventory, food safety, supply chains System efficiency solutions* labor conditions, environmental impact, other conditions Transparency • Poor data: Quality, frequency, • Connected value chain that collects • Analytics and timeliness of data used data in real time for actionable throughout the value chain, insights including data used in inputs design, farming, storage, manufacturing, and logistics * Technologies that can enable new opportunities to strengthen the value chain (discussed in Section 3) TECHNOLOGY IN AGRIBUSINESS – 7 “ Technology in and of itself, of course, is somewhat value neutral. What we generally found, both in our core extension activities as well as in our transport logistics, and even more broadly, is that technology is really good as an amplifier of activities people might already be doing to make them more efficient or to reach more people at less cost or to do them faster.60 ” — RIKIN GANDHI, CEO, Digital Green 2.1 Analytics Analytics are being used across the value chain to improve operations. Content analysis, for example, focuses on assessing overall food nutrients and quality. Sample 6 and Ancera use synthetic biology-based bacteria diagnostic systems to analyze food. Sample 6 focuses on building integrated systems that detect harmful and unwanted bacteria. The company has promoted applications of its solutions in food production, retailing, healthcare, and anywhere else humans and bacteria intersect. One major arena for analytics is precision agriculture, also known as site-specific crop management, which involves collecting and analyzing information at the individual botanical plant level for improved agricultural practices. Startups have raised a cumulative total of $825 million in this category.37 Precision farming technologies use data on nutrients, moisture, yield, and more to optimize profitability and sustainability.38 A study of 3,380 American farmers found that those implementing precision technology reported an average cost reduction of 15 percent and an increase in average yields of 13 percent; yet 77.5 percent of respondents were concerned about data privacy issues related to using new technology.39 MONITORING TECHNOLOGY Aerial Monitoring Tools Aerial monitoring, also known as remote sensing, can be conducted by drones, airplanes, and satellites, which monitor conditions from different altitudes to reveal patterns that highlight irrigation problems, soil variation, deforestation, changes in livestock, soil erosion, pest and fungal infestations, and other information that may not be easily apparent at ground level. Airborne cameras can take multispectral images, capturing data from the infrared as well as the visual spectrum. These images can be sequenced to show changes in fields. Ground-Based Monitoring Tools In- or on-ground sensors can be deployed to detect crop conditions, weather data, and many other details, which can then be transmitted to decision analytics platforms via the Internet of Things (where computing devices embedded in everyday objects are connected to the Internet to enable analytics). Startup firm Arable, for example, has designed a solar-powered in-ground sensor that can gather data on crop stress, air pressure, humidity, temperature, chlorophyll, canopy biomass, rainfall, and other information which can then be analyzed on its platform to improve precision farming. DATA ANALYTICS Many centralized digital platforms are available that use agronomic data gathered from precision monitoring technology, historic weather data, and other sources to conduct detailed analysis, ranging from the descriptive to the prescriptive. By improving the volume, quality, flow, and frequency of information used in farming and other value chain stages, food production can become more efficient, productive, and sustainable. The volume of data for agribusiness is steadily expanding due to sensors, satellite monitoring, and other information- gathering technologies.40 The quality of information is improving with more sophisticated data-gathering instruments, as well as new sources such as crowd-sourced farmer data.41 The flow of information is enhanced via platforms that connect various stakeholders across the value chain. Finally, the frequency of information is increasing with improved Internet connectivity, device-enabled products sending data to cloud analytics platforms (i.e., Internet of Things), and many other advancements. As the quantity, quality, speed, and flow of data improves, data analytics platforms and machine learning applications can enable better practices in farming, processing, and manufacturing. TECHNOLOGY IN AGRIBUSINESS – 8 Several companies are expanding the use of farm analytics. The Climate FieldView platform by Climate Corporation combines hyper-local weather monitoring, agronomic Analytics: Farmers data modeling, and high-resolution weather simulations to deliver mobile Software Business Network as a Service (SaaS) solutions that help farmers make better informed operating Farmers Business Network offers a and financing decisions. Farmers Business Network (FBN) is a membership-based membership-based online platform for company with a network of farmers who share farming data on inputs, soils, yields, farmers to share performance data and and prices to improve performance and productivity across the value chain. conduct analytics that can improve productivity and their business. Farmers While precision agriculture has made significant inroads and holds the promise submit data on yields, seed performance, of improved returns, producers are faced with assessing the investments weather, and other variables affecting needed, profitability, and complexity of new technologies.42 New investments farming. FBN analytics tools then help are thus arising for more cost effective solutions that can appeal to a broader farmers determine the best combination of market. Monsanto, Bayer, Pioneer, and Jain Irrigation have all been involved in inputs to generate the highest yields. Other acquisitions in this arena. DuPont Pioneer has linked up with farm-machinery tools are available to obtain pricing data and maker John Deere to advise farmers on seed and fertilizer applications in the conduct farm operations management. CEO field, and Cargill provides in-house crop advisory services as well. and Cofounder Amol Deshpande comments that, in his experience, he has observed that 2.2 Automation farms in the U.S. are getting bigger because they need scale to survive. “As farms grow,” Tractors, combines, and other mechanization technologies have long been used he says, “yields per acre can decline, for pre-harvest, farming, and post-harvest operations such as processing and despite better technologies.43”FBN aims to food manufacturing. Emerging innovations such as self-driving tractors have the democratize information so farmers improve potential to improve farm productivity in new ways, enabling farmers to tend to decision-making and grow profit margins. several fields from one location and operate equipment throughout the day and The average member has a farm size of night44. Automated irrigation systems can collect data on soil type, water levels, 3,700 acres, and the growing network of farmers covers over 12 million acres. quality, and accessibility to efficiently deploy water and soil nutrients. When With each new member’s information on automated machines are connected to the Internet of Things (IoT) and other performance, overall agronomics and buying analytics tools, precision and efficiency in operations can be achieved. and selling power can become stronger. Automation can be segmented into two types: basic automation, which simply replaces manual labor to make a process more productive, and intelligent The company recently launched FBN Direct, automation, which not only replaces manual labor but makes better decisions a platform for members to buy farming using data. Firms such as Compac and Cimbria produce equipment that inputs online at prices negotiated directly processes farmed goods into processed food products. Such companies can with manufacturers. According to the company, this model circumvents non- implement turnkey systems including machinery for produce, grain, or other value-added intermediaries that may charge food product handling, sorting, grading, washing, cutting, and packaging. retail markups and sales commissions. Complementary software helps to monitor and control operations and conduct Deshpande says, “The farmer should matter, analytics — an example of intelligent automation. Startups received a cumulative and the consumer should matter. The rest of total of $400 million in this category.45 the constituents should be creating value in the chain.” Deshpande sees an opportunity The production of food using 3D printers is a small but growing trend in the for FBN to enable disintermediation, or the additive manufacturing industry. Food ingredients are put into a 3D printer, reduction of intermediaries in the value which then extrudes the inputs into a structural design, enabling production of chain. He says, “The biggest competitors new types of foods. For example, Culinary Lab is a learning, collaboration, and we see are existing ‘middle men,’ whether exploration space where chefs and other food innovators can transform their they’re retailer, distributor, cooperative, or traditional craft of cooking using 3D printing. If 3D printing ultimately gains merchants on the back end.” wider traction, new food designs could take hold and automated cooking for end consumers could grow. 2.3 Business and Operations Management The business of farming is undergoing shifts, not only in developed and commercial agricultural settings, but also on small- scale farms in developing economies. Information technology applications are helping farmers understand different methods of agricultural production and are making them more aware of operating costs and other variables affecting profits. Firms such TECHNOLOGY IN AGRIBUSINESS – 9 as Granular, Conservis, and Agworld provide farm management software that Automation: Harvest Automation collects, synthesizes, and analyzes data for various farm business processes. The software collects data, tracks resources and productivity, and builds Harvest Automation sells mobile robots for detailed operations plans. Startups received cumulative funding of $129 million labor-intensive industries. The company in this category46 with a focus on management across various aspects of the currently targets agriculture with aims agribusiness value chain using SaaS platforms. to launch a robot for logistics handling for e-commerce companies. Teams of small, highly “intelligent” machines work alongside laborers to perform the most 2.4 Capability Building Tools physically demanding parts of tasks at a reduced cost. The HV-100 model performs As discussed earlier, yield gaps in developing economies, compared to developed material-handling tasks in unstructured, economies, can be attributed to many factors, with farmer education being one outdoor environments with minimal training element.47 Distributing knowledge to remote or rural areas can be costly. New required. The result can be reduced services focused on improving farmer education through technology, such as videos, headcount and costs, efficient resource hotline voice services, and mobile phone applications to leverage trainer and skills management, just-in-time production, and in a low-cost manner, have been found to facilitate adoption of improved inputs and inventory control. The company will soon have encouraged investment decisions.48 Organizations such as AgriFind in France release a mobile, autonomous, material- use a social networking platform for farmers to share their experiences and to deliver handling platform engineered for distribution and fulfillment operations. agronomic advice from experts and fellow farmers. Farmers can post their needs and successful solutions. Whereas startup funding has been low in this arena,49 public sector and nonprofit organizations have played more of a role, potentially due to a lack of commercial viability for the operating model. 2.5 Marketplaces Automation: Blue River Technology As in other industries, technology has helped grow agricultural marketplaces from merely physical places to physical and digital markets. Almost 900 Blue River Technology sells the LettuceBot, startups are involved in digital marketplaces of some kind, and have received which uses “see and spray” technology cumulative funding of $682 million.52 Studies have noted that improved market to apply chemicals only where needed. transparency reduce price dispersion and waste.53 Digital marketplaces can Computer vision and robotics help thin lettuce crops with precision or identify contribute to improved transparency. As seen in Table 3, marketplaces facilitate unwanted plants and selectively kill them — transactions that (1) improve productivity, efficiency, and quality in operations, a more efficient method of plant elimination. and (2) facilitate transactions that promote efficiency across the supply chain. Blue River is also working on products for In the first category, we find marketplaces that improve performance within a corn and soybean markets. The LettuceBot can be used in organic agriculture and for particular value chain phase. For example, there are a growing number of online fields with chemical-resistant weeds. services that provide farmers access to insurance (e.g., Insurance Marketplace) and financing (e.g., ProducePay, which offers cash flow to farmers the day after they ship product). Numerous platforms exist to buy and/or lease equipment such as Agriaffaires, which operates in many countries, France-based Agriconomie, Ravgo in India, and Leboncoin in France. Full Harvest helps to bring excess farmed goods to market. Using a business-to-business platform connecting large farms to food and beverage businesses, Full Harvest sells discounted yet edible surplus and imperfectly shaped produce that would have otherwise gone to waste. This helps bring additional revenue to farmers while reducing wastage of food. Fostering greater access to the products and services described can enable greater investments, and ultimately greater productivity within phases of the value chain. In the second category, we find marketplaces that foster the buying and selling of goods across the value chain. To tackle the challenge of long supply chains, online marketplaces such as La Ruche Qui Dit Oui in France help shoppers buy products within a 150-mile radius, and pick them up from a local distribution point, called a “hive.”54 Farmers set their prices, paying a commission on sales to the platform manager. The service had over 100,000 users as of 2016. To address the issue of non- value-added intermediaries, marketplaces for farm input products are emerging (e.g., the ones operated by FBN in the United States and startup Ricult in Pakistan). Marketplaces can be based on membership, such as FBN, or be open, such as Ricult. TECHNOLOGY IN AGRIBUSINESS – 10