Selling a new idea to farmers is not easy
Agtech is quite trendy in New Zealand at the moment. But it’s unlikely to be a road to riches for those involved. I would caution any entrepreneur from developing a tech solution for farmers.
No doubt, technology will change how agriculture is conducted. Just as it is changing all aspects of our lives.
But that doesn’t mean you can actually make any money out of developing some fancy technology solution for farmers.
The characteristics that make farmers so hardworking and resilient also make them the most difficult people on earth to make a profitable business out of.
That’s not a criticism of farmers. It’s just farmers are a demographic that’s hard to market to, difficult to sell to and the number of early adopters is quite low.
Farmer’s idea of value is very high too.
Dairy NZ developed a product that they trialled on a number of farms. The trials showed farmers increased their profit on average by $50,000 a year by using this technology. Farmers were asked how much they would be prepared to pay for this product, the answer was an average of $1500 a year. These farmers felt a return on investment of 3233 per cent was ‘‘good value’’.
I have a friend who developed a very impressive piece of technology for farmers. It was a true entrepreneurial story, he saw a need, hacked together a prototype and raised money from investors. He was making sales and was growing international customers.
The founder realised, no matter how many sales he made, farmers were just not willing to pay enough for the service. Farmers loved the product, it saved them lots of money and was super convenient. But they didn’t love it enough where they would pay a high enough subscription to make the business viable.
He closed his doors last year. Farmers are generally cash poor and asset rich. The wealth is tied up in the land but the cashflow is low. Farmers make anywhere from 2 per cent to 4 per cent return on their assets. That means if a farmer has a $10 million operation they are making $400,000 a year profit. A few breakdowns, two dry months and a change in the exchange rate are enough to turn that profit into a loss.
For this reason, farmers closely guard their cashflow.
Livestock Improvement Corporation has a service called Space. This is where a satellite will fly over a farm and measure the grass with millimetre accuracy. It costs about $83 a month for a small farm.
I was speaking to some farmers recently, one was using Space, but he hadn’t had a measurement for the past two weeks because cloud cover had obscured his farm.
So he had to rely on his old method of pasture measurement.
A $1000 rising-plate meter and some software purchased 10 years ago does the job. It’s paid for itself already and it works in all weather conditions.
Most farmers already have low-tech solutions to their problems and these solutions have proved to be reliable and perfectly adequate.
If a startup has actually managed to develop a solution with eye-watering value, farmers must be able to intuitively see the value for themselves. That means the product must sell itself.
Not many startups can afford to deploy a sales team of people to drive up farmers driveways and personally show them the value.
Assuming a new product meets the criteria above, they now need to deal with the fact that most farmers are happy to sit back and wait until the product is proved and tested by other farmers first.
It’s no wonder that most successful agtech is developed by farmer co-ops or well-established companies with solid balance sheets. These organisations have existing cashflow from more traditional businesses and they can afford to lose money for 10 years developing and selling a new product.
It’s unlikely a hot startup will develop some water-monitoring technology and sell the service to farmers.
It’s more likely a water pipe company will develop watermonitoring technology and it becomes an additional feature that’s included with the water pipe.
Farmers will choose to buy that company’s pipe over a competitor, because of the added technology service.
This is why every company needs to be a software or technology company nowadays.