Artificial Intelligence (AI) is playing a meaningful role in improving intra-company efficiency, allowing firms to enhance their own productivity and glean useful insights from ever-growing datasets. It is this opportunity, beyond a superficial AI overlay, that should allow companies embracing AI to improve, generating value through these productivity gains either directly or through increased innovation.
As investors, we see this potential that can be unlocked down the value chain and seek also to invest in the beneficiaries of AI, not just the enablers of it. An example of where we have seen early signs of a competitive advantage begin to play out is in agriculture.
Precision agriculture: supporting the next wave of industrial revolution
John Deere, known mostly for its tractor fleet, is a leader in the new economy of precision agriculture, using large amounts of data and autonomous machinery to improve farming efficiencies. Its fleet of “500,000 connected machines run across more than a third of the earth’s land surface”1, offering a wealth of data to support large model accuracy and provide real-time insights to farmers monitoring machinery and crops.
A sign of AI increasing product efficiency comes from the company’s Operations Centre. This virtual hub gives farmers a so-called ‘digital twin’, a virtual replica of a physical environment, allowing users to plan planting and harvesting seasons, create zones for more precise fertiliser application and program autonomous tasks across an entire land area. Given the time commitment and expertise currently needed to manage farms, the average size of which sits at 88 hectares (ha) in England2, c188ha in the US3 and >1,000ha in western Brazil4, putting this control and accessibility in the hands of farmers marks a major step forward.
John Deere’s See & Spray product detects weeds among crops and targets them for spraying, helping farmers avoid blanket application and conserving stores of weed-killing herbicides. These chemicals have been in short supply in recent years, driving up costs for US farmers, whose average spend on agricultural chemicals grew by 20.2 per cent from $8,884 in 2021 to $10,680 in 2022, according to the US Department of Agriculture5. Add in the launch of the company’s autonomous 8R tractor in 2022 and Deere’s nascent precision fertiliser unit, in a similar vein to See & Spray, and it becomes clear the company’s AI technology is playing a central role in helping farmers reduce costs, increase land control and plan more efficiently.
John Deere’s plans to deepen the firm’s AI use include working with NVIDIA to incorporate greater edge computing power and greater power efficiency, and partnering with satellite company Starlink to improve communication connectivity, allowing real-time intelligent farming and deploying spraying drones.
AI edge easing sector cyclicality
While performance in the agriculture sector has softened after a bumper 2020-2023 cycle, supported by the low cost of equipment financing, John Deere has continued to roll out its technology-enabled fleets, encompassing autonomy, digital and AI planning. This higher technology content is showing early signs of driving a faster equipment refresh cycle for farmers, better pricing power and higher margin products. These factors can combine to make the trough of the cycle shallower, meaning the company’s peak-to-trough earnings per share (EPS) decline is likely to be less significant than some fear compared to previous cycles. In our view, a higher ’trough margin’ profile with lower volatility should also be rewarded with a higher multiple.
