Precision agriculture involves the latest practices of farming using imaging, testing, and analysis to increase productivity and minimize waste. Large agribusiness and seed companies offer precision agriculture solutions to create customer stickiness. Drones are the latest iteration of precision agriculture, which historically relied on satellites or airplanes for imaging, but those methods were expensive and often unreliable due to cloud cover at time of surveying. How precision agriculture is leveraging drones: Given the sheer volume of land requiring mapping, scouting, and spraying services, we see agriculture as one of the largest target markets for Commercial drone use. Early prototypes have already begun to reach the market, and we saw a rising presence at last year’s Farm Progress Show (the ag machinery industry’s largest annual trade show), with OEMs highlighting joint ventures with startups. We foresee little consolidation in the industry as many large agribusiness firms have already tethered themselves to UAV manufacturers through acquisitions or partnerships, and will drive business for those manufacturers.
While still early in the adoption cycle, drones are finding the greatest utility in mapping and crop scouting, a service traditionally provided by local agronomists. Current offerings use UAVs following pre-entered flight paths to develop aerial crop surveys, allowing farmers to identify developing risks and opportunities for yield improvements (e.g., disease, nutrient deficiency, targeted pest pressures, moisture deficits/surpluses).
Drones have many advantages over legacy piloted/satellite surveys, including improved accuracy, frequency, and turnaround time. The latter is particularly important as acute crop pressures vary at different stages in the growing season and can have an exponential impact on yields if undetected. While drones can provide spraying services, we expect this to be a more niche application, as the weight required to support pesticide tanks would likely put drones over the 55 lb regulatory limit for unmanned flight in the US.
Drones-as-a-service likely vs individual farm ownership Over the next 5 years, we see two competing models for drones in agriculture. The first would involve farm-level ownership, and the second would see the emergence of companies that would fly drones as a service for customers. It is likely that both farm-level ownership and drones-as-a-service markets will coexist, but the current trends of precision agriculture lead us to believe that drones-as-a-service will be more prevalent.
Farm-level ownership: Mapping/scouting services are typically needed only during the summer growing season and are most effective when land is surveyed on a weekly basis. As a result, farmers with larger plots of land may decide they are better served by purchasing UAVs directly for their farm in order to be able to surveil acreage as often as needed. There are 2.1mn farms in the US according to the USDA, but most of them are small—potentially too small to afford a $30,000 drone. Only 4% of farms generate more than $1mn in revenue per year, but we think even that income will be too low to justify farm-level UAV ownership. We estimate farms of that size are about 1,700 acres, which is roughly the daily range of a typical UAV. We think that a farm would need to be about 5-7X that size to justify farm-level ownership since a drone would likely fly 5-7 days per week.
Drones-as-a-service: While farm-level ownership could be compelling to large- scale farmers, drones-as-a-service, where UAVs are rented out and operated by third-party service providers, offers more compelling economics for smaller farms. This fits a current trend toward shared assets in agriculture. Assuming all US acreage is mapped at a peak rate of once per week for 15 weeks per year (summer), we estimate a required drone fleet of 47,000 units.
How we arrived at our TAM: We estimate the total addressable market by considering the capabilities of agricultural drones in the current regulatory landscape. There are 2.1mn farms operating on 235mn acres of cropland in the US. We assume farmers require weekly mapping and analysis of each acre at saturation point. Although the theoretical capabilities of drones vary, we estimate the average daily coverage of a UAV to be 1,000 acres when factoring in travel to and from the site, flight time, launch, and recovery under a drones-asa-service model. Dividing the 235mn acres by a weekly capacity of 5,000 acres per drone implies a potential for 47,000 agricultural UAVs. We assume an average price per drone of $30,000 based on current prices for agricultural models to produce a US TAM of $1.4bn. International opportunity: We apply a multiple of 4.2X to the US TAM of $1.4bn to derive a global TAM of $5.9bn. The multiple is based on the ratio of US land under cultivation for major crops relative to the world’s largest developed agricultural producers. Ex China, the multiple would be 3.2X and the TAM would be $4.5bn. We include the $5.9bn in the calculation of our global TAM because of the push by the world’s largest UAV manufacturer, DJI, into that space. However, we note that despite the large size of China’s agricultural sector, it is relatively less developed, meaning the use of UAVs could be many years in the future and UAV prices would likely be lower. Select manufacturers: Trimble, AGCO, AeroVironment, Parrot (senseFly), PrecisionHawk, AgEagle. Top agriculture plays: Trimble (TRMB) has added drones to its portfolio of precision equipment. Ag equipment manufacturers are increasingly spending resources on precision ag and machinery utilization technologies as US corn and soybean acreage growth slows in a weak crop price environment. As part of the effort by ag equipment OEMs to increase utilization and maximize crop yields, manufacturers have started to offer UAVs equipped with cameras and high-resolution software that facilitate field mapping. Our GS Machinery analyst estimates TRMB’s precision ag sub segment to be $260mn, and it is part of the Field Solutions segment.