Mark Twain once wrote, "climate is what we expect, weather is what we get."
Monsanto (NYSE:MON) expected it was going to get a bumper crop of business when it bought privately held big data weather shop Climate Corp. for nearly $1 billion in 2013, but as sales of its computer-modeling services have failed to catch on with farmers the agricultural giant may be instead facing a stormy forecast from investors.
Climate corp analyzes hyper-local weather measurements gleaned from the National Weather Service across some 2.5 million locations and forecasts on a daily basis. Melding the analytics prowess of big data, it processes the data along with 150 billion soil observations take from Department of Agriculture surveys and crunches the data to generate 10 trillion "weather simulation data points." Those are then used in the company's weather insurance pricing and risk analysis systems.
When it rains, it pours
In theory it should have created a torrent of opportunity. Giving farmers precise predictions about climatic conditions that can affect the growth and yield of their crops, they should have been lining up for the service.
Yet as Twain once remarked about New England weather -- if you don't like it "just wait a few minutes" -- conditions in agricultural commodities are also subject to sudden change.
Corn, which is the most widely produced feed grain in the U.S., had been trading for over $7 a bushel in early 2013, fell to $4.35 a bushel last year and is below $4 today. Soybeans were over $13 a bushel a year ago, but now go for less than $10. Cotton went for over $0.80 per pound in February 2014 -- it's down below $0.62 today.
The collapse in commodity prices affects how much money farmers have to spend on necessities like fertilizer, with nitrogen usage expected to plunge this season, particularly hitting corn plantings, which is a heavy feeder. They don't have money to spend on luxuries like climate modeling software.
A chance to do something about the weather
Monsanto's Climate software comes in two flavors, the free version Basic and the for-cost Pro.
The former lets farmers see field-level weather conditions across their entire operation as well as forecasts several hours into the future, while the latter adds in an advisory on nitrogen in the field and evaluations on crop health.
When Monsanto originally bought the big data firm, it thought it could charge $15 an acre for the Pro version of the software, but due to the dearth of sales, the biotech slashed the price 80% to just $3 an acre for the 2015 growing season. And if that wasn't enough to lure customers in, so long as farmers purchase 500 acres of Pro coverage, Monsanto will give them the first 250 acres for free.
By giving farmers the opportunity to experience the service across their whole operation at a discount, Monsanto is counting on them wanting to renew. It wants to increase the number of active users in its Basic program by 50% to 45 million acres hoping a percentage of them will upgrade to the Pro version. Even if they do, it's not going to generate much money for the company and certainly won't come close to begin paying back the investment Monsanto made.
The biotech had only around one million acres covered under its fee-based service in 2014 and during a February investor presentation said it wanted to double the number of acres covered to two million. At $3 an acre, that's just $6 million it's generating, hardly worth the $930 million it paid.
Certainly Monsanto is counting on growing those numbers in the years to come, but it's had to beef up the offerings under the Climate banner to make the package more attractive. It folded its FieldScript and precision Ag equipment products under this Climate umbrella, and it now plans to offer a host of digital agricultural advisory services from this platform. It also partnered with Agrium (NYSE: AGU) to have the fertilizer producer offer the Pro package to its Crop Production Service's retail customers.
Big data has the ability to transform agriculture, particularly when coupled with the newest precision planting technologies. And commodity prices won't stay depressed forever. For example, because farmers will be cutting back on corn planting due to the high cost of fertilizer and the low return they're making per bushel -- the USDA estimates less than 13.6 billion bushels this year, down from 14.2 billion in 2014 -- the stocks will eventually deplete and prices will rise once more.
But as any farmer can tell you, farming is a heckuva way to make a living, and Monsanto's belief is its Climate purchase will be a rainmaker instead of turning into a dustbowl of failed opportunity.