How a tractor maker’s business model has evolved with the times

Amazon Prime’s hit TV series Clarkson’s Farm has introduced a new generation to farming, exposing audiences to the wonder, hardships, and unpredictability of agricultural life.

Despite the importance of food as one of our most basic needs, the way it is grown and harvested has received scant attention from most people in developed economies. That is changing.

There was a time when most of the population would work in food production, with farming considerations central to the way that almost every aspect of society was ordered. The agricultural revolution brought the mechanisation of farming, replacing muscle with machine across a swathe of labour-intensive tasks. Countless people were freed up to pursue other jobs, and the farming life became alien to most. Yet as the proportion of farmers has decreased, the need for food has increased as the global population has grown.

How to feed the world sustainably as the effects of climate change are increasingly felt, is a key development challenge for humanity to address.

Unsurprisingly, given Jeremy Clarkson’s earlier career as an automotive journalist, tractors play a starring role in Clarkson’s Farm. They deserve that prominent position, having revolutionised the efficiency of farming since their invention in the late 19th century. And for many, when they picture a tractor, they will see it in the iconic green and yellow livery of the storied US manufacturer John Deere.

The company can trace its lineage back to 1837 where in Grand Detour, Illinois, the original John Deere set up a blacksmith shop. By 1857 his firm was producing 10,000 ploughs per year and in 1918 the company fully entered the tractor business, putting it on the journey that led it to dominate North American agricultural equipment production and sales.

Well-suited to the vast fields of the US, the image of a John Deere tractor at work is one synonymous with America’s success as a food producer and exporter.

John Deere share price 09.08.2019 – 09.08.2024

Source: Bloomberg. Rebased to 100. Weekly price. The performance information presented on this page relates to the past. Past performance is not a reliable indicator of future returns.

The company is a leading producer of large agricultural machinery, although it also has strong businesses in smaller agricultural equipment, construction, forestry and increasingly in precision agriculture.

Historically the agricultural equipment business has had something of a ‘boom and bust’ dynamic. When times were good for farmers, agricultural machinery production thrived, but when times became harder farmers cancelled their orders and John Deere’s business suffered.

Technology has offered the company the chance to, at least partially, remove this lumpiness from their business model. John Deere now focuses not just on selling machines but also selling farmers software and other technological solutions with a subscription model.

This has similarities with Apple’s business model, where the company not only sells consumers the hardware but also seeks to lock them in with monthly or annual subscriptions for services. The company invests heavily in research and development to continue to develop solutions that enhance agricultural efficiency and reduce waste.

The demand for more sustainable food production

Some of these technological innovations look set to play a key role in the global effort to create a more sustainable system of food production. While agriculture has evolved dramatically in the last two centuries to enhance crop yields, this progress has not come without costs.

One revolutionary development was the introduction of synthetic fertilisers, made possible by German chemists Fritz Haber and Carl Bosch’s development of a method to create liquid ammonia by combining nitrogen from the air and hydrogen.

Their invention caused crop yields to surge, but synthetic fertilisers have had multiple undesirable side effects. One is the impact of nutrient run-off into ecosystems, where chemicals from synthetic fertilisers may enter bodies of water and harm aquatic life.

Another is the air pollution that agricultural nitrogen emissions can cause in combination with car exhausts, which can be harmful to human health. Over the long-term, synthetic fertilisers can also damage the growing potential of agricultural land.

One method of reducing the impact of synthetic fertilisers is simply by using less of them. John Deere’s technology offers a means to do this while minimising any impact on crop yields.

One recent innovation uses sensors to determine where exactly a seed has been planted in the ground, before applying a small amount of fertiliser directly to where the seed has been planted.

John Deere claim that this technology reduces the amount of starter fertiliser needed by 60% versus current technologies. Similar technologies also exist for minimising herbicide and pesticide use, with one technology using cameras to identify whether a plant is crop or weed and applying the relevant chemical only to the weeds.

Reduced use of herbicides and pesticides should also mean less potential damage to both human health and broader ecosystems.

The promise of these advances in precision agriculture sits hand in hand with developments to reduce the direct environmental impact of tractors and similar machinery themselves.

Perhaps the most notable of these are new forms of propulsion, including investments in hybrid and battery-electric technology. John Deere has already rolled out this technology in its smaller agricultural and lawn machinery and in construction machinery such as excavators.

Sustainable fuels are also a focus, with the use of ethanol as a fuel typically reducing carbon dioxide emissions by at least 40% compared with petrol. These cleaner fuels could serve a vital role where the use of electric propulsion technology is less practicable.

Our view as fund managers

To us as the fund managers of the Premier Miton Diversified Sustainable Growth Fund, John Deere is attractive in offering both a commercially sound business model and multiple avenues of exposure to the growth of sustainable agriculture.

Investing in cutting edge technologies should not only help John Deere maintain its edge over competitors, but also reduce the use of harmful chemicals and pesticides. This is ultimately good for customers in reducing their costs and for the environment in reducing pollution.

In our view, continued investment in these technologies offers real promise as the world works towards feeding a larger population while reducing the impact of agricultural practices on the environment.