Get Set for Outcome-Based Pricing

Receiving money back on purchases of seed and chemical that didn’t trigger an expected yield or other outcome seems like a farmer’s dream come true.

Someday, though, it may become reality through a business model called outcome-based pricing. 

This summer, Bayer Crop Science has been piloting such a plan with a handful of U.S. corn farmers. Rather than selling chemical by the jug or seed by the bag or bulk unit, an outcome-based model entails selling metrics like a yield guarantee or a weed-free or disease-free field.

“If the (desired) outcome doesn’t happen, we would then compensate the farmer,” says Liam Condon, Bayer Crop Science CEO.

This business model doesn’t exist today in agriculture, admits Condon. Nor is Bayer close to debuting one. Bayer officials stress the concept is in an early testing phase.

In the next few years, though, it likely will happen, says Condon. Eventually, Bayer plans to expand this pilot program to other crops. 

“The ultimate model is to offer a yield guarantee that ensures the farmer always gets paid,” he says. 

Sharing the Risk 

Data science via Bayer’s digital agriculture division, The Climate Corporation, can make this model work, say Bayer executives.  

“Data science allows us to predict with increasing accuracy how specific hybrids and other inputs are likely to perform on any given field,” says Lisa Safarian, who heads Bayer Crop Science commercial operations for North America. “We envision a time when we can walk alongside our customers and take more of the guesswork out of their job. We will base our value on the value they get at the end of the season, field by field. 

“We can share the good times and the bad,” she adds. 

If the prearranged metric isn’t realized – whether it be a yield, weed, or disease goal – Bayer would compensate the farmer in either cash or product refunds or rebates. 

The good times? If a farmer follows specific agronomic steps outlined by Bayer and yields or other metrics swell above the prearranged level, both Bayer and the farmer share the extra bounty. 

It’s this upside sharing that rankles some farmers. 

“At first glance, it seems typical of a corporate business model,” says Doug Sombke, a Groton, South Dakota, farmer and president of the South Dakota Farmers Union. “It reminds me of chicken contracts.” 

The outcome-based model does start moving along the lines of livestock contracts that lock in both upside and downside, says Peter Martin, principal for K-Coe Isom Food and Ag, a food and agricultural advisory firm. 

“This clearly isn’t for everyone, but for those who are risk-averse, this may be a great option,” he says. 

Digital Disruptor

Other industries are shifting to similar models, says Martin. Some accounting and consulting firms, for example, are moving from billing in time increments to a model that links price to the value of client outcomes, he adds. 

Slumping commodity prices that have agricultural firms thinking about pricing, in general, are driving the model, he says. Ditto for disruptors like Indigo Ag and Farmers Business Network that are shaking up agricultural input markets.

“This disruption will likely lead to existing companies revisiting their business and pricing models in search of opportunities,” Martin says. 

Disruptive digital agriculture is akin to Uber’s acceleration in transportation, says Mark Gulley, who covered Bayer’s 2018 buyout of Monsanto as a stock analyst before retiring. Businesses that don’t see these trends coming – such as taxi services in the case of Uber – quickly get rolled.  

“They will look up and say, ‘What happened?’ Well, it happened fast,” says Gulley. “When you have ag biotech, auto steer (automated guidance), and now digital ag, those are big things that have long-term importance.”

Farmers will continue to be free to buy inputs like seed or chemical by the bag or jug, says Aaron Robinson, Bayer Crop Science North American vice president for business model strategy. Still, data science advances enable Bayer to think differently about pricing than it did just three years ago, he says.

One knock about digital farming is that it just produces a plethora of undecipherable colored field maps. Now, Bayer’s data science has improved to where the firm can tailor agronomic recommendations that greatly boost the odds of a favorable return on investment (ROI), says Robinson. 

“Certainly, selling products is part of this,” he says. “But when you’re selling outcome or productivity, the traditional volume-based business that we work in today is less applicable.”  

Current models price products on a mean (average) basis, says Robinson. This model translates into one-half of the farmers using the product garnering a more positive ROI than the remaining one-half. 

Rather than a random price and value relationship, outcome-based pricing individualizes each field to prescribe the optimum product mix for a desired outcome, he says.

 “If we’re wrong, then that’s part of the reconciliation process,” he adds. “As we get better and better with the data science, that becomes less probable.”

Seed advisor 

Seed Advisor is the digital tool that’s fueling Bayer’s foray into outcome-based pricing, say Bayer officials. It uses an algorithm that matches hybrids with specific fields. Seed Advisor users in the 2019 precommercial program paid a $4 per acre fee, on top of a $999 annual fee for Bayer’s digital agriculture platform FieldView. (2020 Seed Advisor prices may differ.)

Bayer officials say farmers who tested the tool in 2018 boosted corn yields by an average of 9.1 bushels per acre across 100,000 U.S. corn acres in Iowa, Illinois, and Minnesota. Currently, Seed Advisor has also demonstrated a yield edge in 80% of cases where it’s used vs. where farmers select hybrids on their own. (Bayer has not yet tabulated 2019 results.) 

Greg Deim became a believer in digital seed selection in 2017 when he and his family first tested Seed Advisor. 

“They recommended you plant one of the top three hybrids listed for each field,” says Deim, who farms with his father, Craig, and brother Justin near Swea City, Iowa. During that year, they planted the third-ranked hybrid in a field next to a hybrid that unknowingly ranked fifth. 

“There was a 15-bushel (per-acre) advantage for that (third-ranked) hybrid,” Deim says. 

This prompted them to increase use of Seed Advisor to where they used it to select seed across most of their 2019 corn acres.  

Rick DeGroote sees farmers adopting Seed Advisor as rapidly as they embraced auto steer 15 years ago. 

“This (Seed Advisor) might just take a little while longer to catch on, but when farmers see the results, it will take a lot of the guesswork out of what they want to plant,” says the Shell Rock, Iowa, farmer who’s tested Seed Advisor on his farm. 

Challenges

Guaranteeing outcomes would remove much risk for both farmers and companies, says Nish Majarian, Agrian CEO. 

“It’s the flying cars of ag, right?” he says. “What these companies are talking about is a data-driven performance guarantee program that does not require a great deal of human interaction. Everybody believes it’s going to happen someday. People just aren’t sure how it’s going to work.”

Hurdles include:

• Field complexity. “Agriculture is more complex in many ways than the human body, because there are many different interactions going on in the field,” Majarian says. “You have insect or disease pressure that is sometimes predictable and sometimes not predictable.”

Unpredictability also surfaces in other forms. “One of the challenges that you have with a program-based guarantee is the grower next door,” Majarian adds.  

A neighbor’s weedy field, for example, could thwart an outcome-based agronomic plan if weed seeds move via water and infest a program field. 

• Data accuracy or performance of the program algorithm from which digital agronomic recommendations are made.  “You’re one bad recommendation away from losing a lot of credibility,” says Majarian. 

• Adverse weather. Excessive 2019 rainfall partially dashed DeGroote’s plans for planting every cornfield with hybrids recommended by Seed Advisor. When rain halted planting plans for a field with a Seed Advisor-recommended hybrid, DeGroote went to another field and planted where the hybrid wasn’t advised. 

“When you run into a year like this one, every plan goes out the door,” he says. 

A precipitation-pocked year like 2019 is also hard on companies, Majarian says. “I don’t know that any companies today have deep enough pockets to manage a year where a lot of things go wrong,” he says.

This rain-ravaged year wasn’t an ideal testing year for the model, Robinson says. Prolific precipitation keyed delayed planting, maturity changes, and acreage switches to other crops or prevented planting. Still, he says, 2019 provided key lessons in how to manage an outcome-based model. 

“We learned we have to find that balance between being so rigid that you can’t execute it, to being so flexible that you can’t leverage any of the data science that delivers incremental value,” says Robinson. 

• Farmer reaction to sharing the upside. “Man, I can tell you that in my professional journey, when you start talking about sharing the upside with growers, farmers are pretty sensitive about it,” says Wade Barnes, CEO of Farmers Edge.

A year ago, Robinson says he would have shared this opinion. Still, he says he’s been surprised with pilot program farmer reaction to downside risk and upside value sharing. 

“It is a situation where we are in the same boat rowing with them – almost literally this year with all the rain,” he says. “We have as much skin in the game as they do.”  

Is it for you? 

Ben Riensche, Jubilee, Iowa, thinks business models like outcome-based pricing are a mask to cover lack of industry innovation. “It seems like we are just taking the same old products, rebranding them, and trying to think of new pricing schemes,” he says.

He also points out that seed selection – a major current component of Bayer’s model – is just one part of all decisions he annually makes in his crop-management plan. Other crop inputs he uses include drainage tile, fertilizer, vertical tillage, and microbials. 

“I make 99 decisions in growing a crop, and just one of them is picking seed varieties,” he says. 

DeGroote, though, is open to testing the concept.  

“One of the most attractive parts of it is not having to pay for seed until harvest,” says DeGroote. This represents a huge savings in interest, he adds. 

Farmers who feel they are giving up their traditional independence may be the biggest challenge outcome-based models face. Theoretically, the connected or wired farmer is doing just that by using autonomous machinery and delegating input and grain marketing decisions to companies, says Emerson Nafziger, University of Illinois Extension agronomist. Few farmers have yet to adopt this model, however. 

“Most farmers I talk to take some pride that they have many decisions to make,” he says. “I think that writing a check to someone else to make those decisions takes much of the challenge and sense of accomplishment out of farming.” 

Still, using digital tools in an outcome-based program can ease decision-making pressures that farmers face across numerous inputs, says Mike Stern, who heads Bayer’s digital ag business.

“I was once talking to a Minnesota farmer about his seed purchases,” Stern says. “Instead, he talked about all the decisions he had to make for his farm’s crops. Each decision affected the output of his farm, each decision affected his family. He said, ‘I don’t know if I’m making the right decision, but I have to make a decision.’ The promise of digital agriculture is using data science to help farmers make more informed decisions about how to manage their crops.”

Outcome-based pricing models may currently seem like a foreign concept. Still, flash back 15 years ago and think about reactions that would result regarding a cell phone that also takes photographs, says Darren Wallis, vice president of communications for Bayer Crop Science.

“Many would have said, ‘No, I don’t think so,’ ” he says. “Now, you could not imagine life without it. This (outcome-based pricing) is creating a brand-new space.”

How to Play it

If you are faced with future outcome-based models, follow these steps, says Peter Martin, principal with K-Coe Isom Food and Ag, a food and agricultural advisory firm. 

• Make sure it fits your farm. “For some growers, it (outcome-based pricing) will make sense because it limits risk,” he says. Remember, though, that a program like the one Bayer is exploring protects downside, but also limits upside.

“Don’t make these decisions by yourself,” says Martin. “Talk to a friend, accountant, banker, and other people you trust.”

• Know cost of production. This knowledge can help determine which metric is best when negotiating an outcome-based agreement with a company, he says. 

• Shop different companies. “Just because you have worked with the same company for years doesn’t mean you shouldn’t talk to anyone else,” he says. Other firms may offer better deals, including outcome-based ones.

Honing in on hybrids

Scouting fields remains an effective way for farmers to gauge whether cornfields need a disease-curbing fungicide, says Mike Stern, who heads Bayer Crop Science’s digital business.

Still, that’s not practical if you have 30 or 40 large cornfields, he told those attending Bayer’s Capital Markets Day in London last December.

Bayer’s trying to change this by using an algorithm in its digital FieldView platform to decipher which hybrids are most likely to respond favorably to a fungicide application. This can quickly narrow the decision down from 30 to 40 fields to a handful, Stern says. 

Bayer is also using this knowledge to pilot a program that guarantees a certain yield increase when a Bayer hybrid is teamed with a Bayer fungicide mix on targeted fields. Guarantees vary by field. If this threshold is not met, Bayer refunds fungicide and application costs. If levels exceed that yield increase, revenue sharing occurs at an unspecified amount. 

“We don’t have all the data in yet, but our preliminary results on this show that it’s very,  very promising,” says Stern.

Other plans

Other firms are also piloting new risk-sharing input strategies and ways to price products. Here are examples. 

• Syngenta is piloting its AgriClime risk-sharing program in Australia. Syngenta risk-shares the chance of low rainfall during August to October with participating farmers. If they follow Syngenta recommendations and sufficient rainfall does not occur, the firm  refunds up to 30% of the money spent on Syngenta inputs like seed and chemical. The less rainfall that occurs, the higher the refunds, say Syngenta officials. Syngenta plans to pilot the program in North America.

• Farmers Edge has a warranty arrangement that meets certain field metrics. It is partnering with PartnerRe, a reinsurance company, in this plan. “We have collected a significant data set with which we have done predictive modeling,” says Wade Barnes, Farmers Edge CEO.

Farmers Edge uses this information to write a prescription for the inputs like seed, fertilizer, fungicide, and herbicide that matches each field. Meanwhile, PartnerRe uses this information to create a field warranty for input performance. 

“This is what insurance companies love,” says Barnes. “They want to take the management risk out and only insure against weather. “

Farmers Edge plans to run pilot projects next year in several countries, including the United States.. 

• Stine Seeds’ Grower Alliance Program shifts seed corn prices away from a price-per-bag basis to a price-per-acre cost.  Farmers pay an acre-based membership fee that makes them eligible to purchase corn and soybean seed at a discount. The program originated from Stine’s research showing that farmers could glean higher yields by increasing corn population rates on certain fields. 

“The argument from farmers is, ‘Well, you are just trying to sell me more seed,’ ” says David Thompson, Stine Seeds director of sales and marketing. Shifting to a cost-per-acre strategy shifts the focus from the higher seeding rate and toward profit per acre. 

“When we get the seeds-per-acre rate right, your per-acre revenue goes up,” says Thompson.

Bundling? Bayer says no.

Outcome-based pricing models will likely include mandates for using certain company products to meet a specific metric like a yield goal. 

Still, outcome-based pricing isn’t simply a bundling model, says Aaron Robinson, Bayer Crop Science North American vice president for business model strategy. 

Bundles  that include inputs like seed, chemicals, and seed treatments joined together in a pricing plan are the average returns of all products added up, Robinson says. A firm then offers a discount on the total amount purchased, he says. 

“There are companies saying this product delivers 5 bushels, another delivers 7 bushels, and another delivers 3 bushels, all in a bundle,” says Robinson. 

Because they are averages, though, numbers often don’t add up.  Some products may deliver below-average results on an individual farm, he says. 

Data science behind the outcome-based model changes this, he says .  

“We’’re combining our proprietary R&D data with a grower’s proprietary data,” Robinson says. “Bringing those two things together helps create a tailored recommendation for that field. The price is not the sum of the parts. The price is a result of the expected outcome or value that we deliver with that tailored solution.”