McKinsey & Company recently released an analysis of publicly traded global agricultural companies that outperform the rest by sustaining performance across agricultural cycles. I thought it was worth sharing in the hopes that the rest of us might glean better business models, decision-making processes, or general insights we might be missing in our day-to-day operations. It’s worth noting that the agriculture industry has underperformed the broader S&P 500 since 2010, according to McKinsey’s analysis. Despite the industry’s overall underperformance, there is a small cohort of individual companies that have outperformed on their TSR, which is the total return an equity investor earns over a period, combining share price change plus any dividends received, a key metric of value.
McKinsey analysis found that a few factors appear to be driving our industry’s underperformance. First, agricultural companies have been unable to outgrow GDP growth, with 45% of agricultural companies underperforming global or regional GDP growth since 2010. Second, there has been a slowdown in innovation. Median R&D spend has remained flat at about 1% of revenues since 2010, accounting for inflation, real R&D investment has contracted meaningfully over time. This has caused the industry’s innovation pipeline to stagnate across many subsectors. Meanwhile, venture capital investments in agrifood tech have decreased by more than 70% since their peak in 2021.
Third, the industry continues to lag in digital adoption and has not seen efficiency or effectiveness gains equivalent to those of other sectors. In a 2024 McKinsey survey, only about half of US farmers reported adopting precision agriculture hardware, with adoption even lower in other regions, about 30% for Brazil and the European Union, and about 5% for India. Adoption rates for remote-sensing technologies, farm management software, and automation were lower still. Agriculture also spends less on IT than other sectors. For example, McKinsey finds that US agricultural companies spend about 1% less on IT as a percentage of revenue than the US private sector average.
Fourth, headwinds in capital productivity have prevented growth. Fixed capital, infrastructure, equipment, and storage in the system are extensive relative to the value of goods produced, and there has been limited change in fixed asset turns since 2010. Finally, there have been structural challenges with working capital. Agriculture’s median cash conversion cycle has slowed faster than that of its peers, growing by more than 32 days since 2010. Inventory turnover has also dropped, perpetuating inefficient supply chains. Consequently, more than $60 billion in additional working capital is needed today compared with 2010 levels, according to McKinsey analysis.
While there is natural variation across agricultural cycles, agricultural players have underperformed relative to other industries over the past 15 years. Recent years have contained significant volatility in agriculture, including a biofuels-driven expansion (2009–13), a return to trend (2013–19), an inflation reset (2019–22), and a second return to trend (2022–25). Across these periods, some players notably outperformed. Although external factors such as market conditions can influence TSR, return on invested capital is a strong driver. ROIC is directionally linked with TSR, and when ROIC growth is combined with revenue growth, the effect on TSR is amplified. Together, growth across these metrics drives sustainable value creation and long-term shareholder value. Their analysis found that like TSR, ROIC also varies within and between subsectors, with the largest gap between underperformers and outperformers in fertilizers, see graphic below.
McKinsey analyzed 134 agrifood companies, yielding important insights into what differentiated leaders from laggards. Their analysis showed that leaders across four subsectors of agriculture: crop protection and biologicals, equipment OEMs, fertilizers, and grain origination, processing, and trading, made strong moves that set them apart from the crowd. In each of these subsectors, it appears that leaders foresaw market shifts and adjusted their operating models accordingly.
Crop Protection and Biologicals: While laggards saw ROIC slide, leaders expanded margins as prices normalized. They narrowed their offerings to intellectual property–rich segments such as patent-protected or proprietary-blend agrichemicals, cleaned up subscale exposure by shifting fixed costs to variable costs, including contract manufacturing, and tightened channels and trade spend to focus on must-win markets and geographies.
Equipment OEMs: In the upswing, most equipment OEMs grew, but leaders sustained their ROIC after the peak by moving to build-to-demand models and reassessing dealers based on their inventory and performance. Leaders also developed software-enhanced machines with features such as autonomy, computer vision technology, and over-the-air updates and priced these machines to farmer outcomes. In addition, leading OEMs selectively rebalanced their footprints in line with demand, not habit; in other words, they changed the dealers they worked with by pruning the worst-performing ones and adding others where gaps existed.
Fertilizers: Leading and lagging cohorts both peaked in 2022, but top performers maintained positive margins through 2023–24 by reducing conversion costs, offering premium products such as multinutrient blends and proprietary micronutrients with field-proven nutrient-use efficiency claims, and exiting assets amid sustained heavy capital expenditures.
Grain Origination, Processing, and Trading: Outperformers built their success on capital turns that increased their revenue-to-asset ratios through greater efficiency and improved operations. Leaders consolidated underutilized sites, rebalanced toward advantaged feedstock and logistics corridors, built digital grower platforms to lower cost to serve, and decommodified outputs to offer lower-carbon-intensity options, traceable ingredients, and more.
Winners did not outguess the cycle. They changed how they allocated resources, and five bold moves repeatedly appear in the outperforming cohorts…
Programmatic M&A: Large companies pursue about one deal a year, which requires regular, disciplined efforts to identify new target acquisitions, conduct due diligence, and submit bids. For leading players across sectors, on average, no single deal exceeds 30% of market cap, and deals cumulatively reach about 60% of market cap over the course of a decade.
Dynamic resource reallocation: Budgeting agility is critical. Leaders move about 50% of their capital expenditures across businesses over a decade. This allows companies to fuel business units with greater potential to succeed while reducing losses from underperforming units. This might involve restructuring portfolios geographically, such as targeting specific business–market combinations, that is, specific businesses in specific regions.
Big investments: Leaders in the top 20% of the industry spend about 1.7 times the median capital spending on sales. This can mean investing in R&D, developing new sites, building businesses, and more. Players stand to have a particular advantage when buying in a trough.
Productivity leadership: Those companies that made top third gains in productivity, visible in EBIT and cash, took steps such as consolidating business units and locations, investing in new technologies such as automation, exiting unprofitable business units, taking steps to boost sales productivity, and otherwise optimizing selling, general, and administrative costs.
Product Differentiation: Companies that outperform (70th percentile and above) focus on expanding their gross margins faster than peers by differentiating their offerings. This requires a clear view of where the industry is moving and can potentially mean a company “out-innovates” itself, with the goal of long-term success. Success requires making any differentiating factors clear to customers through targeted communications.
Bottom line, the best of the best, regardless of the business cycle, consistently see superior returns on invested capital, driven by greater capital efficiency. These leading companies achieved higher ROIC by managing their strategies differently to stay agile and play in comparatively high-growth areas, regardless of cycle volatility. Given the trends and what the analysis shows from top performers, companies can build a leadership agenda to reshape the competitive landscape over the coming years, regardless of the agricultural cycle. To check out the agenda, click HERE for the full report.
