(Corrects May 4 story to show AgFunder is an online investment platform, not a market research firm, paragraph 19.)
By Ludwig Burger
IRLBACH, Germany (Reuters) - Global pesticides, seeds and fertilizer companies may be forced to re-engineer their business models as farmers adopt specialist technology that helps maximize harvests while reducing the use of crop chemicals.
New businesses are springing up that promise to tell farmers how and when to till, sow, spray, fertilize or pick crops based on algorithms using data from their own fields.
Their emphasis on reducing the use of chemicals and minerals known as farming inputs is a further challenge for an industry already struggling with weak agricultural markets worldwide.
"If our only goal is to sell as much inputs as possible by the liters of chemicals, I think we would have a real problem going forward," said Liam Condon, head of Crop Science at Bayer, the world's second-largest pesticides supplier.
Bayer bought proPlant, a developer of software for plant health diagnostics, earlier this year. Rivals are also investing in digital farming with the aim of generating service revenues that could offset any future drop in chemicals volumes.
"If you only spray half of the field that's much less inputs," Condon added. "The knowledge to get to the fact that you only spray that part of the field -- that, you can sell."
After an aborted takeover move for Syngenta, U.S. seeds giant Monsanto says data science and services are the "glue that holds the pieces together" of its strategy for future growth.
Monsanto's $1 billion purchase in 2013 of the Climate Corporation, which analyses weather conditions, was the digital farming sector's biggest deal to date.
DuPont is investing in digital farm management services under its Encirca brand, which it said in March had customers representing more than 1 million acres of farmland.
Monsanto's failed swoop on Syngenta triggered a bout of M&A activity that has left the global seeds and pesticides industry in turmoil. The sector has annual sales of more than $100 billion, while fertilisers are worth around $175 billion.
Dow Chemical and DuPont are set to merge in the second half of this year while state-owned ChemChina agreed a takeover of Syngenta in February.
ON THE GROUND
At the 970-hectare farm in Bavaria where Juergen Schwarzensteiner rotates corn, potatoes and grains, satellite maps and software supplied three years ago by a unit of farming goods distributor BayWa have prompted many changes.
These include reducing the overuse of nitrogen fertilizer -- a risk to drinking water quality and the environment -- and cutting down on other fertilisers.
"This plot has had top yields consistently over the years, where I used to just say, that's great," says the farmer, eyeing a red and green patterned computer map showing big discrepancies in how well plants are growing just half a mile apart.
"Then we got the digital maps and differences became apparent that were not clear to the eye before."
Schwarzensteiner's experiences using the technology have secured him a side job advising a farm in Siberia that is about 100 times the size of the one he manages at Irlbach, near the river Danube in Germany.
As well as BayWa's FarmFacts, farm management software startups include Iowa-based Farmers Business Network Inc, backed by Alphabet Inc and investor Kleiner Perkins, and Missouri-based FarmLink LLC.
All aim to provide farmers with individualized prescriptions on how to work each field down to a fraction of an acre, using data they have collected on soil and weather conditions, the use of crop chemicals and crop yields. Feedback from the farmers they have advised in turn allows the companies to fine-tune their computer models of plant growth.
RISKS AND CHALLENGES
According to online agriculture investment platform AgFunder, venture capital investments in food and agriculture technology nearly doubled to $4.6 billion last year, with "precision agriculture" startups raising $661 million in 2015, up 140 percent from 2014.
Syngenta bought seven agricultural technology firms last year alone, AgFunder said.
For now, the main aim of these companies is to help farmers using their drones, field robots, decision support software and smart irrigation systems to boost yields, said Carsten Gerhardt, a chemicals industry specialist at advisors A.T. Kearney.
"But in the mid- to longer-term, I also expect there to be a reduction in the use of input factors by about 30 to 40 percent," he added.
"There's a risk for established players if digital services providers can convince farmers that they can settle for the second-best herbicide and show what really counts is a more precise way of using it."
Eric Bartels, a partner at McKinsey who focuses on the agricultural industry, said developing new pesticides would help companies hedge against any drop in sales, however, because farmers will pay a premium to keep their fields pest-free.
Another question is whether today's chemicals and farm nutrients giants can capture the farm management software market for themselves. Gerhardt said digital startups would struggle to catch up with established players' knowledge of plant biology and the farm business, and to build a global sales network.
But Rabobank's farm sector analyst Harry Smit says crop chemicals and seed players diversifying into such services will struggle to be seen as providers of impartial advice.
That was one of the reasons why German grain and sugar beet seed maker KWS Saat, among the world's top five seed makers, decided not to invest in digital farming platforms.
"Farmers want independence," KWS finance chief Eva Kienle said. "They don't want to get the impression they are being recommended a product just because the supplier is earning a profit on it."
(Editing by Catherine Evans)