By Mrinalika Roy

(Reuters) -The U.S. AgTech sector is navigating a challenging investment climate. Yet, amid the funding downturn, some companies are carving out growth opportunities, particularly in the dairy and solar sectors.

Macroeconomic headwinds, weak commodity prices and a sluggish agricultural cycle have weighed on funding and valuations in the agricultural technology sector that encompasses precision farming, biotech and data analytics, which help farmers grow food more efficiently.

According to the latest PitchBook data, AgTech venture funding dropped to $1.6 billion across 137 deals in the first quarter of 2025, a nearly 25% decline in deal count and a 3.6% fall in capital compared to the previous quarter.

"AgTech's challenges aren't unique. What we're seeing is part of a broader venture capital correction, particularly outside AI," said Tom Brennan, partner, McKinsey & Co.

But precision farming, which uses data and tools including automation and robotics to farm more accurately, has managed to see robust investor interest, amid a labor shortage.

On a trailing 12-month basis, precision agriculture registered $1.82 billion in deal value, with the 'robotics and smart field equipment' sub-sector seeing 48.5% value growth. "Roughly 40% of U.S. ag labor is likely undocumented," said McKinsey's Vasanth Ganesan. "This creates strong incentives for farmers to turn to robotics and automation."

California-based Monarch Tractor has seen increased interest in its autonomous products, especially from dairy farms.

"Our latest feature, autonomous feed pushing, has seen strong uptake, especially from co-ops like Dairy Farmers of America," said Monarch CEO Praveen Penmetsa.

Another growth avenue for agtech firms is solar land management, which involves robotic tractors that maintain and service panels on solar farms without human intervention, demand for which is driven by U.S. utilities powering the AI data center boom.

"We're already working with top North American solar developers and expect to announce major partnerships soon," Penmetsa said.

Major players such as John Deere and Caterpillar are also increasing their presence in automation.

"Big players entering the space signals strategic value. It suggests there's now a clearer path to exit - which was not always the case in AgTech," McKinsey's Ganesan said.

Experts believe the capital markets will rebound in the second half of 2025, barring prolonged trade disruptions, benefiting established players that are ready to scale.

(Reporting by Mrinalika Roy in Bengaluru; editing by Arpan Varghese and Shinjini Ganguli)