Is it 2008 All Over Again? Chinese Supply Crunch Hits Crop Protection Players

They say that if you want to know the price of agricultural chemicals, look at the sky in China.

If the sky is blue, the price is up.

Dennis Pfeiffer got off a plane last week from Southeast China, where the umbrella company of the company he leads, Tide International USA, is based.

The skies were blue — in fact, bluer than he can remember them being.

It’s a sign of the times. The supply chain meltdown that’s hit every brand of smokestack industry is perhaps just part of the price China is paying for its breakneck industrial expansion. With around half of U.S. agrichemicals sourced out of China, few will be left unscathed.

“(China) reminds me of the ‘70s in Cleveland when the river would catch fire. And you’d fly into LA and the sky was brown. They’re having that problem now. There’s no doubt about it; they are serious about cleaning it up,” Pfeiffer assures.

“As India comes online and becomes more competitive, I think that we would see restabilization over the next 18 to 24 months.” –Brian Heinze, President and CEO, Willowood USA

Brian Heinze has been in the agchem biz for 25 years now, and he’s never seen anything quite like it, either.

Through all of those years, the founder and CEO of fast-growing post-patent player Willowood USA recalls a single case of a company not honoring a contract. That would be five fewer than he had fall through on one trip to China alone in late October 2017.

“Basically, (Chinese suppliers of active ingredients) are claiming force majeure. They are saying, ‘The government has forced our shutdown; we can’t get raw materials.’ There is a legit out, but that’s not good for us or anybody else,” Heinze says, adding, “I think this is going to haunt the Chinese eventually.”

To point to some examples, imidacloprid technical was $13.50 a kilogram a year ago, and is now $36 and rising. Same story with lambda-cyhalothrin: The price has more than doubled. Tebuconazole, formerly a commodity-type product, is almost nonexistent, and glufosinate supplies aren’t much better. Clethodim is proving to be Tide International USA’s biggest problem.

As necessary and long overdue as the environmental clean-up is, Heinze predicts many won’t make it through this bout of supply disruptions, which has people drawing comparisons to 2008 when phosphorous and glyphosate prices sprinted Usain Bolt-style in the lead-up to the Beijing Olympics. “Not to fault any entrepreneurs, but some more fly-by-night generics that have operating cash flow-related issues are going to be in a much tougher position to survive.”

The squeeze has him turning to Indian suppliers to source actives like sulfentrazone, propiconazole, propanil, and tebuconazole, and concentrating on diversifying Willowood’s portfolio. Where he can’t get imidacloprid, lambda-cyhalothrin — and to a lesser extent tebuconazole and glufosinate — he’s shifting to products he knows he can get more reliably, such as mesotrione and sulfentrazone.

India, as one of the last truly growing agrichemical markets, is home base for Willowood’s first AI manufacturing plant, but it will not be operational for another two to three years. Why India? Tax incentives, Heinze says. The company currently pays 6.5% in duty from China.

Sourcing has also become a year-round affair, instead of the one-and-done October deals standard up until just two to three years ago. Now, Heinze says, Willowood is negotiating formulating slots much earlier and buying starting in May, before the shutdown for maintenance in hot periods in both India and China for the subsequent year’s production.

“If we’re going to lose $10 to $20 million because we can’t participate in these high-priced markets, we’re going to have to make up that revenue up elsewise,” Heinze says. “The bigger point is, we’re launching eight new products in 2018. My personal philosophy in founding and running day-to-day operations as the president and CEO of Willowood USA is either you’re growing or you’re stagnating. If you look at our product mix five years ago, the crown jewels then are commodities today.”

Key Words: ‘When I Get the Product’
The instability and uncertainty rumbling through the industry over the last few months could be seen as triggered not only by pervasive plant shutdowns but also by the unknowns post-M&A feeding frenzy, in which, of course, China has played a pivotal role via ChemChina dropping $60 billion for Adama and Syngenta. Then there are the conspiracy theories circulating of how the government there has deliberately fed the supply shortages by letting factories that sourced for those companies continue while putting a stranglehold on the rest.

Pfeiffer puts the current supply situation simply. “Everybody has the same strategy: ‘I’ll tell you the price when I get the product.’”

Tide International USA is unique among generic manufacturers in that it formulates and packages 100% of its products in China in its own plant; it does zero toll manufacturing. It gives the company an advantage, because it knows the supply and price a little bit further back in the chain, Pfeiffer says. Yet, it isn’t enough to promise customers the supply it had last year.

Eric Wintemute, CEO, AMVAC

AMVAC CEO Eric Wintemute says, “If someone guarantees a price for a year on a supply, I’d be wary because I don’t think anybody can guarantee prices. We manufacture a lot of our products (in the U.S.), and that’s a plus, but there are a few of our 43 active ingredients and some raw materials that we do source out of China. Obviously, you need to be prepared that supply on a number of products is going to be difficult.”

Southern California-based AMVAC has been closely studying and adjusting its playbook for the Chinese supply matter since August, when the country’s government began its crackdown on industrial parks. If one player is found to be out of compliance, the whole park gets shut down. Each manufacturer in that park then has to schedule time with a national enforcement team to show they are in compliance with all regulations, a process that can take weeks or months, a period during which there is no production. “There’s a fair amount of chaos going on now,” Wintemute says.

The company’s biggest-volume product is metam sodium soil fumigant, the raw materials for which are sourced entirely in the U.S. But for some other products it expects to see an impact, notably bifenthrin, acephate, and chlorothalonil.

“We think the effect on companies might not happen until we get into the season next year, so maybe more of a second-quarter or second-half effect in 2018 going into 2019,” AMVAC Chief Operating Officer Bob Trogele says.

All is not gloom and doom — on the contrary, he sees opportunity, bolstered by its strong U.S. manufacturing base.

“We have really worked hard on proper inventory management in the channel here in the U.S. and we’re very focused on how we can help our customers retain margins. We are known for supply reliability,” he adds.

“I hope that because of what’s going on, the landscape opens itself to more opportunities in that a retailer can see more of what’s available in purchasing from post-patent companies.” –Troy Bettner, HELM Agro USA

A More Open Market Ahead?
Troy Bettner, Marketing and Business Development Leader with HELM Agro US, says the opportunity for ag retailers, in particular, is apparent.

The supply environment “is forcing retailers to evaluate different strategies and options moving forward,” he says. “Retailers are opening their eyes and ready to investigate more of what’s out there.”

By the same token, Bettner says, one has to take into account the risks with a more unfamiliar supplier, not to mention the loyalty programs backed by many products and countless other factors. “Retailers and growers are going to say, ‘Who am I going to trust?’”

Bettner touts HELM’s position as a 115-year-old family-run company that is not beholden to shareholders. It is financially strong with $8 billion in annual sales, and values its relationship with its retail, distributor, and grower partners above all else. In ways, it’s what many of his competitors increasingly are not.

Rattled by so much uncertainty in agchem of late, Bettner says, “if I’m going to look to other (supplier) options as possibilities, I want to feel comfortable with what those options are. In our world, do all the post-patent companies out there research compounds thoroughly; do they look at the formulations in the field before bringing them to market; do they do adequate testing to know that they’re going to be no surprises in the field? If there is an issue in the field, will that company be there to walk the field with me and back me? I say that from a retailer perspective.”

He adds, “When you’re walking with the retailer, you’re walking with the farmer.”

Heinze recalls an article he read recently that discussed how Bayer-Monsanto could control 40% of inputs, and the resulting loss of supplier and product optionality for farmers.

From where he’s sitting, it’s a phenomenal time for post-patent companies and their partners to give those options back to them.

When supplies restabilize — and he believes they will within 18 to 24 months, perhaps sooner — the grower’s needs will not have changed much. “The one thing that we know is that next year there will be somewhere around 90 million acres of corn planted, 70 million acres of soy, and between 30 and 40 million acres of cereals,” Heinze says. “We’re of no benefit to you long-term if we’re not solvent. Growers are either going to use a preemergent or a postemergent herbicide to control weeds in their crops; the ones that are less predictable are insecticides and fungicides,” Heinze says. “Your growers are going to have to protect their crops.”

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