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 â in fact, bluer than he can remember them being.
Itâs a sign of the times. The supply chain meltdown thatâs 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.
â(China) reminds me of the â70s in Cleveland when the river would catch fire. And youâd fly into LA and the sky was brown. Theyâre having that problem now. Thereâs no doubt about it; they are serious about cleaning it up,â Pfeiffer assures.
Brian Heinze has been in the agchem biz for 25 years now, and heâs 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.
âBasically, (Chinese suppliers of active ingredients) are claiming force majeure. They are saying, âThe government has forced our shutdown; we canât get raw materials.â There is a legit out, but thatâs not good for us or anybody else,â Heinze says, adding, âI think this is going to haunt the Chinese eventually.â
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 arenât much better. Clethodim is proving to be Tide International USAâs biggest problem.
As necessary and long overdue as the environmental clean-up is, Heinze predicts many wonât 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. âNot 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.â
The squeeze has him turning to Indian suppliers to source actives like sulfentrazone, propiconazole, propanil, and tebuconazole, and concentrating on diversifying Willowoodâs portfolio. Where he canât get imidacloprid, lambda-cyhalothrin â and to a lesser extent tebuconazole and glufosinate â heâs 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 Willowoodâs 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 yearâs production.
âIf weâre going to lose $10 to $20 million because we canât participate in these high-priced markets, weâre going to have to make up that revenue up elsewise,â Heinze says. âThe bigger point is, weâre 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 youâre growing or youâre stagnating. If you look at our product mix five years ago, the crown jewels then are commodities today.â
Key Words: âWhen I Get the Productâ
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. âEverybody has the same strategy: âIâll tell you the price when I get the product.ââ
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 isnât enough to promise customers the supply it had last year.
AMVAC CEO Eric Wintemute says, âIf someone guarantees a price for a year on a supply, Iâd be wary because I donât think anybody can guarantee prices. We manufacture a lot of our products (in the U.S.), and thatâs 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.â
Southern California-based AMVAC has been closely studying and adjusting its playbook for the Chinese supply matter since August, when the countryâs 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. âThereâs a fair amount of chaos going on now,â Wintemute says.
The companyâs 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.
âWe 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,â AMVAC Chief Operating Officer Bob Trogele says.
All is not gloom and doom â on the contrary, he sees opportunity, bolstered by its strong U.S. manufacturing base.
âWe have really worked hard on proper inventory management in the channel here in the U.S. and weâre very focused on how we can help our customers retain margins. We are known for supply reliability,â he adds.
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 âis forcing retailers to evaluate different strategies and options moving forward,â he says. âRetailers are opening their eyes and ready to investigate more of whatâs out there.â
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. âRetailers and growers are going to say, âWho am I going to trust?ââ
Bettner touts HELMâs 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, itâs what many of his competitors increasingly are not.
Rattled by so much uncertainty in agchem of late, Bettner says, âif Iâm 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 theyâre 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.â
He adds, âWhen youâre walking with the retailer, youâre walking with the farmer.â
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 heâs sitting, itâs a phenomenal time for post-patent companies and their partners to give those options back to them.
When supplies restabilize â and he believes they will within 18 to 24 months, perhaps sooner â the growerâs needs will not have changed much. âThe 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,â Heinze says. âWeâre of no benefit to you long-term if weâre 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,â Heinze says. âYour growers are going to have to protect their crops.â