Why Glyphosate Prices Are Rising

China Corn

The current inflationary trend in glyphosate prices is reminiscent of 2008 when the price surged to more than $16,200 per ton. This previous glyphosate bubble, hallmarked by a huge price increase and subsequent crash, is tempering investor and speculators’ enthusiasm with understandable caution. After bottoming out at a low of about $3,100 per ton, glyphosate’s value has steadily and predictably appreciated.

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At first glance, it would seem rising prices are due to simple fluctuations in the cost of raw materials and newly enacted government regulations in China. However, closer scrutiny and detailed analysis reveals that the recent price rise has been preceded by fierce political maneuvers, trade disputes and to a large extent, calculated business savvy demonstrated by Monsanto.

Glyphosate production is an integral cog in the economic engine of China’s crop protection manufacturing base. The number and breadth of industries – both foreign and international – involved in its productions, distribution and transport cannot be understated, and for this reason the Chinese government is understandably protective of its interests.

Treading a dangerous line between outright anticompetitive behaviors and protection of its indigenous markets, the Chinese government has adjusted the export tax rebate on N-phosphonomethyl aminodiacetic acid (PMIDA), an important precursor chemical of glyphosate. The removal of the 13% rebate was pitched as an environmental initiative to protect China’s phosphorus resources. But an ulterior motive for this move has a hugely significant – and surely intended – corollary effect: promoting the Chinese glyphosate industry.

Foreign manufacturers sourcing PMIDA from China are now at a sizeable disadvantage in comparison to their Chinese counterparts. The move has been welcomed by the Chinese glyphosate industry and seems to have produced the desired effect with indigenous enterprises experiencing healthy growth in its aftermath. Furthermore, the price of paraformaldehyde has fallen 3% in the past four months due to overproduction, and both phosphorus and glycine have also seen price decreases – all paving the way to favorable appreciation in glyphosate production.

In 2012 the industry saw similar trends with higher raw materials costs influencing the cost of glyphosate, with prices rising from a baseline of $4,050 per ton to nearly $6,000 per ton. However, to fully understand the current price hike there are more pieces to this puzzle to be considered.

Political Muscle

Earlier this June, according to an Argentine government news release, China approved the import of glyphosate-resistant GM crops. The announcement sparked considerable debate among industry stakeholders, academia and informed members of the public. Far from being a debate about the ethical or safety issues synonymous with GMOs, the primary issue focused on the economic and financial impact the move would have on the Chinese pesticide industry.

In what seems like another example of the corporate world flexing its political muscle and lobbying power, there are allegations that the Chinese Ministry of Agriculture is favoring global agrochemical and seed giants such as Monsanto, Syngenta and BASF. Despite the appearance of political and corporate cronyism, the Chinese government has few options when faced with shortages of soybean and corn. The volume and supply demands for these seed products are ultimately dictated by the rapid expansion of China’s economy and the mouths of some 1.4 billion people.

Globally speaking, China ranks as the sixth-largest GM crop-cultivating country. In 2011 and 2012, it imported 51.83 million tons and 58.33 million tons of GM soybeans, respectively, and it will likely import more than 60 million tons in 2013.

In response to China’s increasing demand for GM soybeans and corn, Latin America, which is heavily dependent on glyphosate, is producing vast quantities of GM crops. In 2012, Brazil had 36.6 million hectares arable land dedicated to cultivation of GM crops. Argentina also shipped its first major cargo of GM corn to China. China’s urbanization and industrialization problems have, to a large extent, been subordinated by its massive economic success. Conflicts caused by growing demand for grains and poor agricultural productivity are largely surmounted by importing GM grains.

That is why Chinese premiers and foreign ministers visit Buenos Aires year after year promoting “agricultural cooperation” and preferentially facilitating the import of the GM soybean and corn.

China granted seven GM import approvals in the first half of 2013, and 60% of the soybean exports from Argentina were shipped to China during FY 2012. China’s GM import approvals have led to increased plantings in Latin America countries, and consequently increased glyphosate use. With the delicate glyphosate supply and demand equilibrium stressed by huge consumption in Latin America, a price increase was inevitable.

The Monsanto Factor

In retrospect, the price hike in 2008 was partly caused by market reaction to rumors about Monsanto reducing glyphosate capacity and apparently distancing itself from this sector of the business. China gladly stepped in and filled the supply vacuum left in its wake and is now the leading global supplier by a massive margin. However, the market is still dominated by Monsanto’s branded products and its herbicide-resistance crops, along with the financial incentives offered by Roundup Ready Plus – a loyalty program whereby crop growers using Monsanto’s GM seeds are rewarded if they also use its branded glyphosate products. These incentives have long provided it with a dependable market sector even when faced with the higher-volume, lower-quality generics mass produced in China.

But with Monsanto’s obvious prioritization of high-end biotech investments and glyphosate’s somewhat meager 12% contribution to gross profit, rumors abounded on the ultimate fate of its glyphosate manufacturing base. Tellingly, these rumors peaked during the middle of 2012, coinciding with the rebound in glyphosate prices. On the back of these rumors, rampant market speculation drove price increases.

With China’s favorable market characteristics and the incentives offered to indigenous enterprise it was the obvious surrogate manufacturer. In line with this logic, nearly all the listed glyphosate companies have experienced considerable gains in their share values.

Contrary to these circulating rumors, Monsanto had seemingly no aspirations to surrender a lucrative slice of the glyphosate pie without a fight. With the punching power and influence at Monsanto’s disposal it set about petitioning the Chinese Ministry of Commerce to impose stricter regulations on Chinese producers and increase their environmental responsibilities when manufacturing the herbicide.

Monsanto has displayed its will to retain market share in the glyphosate industry. Monsanto further secured its Roundup brand with its recent and brilliantly calculated move to end its decade-long contract with Nufarm to distribute its branded products in Australia and New Zealand.

Interestingly it has re-contracted with Sinochem, which will regionally distribute and manufacture Monsanto’s branded product from Chinese raw materials repackaged with Monsanto’s brand. The move can be understood if we consider the financial incentives of partnering with a Chinese enterprise, which will be afforded these incentives that accompany open access to Chinese supply chains along with government incentives. It is now clear that Monsanto never intended to quit the glyphosate market, even facing decreasing profits over the past several years.

The Chinese government also attempted to consolidate glyphosate manufacturing to larger companies better insulated against the vagaries of glyphosate values. In recent years numerous small- and medium-sized Chinese producers have been eliminated, which has concentrated glyphosate manufacturing to fewer Chinese producers. These producers are also financially better equipped to compete with larger multinational corporations, and this market consolidation threatened Monsanto’s position. The more market share Chinese glyphosate producers ate up, the more Monsanto would lose its control on the glyphosate market. However, this strategy has been somewhat circumvented by the overall price increase, which has reinvigorated small and medium enterprises in China and proved extremely beneficial to Monsanto’s interests.

According to the latest data from CCPIA, the average price of glyphosate fell $80 per ton in May 2013, while production volume soared 15.6% in June alone, largely due to four manufacturers resuming glyphosate production. As we can see, Monsanto has integrated itself into major parts of the supply chain. From this enviable position it can exert massive influence on the world glyphosate trade – by controlling its supply of GM seeds, incentivizing the use of its branded products and employing strong political lobbying.

Environmental Consequences

Beyond the actions of Monsanto lies another key factor in the recent rise in glyphosate prices. From 2009 to 2013, China has successfully dealt with a slew of anti-dumping allegations from Australia, Brazil and the United States. With each victory comes a significant rise in share prices of the listed glyphosate companies. Nantong Jiangshan enjoyed a near 10% increase in share values after Australia terminated its anti-dumping probe on the formulated herbicide, despite the company being amidst an ongoing environmental scandal and investigation.

Looking back at 2008, Monsanto’s decrease in glyphosate production was largely at the behest of governmental pressure instigated by intense lobbying by NGOs championing environmentalist agendas. Ironically, the comparatively low environmental impact of glyphosate was one reason for the large-scale production expansion in China.

In an effort to keep pace with the demand for glyphosate, manufacturers and local government worked to build the infrastructural and regulatory frameworks to facilitate increased production.

Unfortunately it has been revealed that regulatory corners were cut during the construction of many of these facilities.

It turns out that many were constructed before obtaining the approval document of environmental impact assessment, which is in direct violation of government regulations. The MEP has been the subject of considerable criticism at its poor handling of this situation. To remedy the situation the Ministry is improving its regulatory systems for new chemicals, existing chemicals, hazardous chemicals and dangerous wastes, and is also tackling the most serious problems in each of these industries.
Glyphosate manufacturers are now subject to increased environmental control and management as mandated by new regulations. With this change has come the expectation of supply shortages. The Chinese government has demonstrated its conviction to this task by investigating Wynca for environmental violations. The leading glyphosate company was investigated for suspected deliberate pollution, and two company officials are in police custody. Furthermore, rejections of environmental permit applications have increased again, indicating that China is making good on its promise to regulate the industry.

Registration for glyphosate AS (aqueous solution) with active ingredient content below 30% (the low-level solution is formulated by mixing the AI and the wastewater generated during production) has also been cancelled, and both glyphosate and PMIDA manufacturers are now required to install adequate environmental management of waste production and fulfill other obligations which they might evaded in the past. Apart from the expense of constructing these disposal facilities, the average operating cost of the wastewater treatment is $325 to $485 per ton. Every ton of glyphosate TC produced will generate 5 to 6 tons of the crystallized residues. Simply considering the environmental cost, a 10,000 yuan price increase and 20% production reduction is the lowest estimate if the environmental protection initiatives were fully implemented.
Fuhua successfully expanded its capacity to 120,000 tons per year, and if the environmental advantages could be supported by the strong policy, the company would quickly ramp up the capacity to 240,000 tons.

The price rise of glyphosate cannot be solely attributed to a single factor. Rather it is the interplay of a range of interdependent influences whose complex relationships have shaped the recent price rise. With glyphosate pricing trends historically proven extremely unpredictable, the recent rise seems built on more rational foundations and logically, is likely to remain relatively stable.