Editor’s note: Contributing writer David Li offers a snapshot of current price trends for key herbicides, fungicides, and insecticides in the Chinese agrochemical market in his monthly China Price Index. Below he also provides key insight into why supply chain management will become more difficult for global crop protection companies in the future, mainly because competition in the marketplace is changing faster than procurement teams can imagine.
Supply chain value is especially important in these uncertain times. According to the article by Agribusiness Global contributor Javier Chavarro, channel mergers and acquisitions are in full swing in the Latin American market. As Chavarro mentioned: “The two main objectives of mergers and acquisitions are first to increase revenues and profitability, often achieved through the increase in market share, and second to reduce costs, which occurs mainly when companies use the same resources, in addition to eliminating duplicate functions.”
In the key strategy of channel consolidation, cost reduction is clearly the key to sustainable growth of the company’s logical foundation. For China, the world’s largest producer of agrochemicals, developing and executing a sustainable supply chain strategy in conjunction with global crop protection companies is the core competency.
The key challenge facing the crop protection market now is how to extend the productivity frontier of the crop protection market. The productivity frontier is focused on two main dimensions: first is to raise farmers’ willingness to pay, and second, to reduce the cost of crop protection to farmers.
Value Creation from Upstream to Farmers
A farmer’s willingness to pay is primarily measured by how much value they receive. A relatively simple metric to judge this is the farmer’s return on investment (ROI), which is why we usually help farmers calculate yield improvement with one of the following formulae: Divide the additional value gained from yield improvement by the value of inputs into crop protection products; or subtract the cost of crop protection inputs from the reduction in yield loss. While this is simple math, and ROI calculations are necessary but not sufficient to explain farmers’ willingness to pay.
In the current state of the global agriculture market, there are five key factors for the economic pillar of agriculture: sustainability, digital tools, finance, new molecules, and novel formulation.
Sustainability is a central element. Sustainability requires that the environmental impact of agricultural production activities be reduced to the level of an optimal solution. It is not possible to find the best optimal solution in any market environment, but it is possible to find a sub-optimal solution for a certain period of time. Agricultural inputs are unlikely to be completely replaced by biologicals in the short term. However, crop protection companies can reduce the environmental impact of crop protection by offering lower dose portfolios.
New compounds, as well as expiring patented AIs, will also give farmers around the world more options. There is no slowdown in the global readiness of compounds with expiring patents. On the contrary, China’s agrochemical market is moving into a “fully competitive market.” The launch of expiring patent compounds in China’s supply market will be timed on a “monthly” basis, rather than an “annual” basis. Supply chain management will become more difficult for global crop protection companies in the future, mainly because competition in the marketplace is changing faster than procurement teams can imagine. Bringing in upstream suppliers at the conceptualization stage is essential to develop a competitive strategy for the downstream markets of expiring patented AIs.
While crop protection companies cannot currently achieve full carbon neutrality, their supply chain strategies can set “carbon neutrality” as a criterion for supplier selection. Over the next five to 10 years, raw material suppliers can continue to contribute to crop protection companies’ “zero carbon” strategy. Green processes, green solvents, and biodegradable adjuvant will lead the way. Formulated products not only need to reduce the dosage of the active ingredient and improve the delivery efficiency of the molecule to the target, but they also need to reduce their environmental impact.
As Prof. Xuemin Wu, Chief Scientist of the National Laboratory of Pesticides and Adjuvant Laboratory at China Agricultural University, suggests: “Nano-pesticide formulations, as well as innovative molecular delivery systems, will lead to fundamental changes in crop protection market, and this process has already begun.” Combined with new compounds and innovations in formulation systems for compounds with expiring patents, the concept of “green formulation” will be more widely adopted by farmers worldwide in the near future.
Digital tools are a vehicle. They integrate marketing, farmer education, farmer communities, product service. and customer feedback for crop protection companies and distributors. Bayer CropScience’s digital platform on China’s WeChat app is more than just a sales tool. It connects farmers to company decisions. We can compare the digital platform to a human brain. Digitally monitoring the status of farmers’ fields and providing procurement services to farmers are just the end nerves of the digital platform. The customer link is the soul of the digital tool. The customer feedback that crop protection companies get after providing digital tools and digital services is the most valuable part. However, the data and information are just the skeleton.
Agricultural financial services are a shortcoming for Chinese agrochemical companies. Chinese companies can currently only provide financial services for the supply chain of B2B customers. Since Chinese companies do not have the channels to make large-scale acquisitions in fast-growing markets such as South America, they are unable to reach farmers intensively. Without access to end farmers, Chinese companies are unable to use their brands and products to explore new growth potential for customer demand, and even less able to provide much-needed financial support to farmers. Opportunity and risk go hand in hand. It is the destiny of B2B suppliers to earn meager profits in the B2B market. If Chinese agrochemical companies can’t reach the terminal channels, they will always be blocked at the border of the terminal market. Even if a Chinese company establishes a branch in a key country like Brazil, that is just a necessary step for B2B marketing. In the next 10 years, as Nutrien, a crop input company with important strategic natural resources, is doing now, whoever controls the channel will be the king.
The costs borne by farmers in the crop protection sector depend on a number of factors. The most central one is, of course, the cost of raw materials for crop inputs. The collapse in the prices of Chinese-made AIs from 2023 onwards has given a strategic opportunity to new entrants in the crop protection market. De-stock is currently the main direction of the global agrochemical market. This state is expected to continue in 2024. Multinational companies can return products to the factory for reprocessing if they are sold past their shelf life. However, no company is willing to bear the costs incurred. Therefore, the most important thing for MNCs is to maintain unit prices and stimulate the consumption of sold products through market promotions, such as utilizing purchase volume balance discounts.
Sustained purchasing by channelizers is also a major concern for MNCs to compete in a depressed market. In the 2024 growing season, nothing is more important than purchase orders. Distributors’ key bidding strategies will determine their continued profitability going forward. Currently, global shipping costs continue to stabilize at a low level and the USD/CNY exchange rate will continue to be in the 7.2-7.3 range going forward. The biggest variables may be in geopolitical risk and the occurrence of unpredictable production accidents. Removing the variables beyond our control, global agrochemical prices should continue to stabilize at low level in some time. Price fluctuations will be dwarfed by overcapacity. The future of the agrochemicals market will see a shift away from price volatility and back to long-term value orientation. Leading companies with long-term strategies and transparent operations will dominate the upstream of the supply chain.
Collapse of China Glyphosate AI Price
Value transfer is a cycle. Crop protection companies and upstream Chinese pesticide manufacturers are value transmitters. Global crop protection companies and Chinese pesticide manufacturers are not in a zero-sum game. Supply strategies that are in the interest of the crop protection companies and in the interest of the upstream pesticide manufacturing companies are reachable and executable. This depends on an important philosophical foundation: Who are you with? At what time? What sub-optimal strategic decisions are made (note: there is never an optimal solution)?