No More Denial
22 December 2008 After decades in the shadows, the non-crop segment of the agrochemical market has thrived over the last 15 years, especially in developing countries where pesticides to control insects and rodents are making significant improvements to quality of life. True, per capita expenditure on pesticides is still way behind that of the US or Europe, but good economic growth has increased disposable income for many in these countries, and in economists’ jargon, they have demonstrated a high propensity to spend on household pesticides. There has been consistent growth in other parts of the non-crop market too, for instance relating to leisure activities like golf and gardening, but this is mainly in the developed world.
A few truths show us that non-crop, despite its unattractive name, is a force to be reckoned with:
In overall terms, the global market for non-crop — which includes all uses of pesticides apart from crop production — looks to be worth around US $15 billion at the end user level. A new global survey will be coming out later this year which is expected to show that this growth is continuing. If so, it will demonstrate that the drivers of this dramatic expansion are based not on vulnerable fashion, but on the solid determination of people to use pesticides to control — and kill if necessary — insects, weeds, and diseases that interfere with their enjoyment of life, not least their health.
Contrast that with the crop protection business … well, there is little comparison. Data from Allan Woodburn, one of the more reliable observers, shows that the crop business shrank by an average of 0.2% per year through the 1990s, and by 0.4% from 2000 to 2004. Slight growth in 2005 and a drop in 2006 completed a 15-year period of stagnation or decline. The outlook now is not much brighter, even allowing for the Bush administration’s commitment to expand biofuel production in the US, since genetically modified (GM) corn will likely account for most of the additional crop.
Yet, apart from DEET and timber treatment chemicals, almost every non-crop product has first been developed for crop pests — as they still are today. So it’s all the more remarkable that demand has risen fast when products are only slightly adapted to the needs of final users.
Simple In Concept, Tough To Quantify
The non-crop sector is simple to define — every use of pesticides apart from crop growing — but it is hard to measure. By far the most important segment is home and garden, which accounts for around 60% of the entire market.
Asia, the fastest growing part of the market, accounts for 35% of global demand and is rapidly overhauling the Americas. India and China in many ways typify the dynamic state of the non-crop market. Per capita expenditure on non-crop products doubled in India in the last seven years, mostly for household insecticides (yet it’s still only 4% of the US market), with even the poorest people benefiting from economic growth and choosing to spend more on products that make a material difference to their home environments. India is typical of many developing countries where there are similar prospects of rapid growth in per capita expenditure.
Market Breakdown
Over 600 active ingredients are behind the 3,000 or so brands in use, but a few key insecticides and herbicides stand out with significant shares.
There is a proliferation of brands with almost identical active ingredients (ais), especially for insecticides in developing countries, and this largely explains the concentration.
Almost 40% of all non-crop brands by value are held by five companies: Scotts, Bayer, SC Johnson, Syngenta, andUnited Industries. Store brands account for another 5%; the rest belong to over 500 smaller companies.
Apart from Bayer, which has committed fully to the non-crop cause, most of the R&D-based ag-chem companies are still lukewarm, despite what is sometimes claimed. Perhaps this is consistent with top management whose careers — until recently — have progressed in an overwhelmingly ag-oriented industry. For a paradigm shift there may have to be a major external development, such as additional consumer companies moving into the market — a more imminent possibility than before.
Long Chains, High Profits
Until quite recently, little research had been done about the distribution of non-crop pesticides. How were products moved from manufacturer to final user, was it efficient, and which companies were involved? Based on studies of Europe, Australia, and Japan, some answers can be given.
Compared to agriculture, the distribution chain for non-crop is much longer — and more profitable. At the ex-manufacturer level of sales of technical material, the market in the five major countries of Europe (France, Germany, Italy, Spain, UK) was worth around US $665 million in 2002, while end user level sales of formulated, branded products amounted to US $2.1 billion. Mark-ups (costs plus margin) of this magnitude were also found in Australia and Japan.
Why this difference? Two main factors emerge:
- Most non-crop products are sold in small quantities to large numbers of end users — especially in home and garden — and this demands many steps in the distribution chain, with wholesalers to service numerous retail outlets.
- Packaging is more extensive — 60% of non-crop is home and garden, and the end user wants to purchase convenient packets of pesticide.
Reflecting the relative concentrations of bargaining power, retailers in the home and garden and ornamentals markets in Europe have the largest margins of the whole distribution chain, while for the rest of the non-crop market, such as industrial herbicides, turf, and pest control operators (PCO), the ai manufacturers command that position.
Complex, Fragmented Market
For most of non-crop, the chain is complex and fragmented, and often distinct from crop pesticides. The major ai manufacturers vary in their penetration of the chain and their approaches to it. Attempts to go “downstream” in Italy, for example, have largely been abandoned, and in all countries, local companies are major players in distribution.
The relatively small market for pesticides for forestry in France (US $5.9 million) shows how complex distribution can be with a variety of distribution channels at different levels of the chain.
Consolidation presents opportunities for improved efficiency and lower overall costs. Some initiatives in Europe have been successful (for example by Scotts in home and garden) while others involving Terminix have run into problems. Nevertheless, there remains considerable further scope across Europe, especially at the fragmented retail level with PCO.
Market Drivers, Future Growth
Looking ahead to 2010, provided the two key drivers of the market persist — development of education and economic growth — further expansion is anticipated, especially in developing countries.
Looking ahead, many imponderables could deflect non-crop from a path of regular growth, the most likely overall scenario for the next few years. For example, a major human disaster involving poisoning by non-crop pesticides would seriously undermine the assessment of the risks and benefits inherent in their use. On the other hand, an outbreak of West Nile Virus or the return of malaria to Western Europe — if subsequently controlled by effective use of insecticides — would be a very positive boost for their image.
Governments in developed countries seek to satisfy the concerns of their electorates, which at present are broadly to minimize the use of pesticides. Thus vegetation on railway embankments is controlled with energy-intensive mowing rather than a cheap herbicide. On the other hand, most strands of the anti-pesticide lobby are more focused on food and the environment than non-crop. Perhaps they are reluctant to engage with the public when the public’s desire to use pesticides relates to issues of human health or the maintenance of a nuisance-free living environment.
Rumors exist about the alleged plans of certain consumer companies to invest in non-crop. Undoubtedly, their involvement would dramatically change the whole business, not least by bringing non-crop marketing more into line with other FMCGs, boosting demand, and radically reforming distribution. So far, however, major investments remain a mirage.
Last Best Hope?
Is the ag-chem industry waking up to the possibilities of the non-crop market? For some companies, it could be their best chance for survival. With growth continuing at 4% to 5% per year in current money terms, by 2010 the non-crop market would be worth US $19 billion, while crop protection will still likely be in the US $33 to $34 billion range. At that point, non-crop might even have a new name.
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