State Of The Industry: The Upside Of The Downturn
30 June 2009 It is almost impossible to discuss the state of the agrochemical industry without acknowledging the global recession. But interestingly, crop protection remains a bright spot in many national economies.
BASF beat its first quarter forecast on the strength of a 21% rise in its crop protection unit. Monsanto has been called a “best buy” by Wall Street analysts even thought it cautiously lowered its expectations for 2009. Syngenta’s sales rose 7% in the first quarter, and Shanghai Securities reported in March that the Chinese agrochemical index has become an attractive vehicle for investors by outperforming China’s broader indices.
Even companies looking to divest their crop protection divisions are doing so because of their relative value and good performance in the marketplace. Although Dow Chemical Co. reported a 39% drop in sales for the first quarter compared to the same period last year — down to US $9.1 billion — its Agricultural Sciences segment posted a new quarterly sales record of $1.4 billion. Dow Chemical is considering selling its crop protection division to eliminate its bridge loan this year.
Fungicides Take The Lead
The same prosperity appears to hold true for respondents to the inaugural FCI State of the Industry Survey, more than two-thirds of whom indicated that revenues will rise or stay the same in 2009. The relative optimism about growth of crop protection producers and suppliers is significant considering the general economy and the banner year the agrochemical industry experienced last year.
In 2008, commodity price fluctuations and undersupply from China propelled the crop protection market to a 25% rise. Revenues rose in the perfect market conditions of high prices and heightened demand. Growers, knowing that they could cash in on high prices at harvest time, could afford to invest in crop protection, fueling product demand in addition to higher product prices. The result was a jump in global market value from $33.4 billion in 2007 to $41.7 billion in 2008, according to Phillips McDougall, a research and consulting firm.
While global values in 2008 were extremely positive, the one-time factors that made it a success were unlikely to repeat themselves again in 2009, setting the stage for lower commodity prices, lower demand for crop protection and lower agrochemical prices. Analysts’ optimistic expectations at the start of the year were a paltry 1% to 2% rise in global values. But half of the respondents to the state of the industry survey expect their revenues to increase this year — the vast majority of them expect sales to rise more than 5%.
Similarly, demand appears to be higher than expected as almost 80% of respondents expect their output to be about the same or higher than last year. Almost 70% of respondents either met their budget or exceeded it, and almost 75% are optimistic or neutral about the global economy.
Of course, agriculture is not completely insulated from recession. But a few different phenomena have influenced the industry to a greater degree: First, and perhaps most importantly, the demand for food among the world’s growing middle class has not tapered. And area planted and productivity continues to climb to meet the caloric demands of 6.3 billion people. Occasionally, there is a shift in the types of crops planted to compensate for higher input costs. For example, farmers might plant more soybeans than corn to mitigate the high price of nitrogen. But the total area planted has continued to grow, albeit slightly, during the past few years to keep the pace of demand for higher-quality food despite negative changes in global wealth.
“Macroeconomic pressures appear to be less severe on our business, which makes us more attractive to suppliers and banks,” says Zachary Kusheff with Agria SA, a Bulgarian manufacturer and exporter that expects its revenues and total output to outpace last year. “What affects our business most of all is the regulatory pressure on some of our compounds and the increasing costs and time needed to defend a position of any molecule in the major markets.”
The second economic factor helping the industry is true of many businesses: Challenging business environments force companies to streamline operations to become more efficient. That means that when the general economy picks up and demand rises, companies that have examined their purchasing, processes and people will be some of the most competitive companies coming out of the downturn.
“The economy is influencing us for the better because we are able to identify our loopholes in our current financial work procedures and correct it to avoid being affected in a similar way in the future,” says Rajesh Kumar of Hong Kong-based Willowood.
Exports make up more than 75% of Willowood’s business. Yet, Kumar says he is optimistic about the economy and the growth of the agrochemical industry even though many producers in China point to more local business to help supplement a suffering export market. Kumar expects the company’s revenue and output to be about the same as last year.
Introspectives also make companies more reliable and predictable, which are important attributes for trading partners, according to respondents. Argentina-based Chempro Director Diego Taube says during a downturn, it’s important to focus on customer service.
“For us, the times of crisis are the ones where we can make better businesses, so we are not scaling back,” says Diego Taube, director of Argentina-based Chempro. “We are investing even more in key areas of our business, such as IT and registrations.”
Consolidation
Another factor that might be fueling growth and profits is consolidation, especially in fragmented markets, such as China. Although consolidation in many markets is dependent on local conditions, much of the industry is amid a shift as automation, environmental requirements and operations begin to favor larger enterprises that can invest in operational efficiency. Almost half of respondents to our State of the Industry Survey reported that consolidation will affect them in some way.
Of the 29% of respondents who said that consolidation will benefit their company, very few of them say they will benefit from acquiring companies or being acquired. Instead, they intend to remain the same size — or perhaps increase capacity organically — to try to capitalize on market share by growing through better customer service and relationship management.
“I believe that this is an opportunity for the small players because the big buys are driven by the constant delivering of shareholder value,” Kusheff says. “They have to rationalize their product ranges and focus on the highest margin products. This leaves niches for generics to go for. In a process of reorganization, things tend to get overlooked, and new organizational and reporting structures take time to adjust. Responding to customers’ needs is essential, and small companies tend to be better at this level.”
Lending
If you ask a dozen economists to explain the global recession, you will probably get a dozen different answers. But most will agree that the lack of liquidity in the global marketplace for small businesses and consumers at least exacerbated the contraction of trade, employment and operations around the world.
The banking meltdown has touched just about every industry that needs loans for infrastructure, capital expenses and operations. But agriculture has fared well, largely because investors sought better returns from commodity investments in lieu of volatile stock markets. That behavior, in part, inflated prices and helped growers and input providers prosper.
As a result, banks are either lending more freely to ag companies, or liquidity from windfall revenues are keeping the credit crisis at bay for survey respondents. Just 10% of respondents feared that they would not survive without more lending. Not surprising, all of the respondents in this category reported that they earned less than $10 million annually, indicating that perhaps lending institutions aren’t taking a lot of risks with smaller companies.
About two-thirds of respondents to our survey say they need loans and can obtain them, and the lending environment is improving every day, analysts say. Money is beginning to pour back into banks as investors rock forward off their heels, and that money potentially will make its way into the agriculture economy, at least for now.
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