Navigating Agricultural Challenges in 2023 and Beyond
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Top 3 Takeaways
- Oversupply Woes in Agrochemicals: The agricultural industry is grappling with a significant oversupply of agrochemicals, primarily affecting markets in South America and North America. This oversupply issue can be traced back to consolidation, geopolitical shifts in China, and disruptions caused by the COVID-19 pandemic. The oversupply problem is expected to persist, and stakeholders are advised to closely monitor product statistics and maintain a disciplined supply approach.
- Double Whammy of Cost of Capital and Inventory Management: Rising interest rates have led to increased capital costs, impacting distributors’ ability to maintain inventory levels. Distributors are reluctant to reorder products until existing stock is depleted, leading to plummeting inventory levels and challenges across the supply chain. The normalization of channel inventory levels may take between six and 18 months, or potentially extend into 2025.
- Geopolitical Impact and Uncertainty: The Russia-Ukraine conflict has severely affected grain markets and disrupted businesses in Ukraine, raising questions about the country’s recovery and funding for rebuilding efforts. Ongoing geopolitical changes worldwide contribute to uncertainty in the agrochemical industry. Energy costs, driven by factors like China’s economic growth, are on the rise, leading to potential investment in alternative fuels such as biodiesel.
Discussion Summary
In a dynamic discussion, Bob Trogele, Chief Operating Officer and Executive Vice President, AMVAC Corporation, delved into a range of topics that are reshaping the agricultural landscape. We’ve extracted key insights from the event to help you better understand the challenges and opportunities the industry faces as we move into 2024.
Black Swan Events: Oversupply Woes
As the conversation kicked off, one of the prevailing concerns centered on oversupply issues in the agrochemicals and crop protection sector. According to Trogele, oversupply has been a recurring theme. This problem has particularly impacted markets in South America, with Chile and Argentina seeing a 20% decrease in 2022, while Brazil is projected to face an even more significant oversupply challenge, potentially exceeding 30%. North America has not been immune to these problems either, primarily due to an oversupply of nonselective herbicides.
But how did the industry find itself in this situation? The oversupply trend can be traced back to consolidation, political changes, and environmental shifts in China between 2018 and 2020. These changes disrupted global supply chains, causing difficulties for many distributors worldwide. The pandemic added more complexity, leading to a surge in buying across all levels, from farmers to retailers and wholesalers.
To tackle this oversupply challenge, Trogele advises stakeholders to closely monitor their product statistics and segment-specific needs, emphasizing that having a disciplined approach to supply is key.
A Double Whammy: Cost of Capital and Inventory Management
Trogele also highlighted the industry’s struggle with the rising cost of capital. Unlike the situation during the 2008 financial crisis, when interest rates were nearly zero, current interest rates fluctuate between 6% and 12%. These interest rates significantly impact the cost of maintaining inventory for distributors and are identified as a top concern in the industry.
With the cost of capital on the rise, distributors are increasingly reluctant to reorder products until their existing stock is depleted. Inventory levels have plummeted across the board, with non-crop markets seeing a dramatic decrease. To illustrate the scale of the issue, as of 2023, there’s an additional $5 trillion in inventory sitting in the supply chain in the U.S. alone, representing a market growth of the same magnitude.
When Will the Channel Inventory Situation Improve?
The burning question on everyone’s mind is when this channel inventory situation will normalize. Trogele indicated that the industry consensus suggests it may take between six and 18 months, potentially extending into 2025. He anticipates Brazil might continue to face challenges and advises companies to make a concentrated effort to strengthen their core segments and enhance their market access.
Trogele believes the Brazilian market, marked by both volume and pricing issues, poses a substantial threat to companies heavily invested in this region. He suggests keeping a close eye on changes in China’s buying behavior and the timing of interest rate peaks.
Geopolitical Impact: The Russia-Ukraine Conflict
The Russia-Ukraine conflict has not only severely affected grain markets but also has a significant impact on the agrochemical industry. Trogele shared that his company operates in Ukraine, where business has been severely disrupted due to the ongoing conflict. He believes it will be years before Ukraine’s agricultural infrastructure can fully recover, especially considering the damages inflicted on mines, transportation systems, and more.
The question of who will fund Ukraine’s rebuilding efforts remains unanswered, with potential contributors including the European nations, the U.S., or even China. This geopolitical issue, alongside various other geopolitical changes, creates uncertainty for the agrochemical sector.
Energy Costs and Impact on Agriculture
Energy costs also took center stage during the discussion, with a focus on rising gasoline prices in the U.S. While prices have moderated, they remain elevated compared to previous years. Trogele anticipates that energy prices may continue to rise in the future, with China’s economic growth and potential demand as a major contributing factor.
He highlighted that energy security is becoming a significant concern, potentially driving further investment into alternative fuels such as biodiesel and renewable diesel. Additionally, Trogele stressed the importance of monitoring the allocation of acres for biodiesel feedstocks, as demand may surpass supply in the coming years.
Inflation and Stagflation
Inflation and its effects on the agricultural industry were also discussed. Trogele pointed out that stagflation, characterized by low GDP growth and high inflation, may already be present. The trend has been driven by extensive government subsidies, extensive money printing, and increased credit card debt.
The precarious financial situation of many millennials and higher interest rates can further exacerbate the inflationary environment. While we might see a shift in renewable energy and biodiesel as an opportunity, much will depend on how governments legislate and drive these changes.
A Glimpse of Hope: The Potential White Swan
Ending on a positive note, Trogele offered several reasons for optimism. Healthy stocks and use ratios across the board, coupled with the recovery in input prices, bode well for the farming community in 2024. Additionally, the rise of biodiesel and the potential for government support in the form of food security initiatives are factors that may work in favor of the industry. Amidst challenges and uncertainties, there is cautious optimism as the agricultural sector navigates the complex terrain of 2023 and beyond. •