There will be consolidation among seed and agchemical companies at the top, experts agree.
Innovation and record commodity prices drove continued investment in agriculture during the past decade, but the winds have changed. Commodity prices have declined and farmers started scaling back purchases in 2014, and that’s continued through 2015 and is forecast into 2016. These cutbacks have made a dent in the bottom lines of agribusiness companies, including the seed industry.
Looking at the top six seed and agrichemical companies, nearly all are trying to scale back. Some are divesting businesses, some are buying back shares, some are restructuring and some have announced massive layoffs. And some are combining several of these measures.
During the most recent round of earnings announcements, Monsanto reported a decrease in net sales of nearly $500 million for its seeds and genomics business in fiscal year 2015. In addition, Monsanto announced the company plans to begin global restructuring actions to enhance competitiveness by delivering cost improvement and to support long-term growth.
DuPont reported a seasonal operating loss of $210 million due to lower volumes and a $108 million negative currency impact. “We saw significant negative impacts from currency as well as market weakness in agriculture, emerging market industrial production, and oil and gas,” says Nick Fanandakis, DuPont executive vice president and chief financial officer.
For Dow, sales were $12 billion, down 16 percent year over year. The company attributed the decrease to pricing and currency. Volume rose 2 percent, excluding the impact of divestitures and acquisitions. Gains were reported in most operating segments, excluding Agricultural Sciences.
BASF reported a sales decrease of 5 percent in the third quarter, compared to the same period in 2014. And Syngenta reported sales for the third quarter were 12 percent lower, due to depreciation of most currencies against the dollar.
Bayer might be the best-positioned company as its Crop Protection/Seeds posted a slight sales increase in a weaker market environment, particularly in Latin America. The subgroup achieved its highest sales growth in the Asia/Pacific region, at 7.2 percent. Business expanded by 4.3 percent in North America and 3.1 percent in Europe. By contrast, sales in the Latin America/Africa/Middle East region moved back 1.2 percent.
The Inevitable
Consolidation is inevitable with the cost of research and the need for return, says Bill Goodbar, president of the Goodbar Group.
“That’s going to be the driving force,” he says. “Monsanto proved you can make good money off of traits, but it’s getting harder and more competitive. The auto industry went through it and so did the pharmaceutical industry. It’s big money with big research and development budgets and expenses.”
Dean Cavey, managing partner at Verdant Partners LLC, attributes the current business environment to decreased commodity prices and the need to diversify product offerings.
“There are two things that have thrust this subject into the spotlight during the past few weeks,” Cavey says. “The first is that commodity prices have decreased to levels that make it difficult to justify a continued high level of research related to seeds and traits. The second is larger companies are looking to expand their footprint in the global agricultural markets. For example, Monsanto’s run at Syngenta’s chemistry platform — Monsanto is looking to reach more farmers with a more complete offering of products around the world, and do it more efficiently.
“This has then prompted other companies to evaluate how they will compete in this space,” he says.
All the major players are looking at new and better ways to compete. Both Cavey and Goodbar believe there will be an announcement in the coming months, but where it comes from and which companies are involved remains to be seen.
Cavey says there are lots of rumors regarding acquisitions in this space. “It can be hard to separate fact from fiction,” he says. “But in the coming months, there will be a realignment in the seeds and ag chemical sector.”
It’s so expensive to develop seed traits and chemistries; Goodbar says it “just makes more sense to have three or four companies doing this work versus six.”
“Monsanto proved you can make good money off of traits, but it’s getting harder and more competitive.”
— Bill Goodbar
When looking at the Top 6, Goodbar says there are some combinations that could work, while others simply won’t due to anti-trust issues. For example, a Monsanto and DuPont combination wouldn’t work, as it would put market share for seeds around 70 percent.
Bayer has traits, chemistries and some seed but not enough, says Goodbar, noting that the company could look to invest there.
He says Monsanto is going to look to buy chemistry, as evidenced by their bids for Syngenta.
“While a merger or acquisition is one option, another might be that two companies could spin off their agriculture or seeds businesses, and then they would join forces under a new name,” Goodbar says. “Syngenta is the precedent for that, stemming from Novartis and AstraZeneca merging their agribusinesses in 2000.”
Publicly traded companies must respond to shareholder needs. Cavey says there’s not an overwhelming sense of urgency but they are anxious to find a strategy that respects shareholders’ wishes.
“With six companies dominating this space, there’s certainly competition amongst them to find the best fit and strategic partnerships, as options are limited,” he says. “Once they determine a strategy, they will move forward promptly and swiftly.”
Overall, Cavey says the seed industry is a pretty healthy place today, even with lower commodity prices.
“There are a lot of mid- and small-size companies that provide excellent genetics and competitive services,” he says. “The big unknown is how the realignment at the top, if it happens, will affect independents.”
Cavey doesn’t expect any changes at the top to make an impact in the near term.
“If there are any changes, it will be in the long-term,” he says. “These mid- and smaller-size companies have been incredibly resilient, in spite of rapid consolidation, and I don’t expect that to change any time soon.”
