Q4 2020: digging into agriculture trends

We were told in Q4 that the picture is brighter than it was six months prior, when global supply chains were in disarray and fear of the unknown triggered a frenzied bout of stockpiling. “I think the supply chains and, basically, the food value chain has largely figured out how to operate in COVID-19,” a former VP at Corteva Inc said. Macro trends such as continued population increases and shifts in buying patterns and behaviours, particularly in developing markets, are also expected to boost the agriculture industry’s recovery. 

In terms of the competitive landscape, consolidation started five or so years ago and was “extraordinarily transformative”, but the dust has yet to settle. Key moves were ChemChina’s acquisition of Syngenta; the Dow-DuPont dissolution and the formation of Corteva; Bayer’s acquisition of Monsanto; BASF acquiring assets from Bayer; and FMC acquiring assets from DuPont. Although further consolidation at the top is unlikely, elsewhere the agriculture industry remains highly fragmented, with this process yet to fully begin. “I think you’ve got, at a high level, what the big five are going to look like,” the former Corteva VP said.

There are also some interesting dynamics among these players when it comes to the global agriculture industry’s main value drivers. Regarding germplasm — the hereditary part of a germ cell important in breeding — Corteva and Bayer are “largely a parity”. But on traits, Corteva is “nowhere near a formidable competitor” to Monsanto and is also overshadowed by Syngenta. For Corteva to “create some balance in the force”, it will need to discover next-generation traits, according to the Interview. “I think that’s paramount to their long-term success if they want to get to some type of… parity with Bayer in terms of financial performance.”

We’re also told there’s still “significant value” to be harvested in crop protection, particularly high-value speciality crops, and with “softer” approaches relatively unexploited too. With growing concerns about the harmful effects of chemicals on people and the environment, interest in greener solutions is gaining momentum. “This could be through biologicals, it could be through small molecules, natural products, a number of alternative technologies that allow for a softer approach than synthetic chemicals,” the specialist noted. Syngenta’s recent acquisition of Valagro is one example of this trend. Syngenta said the investment enables it to deepen its footprint in the rapidly growing biologicals market, which is “set to nearly double in size over the next five years”.¹https://www.syngenta.co.uk/news/syngenta/syngenta-group-acquires-leading-biologicals-company-valagro#:~:text=Syngenta%20Group%20announces%20the%20acquisition,business%20unit%20Syngenta%20Crop%20Protection.&text=Valagro%20will%20continue%20to%20operate,the%20Syngenta%20Crop%20Protection%20business.   

Other Interview discussion points focused on how the supply-demand dynamics of commodities profoundly influence the pricing of agricultural inputs, such as seeds and fertilisers. The former Corteva VP anticipates that seed and crop protection companies will enjoy a “slightly improved environment in 2021 than 2020”, with heightened demand for corn and soybeans cited as factors behind this. 

Canada-based fertiliser company Nutrien Ltd has had “huge commitments in the US corn and soybean market”, highlighting this as a continuing trend. “China is building up their stockpiling… and this is going to be ongoing, supporting the pricing of corn and soybeans, and so that’s very helpful for all the markets within North America,” a former senior director at Nutrien said. This translates into more acres devoted to these crops and ultimately greater fertiliser sales. With demand continuing to ramp up, the US Department of Agriculture expects exports in FY 2021 to total USD 152bn, up by USD 11.5bn from August’s forecast, driven by higher soybean and corn values. These are expected to be up by USD 5.9bn to a record USD 26.3bn, and up by USD 4.2bn to USD 13.2bn, respectively.²https://www.ers.usda.gov/topics/international-markets-us-trade/us-agricultural-trade/outlook-for-us-agricultural-trade/

The state of play for potash, a potassium-rich salt primarily used in fertilisers, was also discussed in Q4. An oversupply has emerged as more companies, such as BHP, have entered the fray, coupled with reduced demand because of COVID-19 disruptions, causing a lingering drag on prices. “I think there are some potential short-term price blips… [but] that overhanging oversupply context is always going to be bothersome to the Nutriens of the world.” With oversupply primarily stemming from Morocco and Russia, in November the US Department of Commerce imposed tariffs on potash coming from these countries, which could level the playing field for US growers.

In an October Forum Interview, it was highlighted that demand for potash is expected to bounce back through 2025, with the specialist pointing to analyst forecasts of 66.4 million tonnes in 2020; 69 million tonnes in 2021; and approximately 75 million tonnes by 2025. As well as COVID-19, uncertainty surrounding US-China trade disputes, the US election, Brexit and Europe’s Green Deal have all dented consumption. “Current problems with the trade war between the US and China are affecting the potash world to a much higher degree, because the flow of different agricultural products to China has changed somehow. It’s giving maybe more incentive in some countries to produce either more soya or other commodities that might be needed,” the former director at K+S AG said.

Agriculture’s continued recovery hinges on a range of factors, such as the weather, global economic health and consumer demand. Political factors are also at play. For example, the US-China trade war on US soybean exports in recent years has brought disruption and uncertainty to US growers, but tensions could ease if new negotiations take place under the Biden administration. 

There will continue to be tailwinds as well as headwinds, but the overall sentiment is one of optimism, fuelled largely by higher commodity prices. The global agriculture industry has another unique trait which positions it well for growth, the former Nutrien senior director noted: “The growers, there are a lot of micro businesses out there that are family owned, and then some are consolidating and working together.” It’s the agriculture industry’s relationship-driven nature that makes it tick, they said.