Poor growth prospects spur consolidation fervor If you put $100 in a basket of stocks of agricultural chemical companies five years ago, today you'd have... $100. The same $100 invested in pharmaceutical company stocks would be worth $270 today.
That, says James Wilbur, managing director and securities analyst for Salomon Smith Barney, illustrates that the crop protection industry - herbicides, insecticides, fungicides, and fumigants - "is a relatively stagnant market."
The projected five-year growth rate for the sector, which has North American sales of about $8.7 billion annual and worldwide sales of $29.6 billion, he says, is "zero."
Speaking at the recent annual meeting of the Southern Crop Production Association at Amelia Island, Fla., Wilbur said while there have been a number of technological changes to help agriculture move forward through enhanced yields or reduced costs, there has been "a very low growth environment for crop chemicals as agriculture's transformation to biotechnology occurs."
The result: the poor economics of farming, changes in strategy, and weak markets are driving the industry consolidation that has been taking place.
Crop chemical sales, he said, "are in a maxed-out position." A couple of exceptions: Roundup, which went off patent in September and has a 17 percent year-to-date sales increase, despite a 12 percent drop in price, and non-selective herbicides because of the wide adaptation of genetically engineered seeds.
Although the industry still spends a lot of money on research and development - about 11 to 12 percent of sales for the eight leading agchem companies - Wilbur said at least 40 percent of that goes to support re-registration of products, thus limiting growth in R&D.
The high costs of re-registration are causing some companies to drop products and focus on higher-paying sectors. "Bayer has announced its intent not to re-register about two-thirds of its products under European Union regulations. This can be expected to have an impact on availability in the U.S.
"And products that don't make a contribution financially will continue to be closely examined by all companies as to market viability."
Many companies are investing in or linking up with smaller firms in order to get access to new developments in seed technology, Wilbur said. "Biotechnology is changing the industry."
But, he noted, "life sciences are now passe," and many companies have backed away from this area in whole or in part. Companies are recognizing that growth drives their stock price, so they're getting rid of non-growth divisions."
While there has been much publicity about the Internet as a primary marketplace for ag chemicals and other inputs, Wilbur says many companies are finding instead that its advantage lies "in improving ways of dealing with the customers they already have, not just for physical products, but for information as well. It offers a new, faster way to do business," but the cost of getting new customers is "very high."
Regulatory issues continue to be a major factor, he says, with the Environmental Protection Agency's priorities defining the industry's thrust and truncating the life of older products. "The Food Quality Protection Act has resulted in some arbitrary standards for the safety of crop chemicals."