Industry executive looks ahead...

Chemical industry changing rapidly The caption under a new Dilbert cartoon reads, "Change is good. You go first." Helena Chemical's Mike McCarty says that caption is a good indicator of how many in agriculture business are feeling.

"The rapid change of pace in the industry is easily seen and a common sentiment is to let everyone else sort the changes out while we sit on the sidelines. `We'll hurry and catch up later,' is what many are saying. Unfortunately, it isn't something we can do," says McCarty, who spoke to a large audience Jan. 29 at the Arkansas Crop Management Conference in Little Rock.

"I'd like to give you Helena's perspective on the changing ag industry and how we're addressing the future."

Helena Chemical was founded in 1957. Forty-plus years ago, tractors were beginning to outnumber horses and mules on American farms. Commercial pesticides and fertilizers were just becoming standard parts of operations.

In the mid-1950s, commodity surpluses were beginning to put pressure on farm prices. This lead to a debate among policymakers about what to do. They discussed price supports, set-aside programs and other efforts to enhance farm income. "Regardless, the number of farms has declined steadily since the 1950s. But the outputs of farms have skyrocketed," says McCarty.

The increase in productivity can be attributed in large part to new technology. The discovery and manufacturing of new products have pushed farmers to record yields.

"Things have indeed changed a lot in the last 40 years. But that will pale in comparison to what changes will be seen in the next 40 years.

"There are many issues and trends impacting the ag business currently. I'd like to talk about four of them: consolidation, integration, generic products and new technology," says McCarty.

Consolidation Consolidation is happening so quickly and at so many different industry levels that McCarty has heard people joke that eventually there will be one farmer, one manufacturer and one retailer.

"Consolidation is a major issue and I'd like to use the ag chemical industry as an example of this. Aventis and BASF have been the most recent of the mergers or acquisitions.

"Why is this happening and is it important? Certainly, longer-term, the larger size of these chemical companies allow advantages when competing on a global scale. What it does is provide greater funding for research and development which is the life-blood of the industry."

Shorter-term, cost reduction and increased efficiency are a way of life.

"I think that's easily seen by recent layoffs these companies have dealt with."

Consolidation also allows the ability to combine and streamline operations to reduce cost. Eventually, McCarty thinks, we'll see four or five global agriculture chemical companies.

"For example, at Helena we realize that our relationship as a distributor or retailer is going to be vastly different with these coming large companies. The services we provide for our farming customers may also have to change."

Perhaps the only agriculture industry consolidating more quickly than the manufacturing side of business is that of distribution channels. Agriculture businesses are faced with tighter profit margins, increased environmental and regulatory issues and the challenges that all the new technologies bring to the market. Many retailers are either teaming up or simply going out of business, says McCarty.

Consolidation continues in the farming ranks as well. The number of farms in the country has declined by nearly 10 percent in the last 10 years and continues to drop as farmers retire or go out of business.

Tillable farmland is also decreasing. However, with the exception of a few states - like California and Florida - farmland acreage is declining at a far slower pace than farmer numbers.

"Simple math tells us there will be fewer farmers in the future. But these fewer farmers are going to control more acreage.

"This could have an impact on our business relationship. Experience tells us all that larger, more business-oriented farms require different services than do smaller farms.

Integration McCarty thinks another trend is that of integration.

"In this context, we need to understand the difference between consolidation and integration. Integration is when companies in different aspects of an industry combine to control more of a channel."

Consolidation often leads to integration because there are fewer players in the market and that makes it easier for them to get together. With fewer and stronger players, it becomes more difficult to compete. Integration is a way to broaden a company's base and better control its destiny, says McCarty.

"I think the single largest factor in ag integration is the onset of biotechnology. The large ag chemical companies have invested hundreds of millions of dollars in research to develop genetic traits that they can sell to farmers, pharmaceutical companies and others. To control market access, they've spent billions of dollars buying seed companies.

"When you think about it, today virtually all major seed companies are owned by ag chemical companies. This is a significant change from only a few years ago."

Generic Products Around the world, approximately three-fourths of agriculture chemical products sold are generics. That number is probably approaching 50 to 60 percent in the United States, says McCarty. There is a rapidly growing segment of both large and small companies moving to take advantage of this.

"We're seeing large ag chemical companies strategically involved with generics. I don't think any of us could have predicted 10 years ago that generics would become a strategic part of their portfolios.

"I think we have to ask ourselves what this will do to branded products. Margins may be lower on generics than what we've experienced in the past. I think the days when retailers gave away services to add value to their ag chemical sales may be numbered. Margins for add-on services won't allow it."

New technologies Technology is having an impact on our lives both personally and professionally. There are several worth mentioning, says McCarty.

"The first, obviously, is biotechnology. This could be the biggest driver of change ever in this industry. Transgenic crops have exploded in popularity and have had a direct impact on the ag chemical industry."

The current public opinion in Europe has challenged this development. In fact, farmers may again back off from transgenics until the issues brought up by European GMO critics are settled. But McCarty believes biotech will prevail.

"One of the best examples would be in going back to 1997 and glyphosate-tolerant soybeans. When I look back and see that 7 million acres were planted in those beans and a year later they were on 25 million acres, I'm amazed. Now, perhaps two-thirds of soybeans planted in the country are Roundup Readys."

With the popularity of Roundup being sprayed from fence-row to fence-row, the farmers' reliance on the retailer for spraying advice has been drastically curtailed. Retailers must consider the impact of this, says McCarty.

"Precision farming and electronic commerce are also important. At Helena, we've invested in technology and expertise to try and differentiate our soil-mapping, variable rate techniques and other things. But I believe it's up to all of us to provide services that will break this new technology down into tangible benefits for farmers."

Retailers must remember that simply providing farmers with more information doesn't necessarily provide them with a benefit, says McCarty.

"We must show the farmers how that information translates into valuable knowledge that will make them more money."

The Internet and electronic commerce have also had an impact. Some farmers are buying products over the Internet and bypassing retailers. As a result, many companies have become immersed in electronic commerce.

"I don't believe that Internet sales will likely become the standard. But I do think a segment of the market will go to the Internet. The Internet is an amazing resource. Farmers are no longer tied to traditional close-to-home sources. We must be mindful of this and make sure the information we do provide is easily understood and used.

"The changes coming that I've outlined could be bad for some - or they could be huge opportunities. The difference, to a large degree, is how aggressively we act to control our own future," says McCarty.

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