Agrochemicals provide counter-cyclical tailwind

Lag­ging prices in parts of the agro­chem­i­cals sec­tor could catch up with grow­ing vol­umes in 2019, helped by the recov­ery of Brazil’s agri­cul­tur­al sec­tor, destock­ing of crop-pro­tec­tion pro­duc­ers, and the launch of new prod­ucts, says Scope Ratings.
The mix should pro­vide a counter-cycli­cal tail­wind for inte­grat­ed chem­i­cals com­pa­nies which have led recent indus­try consolidation—BASF, DowDuPont, Chem­Chi­na (Syn­gen­ta) and Bay­er — and are look­ing to agro­chem­i­cals rev­enue growth and cost sav­ings to help pay down merg­er-relat­ed debt.
“Stronger cred­it met­rics could be the pos­i­tive out­come,” says Klaus Kobold, ana­lyst at Scope. Scope acknowl­edges that this out­look is vul­ner­a­ble to exter­nal fac­tors, such as esca­lat­ing trade ten­sions, a decline in com­mod­i­ty prices in gen­er­al and the deval­u­a­tion of the exchange rates of mid­dle-income coun­tries with large agri­cul­tur­al sec­tors such as Brazil, says Kobold.
The glob­al agro­chem­i­cal mar­ket is made up two sub sec­tors of rough­ly equal size: Crop-pro­tec­tion prod­ucts like pes­ti­cides and fer­tilis­ers. Scope treats pes­ti­cides, fungi­cides and her­bi­cides sim­i­lar­ly to spe­cial­ty mate­ri­als because the man­u­fac­tur­ing process requires sub­stan­tial­ly more prod­uct knowl­edge. Fer­tilis­ers are more like a com­mod­i­ty, as they are sold in larg­er quan­ti­ties and prod­uct prices are more transparent.
Demand for agro­chem­i­cals is dri­ven by a diver­si­ty of fac­tors: From prices for farm pro­duce to the avail­abil­i­ty and qual­i­ty of farm­land, envi­ron­men­tal reg­u­la­tion and short­er-term weath­er con­di­tions. One con­se­quence is that the glob­al agro­chem­i­cals sup­ply and demand fol­lows their own cycle, not nec­es­sar­i­ly in phase with the glob­al eco­nom­ic growth. Recent years are a good exam­ple, with a mar­ket con­trac­tion in 2015 fol­lowed by years of lit­tle or no recov­ery, despite stur­dy glob­al eco­nom­ic growth.
How­ev­er, the cycle seems to have turned. Amid the pow­er­ful under­ly­ing demand dri­ver of pop­u­la­tion growth and improv­ing com­mod­i­ty prices—the World Bank fore­casts most­ly high­er soft com­mod­i­ty prices for this year and next—the con­di­tions are right for farm­ers to invest and plant more and be able to afford more expen­sive plant-pro­tec­tion products.
The lat­est indi­ca­tions from the cor­po­rate sec­tor also sup­port the view of an improv­ing agro­chem­i­cals mar­ket, par­tic­u­lar­ly in the crop-pro­tec­tion seg­ment. Bay­er Crop Sci­ence, DowDuPont’s Corte­va Agri­science and ChemChina’s Syn­gen­ta have showed improved rev­enues this year and sig­nalled favourable future pricing.
“It’s also worth not­ing that the recent con­sol­i­da­tion in the agro­chem­i­cals sec­tor should give play­ers some extra pric­ing pow­er,” says Kobold.