From Rabobank News
Rabobank believes that US row crops are nearing the point of stabilisation, which, in turn, has broad implications for both buyers and suppliers of farm inputs. For manufacturers, we see the market evolving towards more value-based integrated solutions and away from individual product sales. This thesis appears to be validated by the pending merger of Dow AgroSciences with DuPont Pioneer.
A commodity price shift began in the mid-2000s as a result of increased demand from 2005 to 2015—featuring a 118% (3.5bn bushels) increase in corn used for ethanol production and a 184% (1.9bn bushels) surge in Chinese soybean buying, along with two years of weather-driven US production decline. This shift dramatically increased the market value of US field crops. In addition, the positive growth in the US agricultural economy attracted liquidity away from other parts of the economy. It was driven by reinvestment in farming businesses, such as land purchases and new equipment.
Recently,more regular yields and lower export demand—due in large to less favourable exchange rates, increasing competitiveness from South America and the Black Sea region, and a flattening-out of ethanol demand growth—are combining to drive US row crop commodity prices down to below break-even levels.
Now, as US row crop farmers brace for a third year of negative net income, Rabobank believes that—for at least the next five years—market forces will drive stabilisation in profit margins near the long-term average break-even levels. But there is a 'cost' to this stability, namely that individual input categories will need to readjust as a proportion of the new total crop value. The most likely scenario is that high-value-added inputs (specialty seed and ag chem) will represent a greater portion of farmer wallet share, compared to machinery and bulk fertilisers. As the crop cycle transitions to stability, we see participants across the value chain responding in different ways:
- Crop farmers will (still) need to conserve liquidity and maintain alternative sources of capital as the industry readjusts to a new-normal environment of lower profitability. This environment—along with the continued movement towards efficiency, conservation, and sustainability practices—will encourage the optimisation and/or reduction of certain crop inputs, with more consideration regarding planting decisions (acreage planted, crop mix, etc.).
- Farm inputs providers will need to deliver more value to cost efficiency-conscious growers, perhaps in the form of integrated and/or bundled solutions. In particular, we believe that seed and CPC companies will need to make strategic investments in R&D and rebalance product portfolios towards more specialty nutrient and advanced seed products, as the marketplace moves towards more integrated, value-based crop solutions. Fertiliser companies will need to make some difficult decisions in order to improve profitability and defend market shares. (Rabobank will provide more commentary on the fertiliser landscape in upcoming research.)
Source : Rabobank