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This is a transcript of episode 20 of the Down to Agribusiness podcast. Visit the show page here.


Crop Protection: Recent and future trends transforming the industry

Be sure to download the Agrow Annual Review report and other free resources on the episode 20 page.

Sanjiv Rana

Hello listeners. Welcome to the podcast by Agrow and Phillips McDougall - both part of Informa’s Agribusiness Intelligence division. I’m Sanjiv, the editor of Agrow, the global news service for the crop protection industry. With me is Jonathan Shoham, he is the consulting analyst for Phillips McDougall, the top consultancy and market research group for the crop production industry.

The focus of this podcast episode, as you might have guessed, is about the crop protection industry. We will analyse the market for 2017 and the factors contributing to market development. Jonathan will talk about Phillips McDougall’s latest figures for the 2017 market. He’ll talk about the short as well as the long-term market outlook. He’ll talk about various factors that impacted market developments in 2017. We’ll also touch upon certain hot topics and upcoming areas that are having an influence on the market and promise to transform the industry in the years to come. So, let’s begin.

Now, the crop protection market, since 2015, has been in a depressed mode and that brought disappointment because that happened after five or six years of consecutive growth. The market fell by around 10% in 2015, the decline was much muted in 2016. So, Jonathan, what are the state of affairs now? How has 2017 turned out to be?

Jonathan Shoham
Yes, well thank you for that introduction Sanjiv. 2017, we believe the market has been more or less flat in nominal dollar terms. It has probably gone down slightly in actual real terms, if you take account of inflation and exchange rate effects. The reason for this is generally, the global agricultural environment has been somewhat depressed with crop prices remaining low, as they have for the past couple of years. That affects farmer incomes and that obviously feeds though to their likelihood to invest in inputs, including crop protection products. So, crop prices have been a significant negative factor, influencing the market.

Against that, a slight positive is that prices of crop protection products, particularly those coming out of China, have gone up a bit. So, that’s slightly mitigated the negative effect of crop prices. Specifically, looking at the different regions, the biggest hit has been suffered by Latin America, especially Brazil, where there has been a surplus of stocks or inventory in the market. Also, some negative effects of low pest pressure and specifically the introduction of the trades intacter, which confers genetic resistance to insecticides and has therefore negatively affected the insecticide market. So, Brazil is the market which has declined the most. Elsewhere in Latin America, markets are generally up.

Likewise, in North America, the US markets have been up slightly due to a good market in cotton and also the Californian market has recovered from a previous downward trend. Canada has also been very positive in North America with crop areas increasing and favourable weather conditions.

Asia, as a region, has also generally been positive. All the big markets, China, India, have increased. In the case of China, there has been a slight increase in product prices. Again, the same factor that affected the overall market. That has partly been due to an increasing number of companies in the Chinese market listing on the stock exchange and therefore they have to be somewhat more transparent. Part of that is demonstrating and in order to do that they wanted to demonstrate better profitability and so some of these companies have been putting their prices up. Another impact in China is that there has been a general environmental crackdown on many companies and that has also forced companies to spend more on environmental measures and compensate, to some extent, by increasing their prices. In India it has been generally a good year with a good monsoon and a fairly buoyant market. The main negative country in Asia is Australia which is always subject of the vagaries of the weather and in 2017, the market was depressed by poor weather which disincentivised farmers to invest in their crops as much as they normally would have.

So, most regions have generally been up. Latin America, as I said, was negatively impacted by Brazil. As far as Europe goes however, it has been a story of two halves really. In Northern and Southern Europe, the markets have been depressed by weather and pest factors, but East Europe has grown quite strongly. Probably most strongly in Russia where the market has been buoyant, ironically, because of the imposition of sanctions by the EU which has stimulated the local famers in Russia to produce more domestically to compensate for the lack of imports. Other East European markets have also generally been strong.

So, as I said, the net impact of all those factors has been a flat market in nominal terms and slightly declining in real terms. I should say at this point that in 2017, Phillips McDougall took the opportunity to restate the size of the market. This was the result of a reassessment of the big markets in Asia, particularly, which are affected by generic manufacturers, or I should say manufacturers of off-pattern products. Phillips McDougall decided that they had probably underestimated the size of the generic sectors in these countries and, as a result, have increased the estimate of the overall market size for crop protection from around 50 billion previously to 53.6 or 53.7 billion for 2017. So, this is basically remedying a past trend of underestimating the market for a few years.

Sanjiv
Right and that was quite a thorough analysis of most of the regional parts of the market. I would like to touch a bit more upon Brazil. It has, for the last many years, been the growth engine of the global market. That is where most of the growth was coming from. Do you think the problems in the country, especially that glut in inventory levels in the distribution chain, have those been largely overcome? Are we going to see growth again in 2018 or is it too soon?

Jonathan
Do you know, that’s a very good question. Brazil has shown significant growth over the last few years and for the last couple of years at least, has been the largest single market in the world overtaking the US. Inventories have been a major problem and as a result, some of the leading companies, for example, Syngenta and Bayer have actually written off the excess stock. So, one would hope that that has readjusted the market and there has been a correction however, it is very hard to know what is actually in the pipeline. Certainly, what we would expect would be improvement in that situation and we would hope that the inventories have been unwound. At the same time, with all the merger and acquisition activity going on in the market, there is a lot of pressure on companies to show good sales. So, I think one cannot be absolutely definitive about what the inventory situation is. It is almost certainly improved from what it was though.

Sanjiv
Right and you mentioned about the mergers and acquisitions. My next question would be on that topic. So, these have been the biggest news for Agrow for almost the last couple of years. Two of the three major M&A’s have already been completed, DowDuPont last August and ChemChina and Syngenta and Bayer and Monsanto, from all indications will be done by the middle of the year at the maximum. That’s what the companies and most regulators seem to indicate. So, what do you think these consolidations will have, in terms of an impact on the industry? In the short term and maybe in the medium term.

Jonathan
Yes, you are absolutely right. There has been a major restructuring in the industry and this is continuing and is probably the biggest restructuring since the year 2000 when Syngenta was formed which was the last big merger before this. As you were saying, the DowDuPont mergers and the combination on Syngenta and ChemChina has already happened. This reduces what was the big six major companies to the big five. When the Bayer Monsanto acquisition is complete, the big six will become the big four.

Obviously, to state the obvious, this increases consolidation in the industry, however, the antitrust authorities have been very demanding in their requirements. In order to approve these mergers and acquisitions, they have demanded that the companies involved make certain significant investments. So, one big impact is a rebalancing of company portfolios, for example, DuPont has had to sell its R&D base and it sold that to FMC. It has also had to sell significant amounts of it’s insecticide and herbicide portfolio. FMC has also been the beneficiary of that. So, FMC has been a major winner in this. In the case of Syngenta and ChemChina, products have been divested particularly to NEWPHARM, so NEWPHARM has been a beneficiary. Bayer has announced that it will be selling some of it’s products, specifically the herbicide glufosinate and associated GM trades, LibertyLink and also some of it’s seed businesses to BASF.

So, there has been an adjustment in the relative portfolios certainly. So, that will be one lasting effect and there may well be more adjustments to come in the future, although we’ve probably seen most of it worked through by now.

Sanjiv
Right, one of the points I would like to talk about is the regulatory environments in various markets in the world. Things seem to have grown more challenging for the industry with regulatory decisions often perceived as being based less on science and more on politics and being influenced by public opinion. So, what is your take on it? How does the industry deal with it?

Jonathan
You are absolutely right. One sometimes questions the scientific basis of some of the pressure that is coming on products. I think a case in point is glyphosate, which was almost banned in Europe but if you look at the actual environmental and toxicological profile of the product, it is one of the safest products around. That exemplifies the disconnect between the science and the politics, to some degree. The regulatory environment is undoubtedly getting evermore demanding, Europe has been a very stringent environment for a long time and is becoming more demanding with increasing requirements. It has specific products it has identified as ones it wants to be substituted if, say, a product has come along, it is introducing criteria such as endocrine disruption, which is a factor which influences its decisions as to whether to accept products or not.

So, Europe always has been and is becoming an increasingly demanding environment. Brazil, which as we said earlier, is now the largest market in the world, is also increasing its regulatory requirements. It’s going from a risk-based system to a hazard-based system and also it will probably take a bit longer to register products there in the future. So generally, the regulatory hurdles are continuing to get higher and this probably, almost certainly represents one of the greatest challenges to companies involved. All companies, whether those who are involved in R&D or those who make off-patterned products. So, this is generally an important feature of the industry.

Sanjiv
Let’s talk about some of the trends that happened in the news and that are likely to make an impact on the industry. For the benefit of listeners who are not aware, Agrow runs the Agrow Awards every November with this year's Agrow Awards scheduled to run on 12th November in London. As part of that, they organise a conference which includes a presentation. In fact, Jonathan was part of it last year. It also includes a couple of panel discussions. So, one of the discussions in the past year was on digital farming. There were managers from some of the top companies in the world talking about the subject, trying to agree or disagree on the immediate impact of digital farming on crop protection and on agriculture in general. What is your take on it Jonathan?

Jonathan
Well, digital farming is certainly one of the hottest topics in the sector at the moment. There is an awful lot of activity in the area. I mean, all the major companies are developing digital agriculture platforms, many of them branded. In addition to that, there are literally hundreds of start-ups and it’s a very active venture capital scene. Obviously, there is a connection between the two because some of the major companies are buying some of these start-ups. Last year there were two major acquisitions, each were about $300,000,000 dollars, of the smaller companies, the start-up companies, by the larger ones. A lot of investment is continuing to go into this sector. In terms of the actual impact on the market, it’s very hard to say.

Digital agriculture is probably most advanced with technologies like GPS, global positioning systems and also in the area of plant nutrition. Crop protection is probably lagging somewhat behind, although there is also a lot of activity in this area. So far, the impact of digital agriculture on the market has been, I would say, minimal. The benefits of the technology are, sort of, incremental in terms of increasing yields by a few percent possibly and decreasing costs by a few percent. It’s early days, there is a lot of activity. Digital agriculture is a hugely complex ecosystem with many different technologies all interacting within it.

I mentioned, GPS, on the hardware side you have technologies like drones, auto-steer tractors and things like that. On the software side, you have farm management packages, you have systems for helping predict weather and predict the impact on crop yields. You have prescriptions which farmers can download in order to programme their tractors to optimise the rates of the products that they’re applying or optimise the rates of seeds that they’re planting for the different crops. So, there are many different interacting technologies and it’s still very much at a formative stage, the whole technology. So, this is going to continue for several years to come. Digital agriculture, I suppose you can actually say derived originally from precision agriculture which started at least 20 years ago, so it has been quite a long technology lifecycle but one that is far from being complete.

Sanjiv
Another area that generates a lot of interest amongst our readers every time we write any article on it is biopesticides or biologicals as a lot of people tend to define them. Agrow, in fact, comes out with a special supplement on biopesticides every April and we will just about begin work on that, talking to most of the companies. What is your take on the subject? Have biopesticides truly established themselves as an integral part of the crop protection toolkit or is it still slightly early times?

Jonathan
Well, biopesticides have been around for a long time and the BT based products have been around for twenty, thirty, probably more years. They are still a major product group within this sector. Overall, biopesticides probably account for around 5% of the crop protection market so it is still a fairly niche market although growing probably faster than the market overall. Having said that, recently there has definitely been an increase in interest in biopesticides, partly as a result of the increasingly demanding regulatory environment which we talked about earlier. Biopesticides can be registered much more quickly and much more cheaply than conventional crop protection products. So that provides a major impetus. Having said that, the vast majority of biopesticides remain niche products by their definition. They tend to be fairly specific and restricted in their spectrum which means that the market that they acquire will be limited. Interestingly, Phillips McDougall has just completed an analysis of patterned activity and the actual level of patterned activity for biopesticides globally is now almost approaching that for conventional crop protection products. So, there is a huge amount of interest still, but I should also say that most of that activity is actually happening in China. So, the Chinese are particularly interested in biopesticides. To what extent that results in new products and an increase in the market is hard to say at the moment but there is certainly a momentum for continued growth in the biopesticide sector.

Sanjiv
Very interesting. Coming back to the global crop protection market again, what does the future hold for us? What is your outlook for the market?

Jonathan

Well, a major factor will be-, well, let’s talk about it in the short term and the long term. In the short term and the long term, a major factor will continue to be crop prices. There are some indications that the harvest for the southern hemisphere this year has been a bit below expectations. Which might somewhat mitigate the situation we have of very high levels of crop stocks which is the main influence on crop prices. Having said that, most people forecast that crop prices will remain low, so that will obviously put a break on further growth in the short term. Having said that, a lot depends on what the industry does. To some extent, the industry has its fate in its own hands, specifically in the area of innovation and the industry has historically been very successful in introducing new products. Even today, there are at least 40 new active ingredients in the product pipeline and it’s possible that four, five, or more products will be introduced each year. That would obviously be a stimulus for further growth, innovation is a major driver of growth. There are also new technologies coming along which will further encourage innovation. Technologies like RNAI and CRISPR. Another big one that everyone is talking about is data analytics, which can help with the targeting and discovery of new products. There are certainly positive forces which in the longer term give cause for some optimism in terms of the future of the industry.

Just to mention one thing that recently happened, in the case of herbicides, there has been no new mode of action introduced for the last twenty years. A group, I think, in the UK and Australia has recently announced that they found a herbicide with a new mode of action, just one small example. There is still a lot happening in the area of product innovation and there are other changes in the environment, like particularly, resistance. So, there has been a big problem with herbicide resistance, particularly the glyphosate. That encourages the development and use of new products. In that respect, there are several new herbicide traits, some of which have been recently launched and some of which are still in the pipeline. For example, resistance to dicamba and 2, 4-D, the big herbicides. They will all stimulate growth and have been stimulating growth in recent years in the market. So, all those factors give us cause for some optimism in terms of future market growth. At the end of the day, of course, the fundamentals still apply. Population is increasing, people’s economic welfare is improving, that generates demand for more food. Crop areas continue to expand, going back to a very fundamental driver, particularly for crops like soya bean where the growth in demand is above the average because it’s driven by economic and population factors. So, it comes back to the old adage that people have to eat, and crop protection remains an absolutely essential input to that equation.

A few years ago, I did a Delphi study consulting experts and saying, ‘What percentage of the increasing yields do you think crop protection contributes to compared to other inputs? For example, seeds and fertilizers, which are the two main other inputs. The experts said, ‘At least 25%,’ so it has a very important role in the overall increase in productivity and production, of course.

Sanjiv
Well I’m very happy you ended your summation on a positive note. I was, in fact, looking to end the podcast on an optimistic kind of a note. Given the fact that the midterm and the long term definitely holds out a lot of scope, a lot of new AIs, a lot of new developments in the making, I think we have a lot to look forward to. Thank you, Jonathan, for the keen insights and thank you listeners for tuning in. This is Sanjiv signing off. Thank you.

Be sure to download the Agrow Annual Review report and other free resources on the episode 20 page.

If you’d like to subscribe to the Down to Agribusiness podcast, you can find us on iTunes or agribusinessintelligence.com where you’ll also find additional resources on the topics we cover. Thanks for listening.

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