Outlook 2020: Brighter skies ahead in ag?

14:26 PM | January 6, 2020 | Rebecca Coons

Stronger fundamentals support return to growth in 2020

Agriculture (ag) markets are eager to turn the page on a disappointing 2019 beset by weather and geopolitical disruptions. Suppliers are forecasting modest growth for 2020 and beyond—driven in the next few years by new products and savings from consolidation and longer-term by population growth, and the need to sustainably increase food production.

BASF expects the market for crop protection and seeds to grow 3% annually through 2030, to €130 billion ($145 billion)—lower than the 5% per year growth seen from 2010 to 2018. Saori Dubourg, member of the board of executive directors at BASF, attributes this slower growth to higher regulatory pressure on crop protection products but also the increased use of precision farming.

Corteva AgriScience, formerly the dedicated ag units of legacy Dow Chemical and DuPont, expects growth of 4–6% in 2020–22. Seed sales are forecasted to increase 3–5% Year over year (YOY) in 2020, with crop protection rebounding 5–7%. “[W]e expect more normal market conditions in North America next year,” says Greg Friedman, executive vice president and CFO of Corteva.

Suppliers had hoped for ag markets to return to growth in 2019 as the dust settled on three years of consolidation—aimed at addressing weak crop prices and margins—whittled the agchem leaderboard from six to four. Suppliers left standing expected synergies from the shakeout to lift margins and that farm profits would begin to rebound from a cyclical downturn. However, 2019 did not provide much of a turnaround. The lack of a rebound was largely due to historic flooding in the US and, to a lesser extent, the US-China trade war.

Ag markets have been stalled since 2017, when Brazil—a key driver of global growth—experienced high inventories, currency fluctuations, and political turmoil. “However, Brazil returned to growth in 2019, and will end the year 10% higher than 2018 and continue to grow in 2020,” Sanjiv Rana, Editor-in-chief, Agrow, Agribusiness Intelligence, tells CW. This is significant, considering in North America the average annual growth is 1.5% and a “really good year” would be 2­­–3%. “Unfortunately, other factors ended up dampening the market in 2019,” Rana says. “Weather was really bad in the Midwest United States, with lots of snow early in the year and historic flooding in the spring.” Australian demand for agchems also continued to be depressed in 2019, as farmers grappled with a third drought year. Globally, agchems managed to eke out a very modest gain in 2019—Phillips McDougall expects sales 1.04% higher YOY, to $58.0 billion.

Meanwhile, glyphosate, one of the cornerstone herbicides since its introduction in 1974, continues to face legal pressure. Thousands of lawsuits in the US have been filed against Bayer, claiming exposure to glyphosate causes diseases, including cancer. The company maintains that glyphosate is safe, noting that it is one of the most-studied products of its kind. Market watchers don’t expect there to be any impact on glyphosate volumes in the near term. “Though there have been a lot of headlines in the US and Europe over glyphosate, the reality is it is not as much of a doomsday situation for Bayer as people expect,” Rana says. “Farmers are still using glyphosate because it works well and they don’t have a substitute.” On its own, glyphosate sales account for 8% of the global agchems market. Even in the EU, where regulatory pressure has been the strongest, glyphosate is registered for use until 2022. “At least until then, there will not be any major reduction in glyphosate demand,” Rana adds.

The US-China trade war disrupted US ag markets in 2019, and there isn’t much clarity for 2020. In 2019, farmers planted fewer soybeans in anticipation of lower export volumes to China. Farmers were also hit with a 10% tariff for imports of major finished agchems from China, Rana says.

Yuanjie Su, senior analyst, Phillips McDougall, Agribusiness Intelligence, Energy & Natural Resources, says that even though there is optimism the Phase 1 deal will reduce tension, the potential risk will drive reconstruction of global grain supply chain.

Longer term, crop inputs will benefit from the fact that the planet is set to add 2 billion people by 2050, all of which need to be fed in a sustainable way. This will be exacerbated by a growing middle class creating demand for a protein-rich diet, arable land under pressure with limited expansion opportunities, and high volatility in crop production and farmer income due to climate change. “Farmers will look to a combination of seeds, crop protection, digital technologies, and application technologies to fully meet societal demands,” Dubourg says.

Su expects continued adoption of genetically modified organisms and digitization of farming operations. “Here I would emphasize the potential progress in China, which just announced its plan to grant biosafety certificate to GM corn and soybean,” he tells CW. “The last time these certificate were granted to rice and corn 10 years ago.” Improved rural area e-connectivity, optimization of digital agriculture technologies, and digitization of operations closely related to farming such as record keeping, accounting, e-commerce, etc. will incentivize the adoption of digital farming operations.” Plant-based protein and food grade grain may also increase demand for plant breeding, he adds.