Agchem R&D to increase with food and fuel demand

Seeds of change

12 June 2008 00:00  [Source: ICB]

With steady global growth projected, agricultural chemical producers are investing in R&D to further enhance yield for a hungry, changing world

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Ivan Lerner/New York

BUOYED BY rising living standards in developing nations and the demands of increased biofuels production, a strong global market for agricultural products is swelling demand for agricultural chemicals.

"The fundamental factors that are driving longer-term market developments are the world's growing population and changing consumer habits, which are manifesting as a preference for better-quality food and a shift in demand from vegetable protein to animal protein," says Friedrich Berschauer, chairman of the board of Germany's Bayer CropScience.

Grain inventories are at record lows, and prices at record highs.

"Per capita calorie consumption in developing countries and emerging economies continues to rise and is approaching the level in industrialized countries," says Berschauer.

Greater demand for animal protein - especially in China - is increasing the percentage of global grain harvests used to feed livestock. It takes 7kg of plant-based feed to produce 1kg of beef. "This differential is known as the processing loss, and increases the pressure on the demand side," says Berschauer.

In the past year, rice prices have increased by 45%, while soybean prices have increased by about 30%.

"Wheat and rice prices are at their highest level for many years," says Berschauer. Continued price increases are likely for major agricultural products in 2008-2009, according to Bayer CropScience. Corn is expected to reach $200 (€129)/ton in 2009, an increase of 89% over the first quarter of 2005. Rice and soybean prices are expected to exceed $350/ton, and wheat is projected to peak at around $230/ton, 41% above its 2005 level.

Growing biofuels demand is also being felt. "There is likely to be a considerable increase in the use of agricultural raw materials to produce biofuels," says Berschauer.

The global agchem market in 2007 was $36.2bn, an increase of 12.5% over 2006. Herbicide consumption is up, driven by greater volume and density of planting, notes Gautam Sirur, principal consultant of UK-based biotechnology research firm Cropnosis.

Cereals are driving greater demand for fungicides. Seed treatment chemicals and technology will continue to grow, he says, but insect and disease attacks are increasing, owing to no-till farming and conservation, which leave soil undisturbed, as well as a cool climate resulting from early La Nina weather-pattern build-up.

The high price of corn, soybean and wheat is allowing farmers in developing regions to consider options they might have dismissed in the past, says Travis Dickinson, head of marketing in the North American Free Trade Agreement region for Syngenta Crop Protection, a subsidiary of Swiss-based agribusiness Syngenta. He points to the use of fungicides to enhance yield and boost profitability.

GROWTH PREDICTIONS

Cropnosis predicts the global market will grow by 9.5% to $39.2bn in 2008, and by 4.9%/year until it reaches $45.8bn by 2012.

The North American market in 2007, excluding Mexico, was $8.9bn (a 4.9% growth over 2006), of which the US market was $7.5bn. The US and Canadian market is projected to grow by 2.1%/year until 2012, to $9.9bn. Latin America is expected to grow at 8.8%/year to just over $11bn. Eastern Europe is expected to grow at 16%/year to reach $3.4bn, and Western Europe's 2.8%/year growth will reach $9.1bn. Asia-Pacific is forecast to grow by 3.5%/year, to reach over $11.4bn.

The rate of new active ingredient introductions across the industry has declined steadily over the past two decades. Between 2001 and 2008, the number of active ingredients introduced averaged seven to eight a year, according to Cropnosis, whereas during the period 1991-2000, introductions averaged 12/year during 1981-1990 11/year and during 1970-1980, nine a year.

"There are fewer unmet customer needs, while costs for developing new products continue to increase," says Dickinson. "This may make investments difficult to justify, but also rewards the most innovative companies like Syngenta."

Syngenta says it invests heavily in research and development (R&D), setting aside about 10% of its sales to discover and market new herbicides, insecticides and fungicides. Sales were approximately $8.1bn in 2006.

The average industry R&D spend is 8.5% of sales, says Cropnosis. Japanese and European companies tend to spend over 10% of net sales on R&D, and US companies usually spend less, about 6.5-7.5% of sales.

"This is largely because they spend a disproportionately higher amount on seeds and biotechnology, which are currently growing faster than agchems," explains Sirur.

Bayer CropScience will be increasing its R&D spending from roughly €600m ($933m) in 2005 to about €750m by 2015. Despite the decline of active ingredient introductions, Syngenta has several product launches scheduled. Invinsa technology will be the first product to specifically protect crop yield during extended periods of high temperature, mild to moderate drought and other crop stresses. Durivo, Voliam Flexi, Voliam Targo and Voliam Xpress are new insecticides awaiting review by the US Environmental Protection Agency.

POSITIVE AND NEGATIVE IMPACTS

Regulatory activity has increased greatly over the past 10 years, resulting in increased costs for the development of products and registration approvals. The costs of developing new products from an active ingredient have tripled to around $150m from start to launch, says Sirur.

Nearly half of this sum is spent on generating data from field trials, assessing safety issues and submitting dossiers through various levels of the system.

"It basically delays the launch of new products and delays return on investment due to requirements in different countries," as well as reducing the period of patent protection available to the original holder, notes Sirur.

"On the other hand, these increased costs also act as a disincentive or barrier to entry of generics," he adds. "The cost of complying with such regulations is often prohibitive to smaller manufacturers, whose turnover may be of the same order as the cost of a me-too registration."

The green movement has had both positive and negative effects on agchems. Positive effects include making products less hazardous, owing to the rigorous testing that operators are required to carry out to meet safety standards, says Sirur. Agrochemicals also leave fewer residues in the environment, and they do not persist for as long.

Another positive outcome has been the drive to seek out active ingredients based on natural products.

But negative impacts have included increased costs to the industry, which often result in increased prices passed on to the farmers delays in replacing older, more hazardous products - which are being phased out to meet those green requirements - with newer products that do meet standards and "giving traditional, commercial farming a bad name," says Sirur.

Dickinson notes that the green movement has heightened the debate surrounding sustainable agricultural practices.

"Agricultural chemicals play a significant and beneficial role in improving crop productivity and helping farmers around the world deliver a safer, more abundant food supply," he says. Without timely pesticide applications, "farmers would have to plant more acres to overcome the portion of the crop impacted by insects, diseases and weeds."

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