INSIGHT: Agchem giants can capture growth

05 September 2008 17:21  [Source: ICIS news]

By Nigel Davis

Looking to continued growthLONDON (ICIS news)--The world’s major agrochemicals companies had a banner year in 2007, and 2008 thus far has produced even stronger growth.

Indeed, the business could expand more strongly in 2008 than at any time over the past 30 years.

The sector is populated by a generally cautious bunch - ever mindful of what the world’s weather might throw at them.

But as this year has progressed, the agrochemicals outlook has improved. Sales and profits for the sector’s leading players were up sharply in the first half. It looks as though there is more growth to come.

Agricultural commodity prices have come off their peak but demand remains strong and planted areas have increased. The agricultural economy has continued to flourish.

Bayer CropScience management board chairman Friedrich Berschauer this week talked of a record year.

The company has hit some of its growth targets a year early and is pushing profits hard. It is not surprisingly ploughing money back into research and development and seeking to maintain above-market growth into the future.

It takes a long time to bring a new agrochemical to market or introduce farmers to new seed varieties.

Berschauer talks about the need for a new “green revolution” that will challenge agricultural systems to produce much more.

Classic crop protection products alone can help to increase yields of major crops by up to 70% if deployed optimally, he says. New hybrid seeds and the more widespread use of plant biotechnology offer other further yield potential.

Agrochemical and seeds companies will be challenged to be more innovative but the big sector players should be well placed.

Publicly funded agricultural research has slowed so they need to take up more of the slack. They may need to spend more to grow but grow they will against a backdrop of stronger demand.

Bayer CropScience is boosting its R&D spend to a significant €3.4bn expecting to introduce 10 new active ingredients to market between 2008 and 2012, Berschauer said. These have a targeted sales potential of €1bn.

An earlier target to achieve sales of €2bn from active ingredients launched since 2000 is likely to be achieved in 2009, two years earlier than expected.

The agrochemicals market globally has been driven by higher agricultural commodity and agrochemical prices, certainly, but other factors have come into play to boost sales and the prospects for stronger earnings.

It may not be immediately obvious in some parts of the world, but the weather has been favourable. Planted areas have increased and the agricultural economy has improved. Biofuels have played a part but so has steadily increasing demand for food

Agribusiness consultants Phillips McDougal says that, overall, agrochemical sales were up 29% in the first half which is a significant increase by any standard.

The Latin American, European and Asian markets have improved while the North America has remained competitive.

The consultant’s outlook for the full year is for sales growth - excluding seeds, biotechnology, intermediates and animal health products - of 20-30% in nominal dollar terms.

The global market is likely to grow more strongly that at any time since the mid-1970s, they add.

The biggest firms in the business should capture this growth, “make hay while the sun shines”, as the saying goes, and boost investment for the future. They will need to capture stronger, or above market, relative growth.

Commodity prices may have declined over the past three months but are still high in historical terms.

If sustained they will help buoy the market in 2009 although much will depend on the current harvest and the impact it has on global prices, Phillips McDougal says.

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By: Nigel Davis
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