Rabobank: As the crop cycle turns

Rabobank senior farm inputs analyst Kenneth Zuckerberg outlines key themes underpinning the ongoing transformation of the farm inputs sector.

With roots tracing as far back as 1896, Netherlands-headquartered Rabobank maintains a presence across various aspects of food and agricultural finance, research and advisory services. Here, Rabobank senior farm inputs analyst and Food and Agribusiness Advisory executive director Kenneth Zuckerberg outlines key themes underpinning the ongoing transformation of the farm inputs sector.

Growers and inputs providers in the US are currently finding it very difficult to operate profitably, due to low grain prices, potential changes to trade policies and changing consumer preferences favoring organic, non-GMO and locally-produced food.

The story is different for Canada, which has a different crop mix and benefits from higher export revenues associated with a strong US dollar. The US situation is further complicated by rising temperatures and pressure on freshwater supplies and availability.

Zuckerberg
Zuckerberg

In our balanced view, the inputs sector is in the process of restructuring itself in order to drive value creation. Here are some key local themes we are monitoring:

Farm consolidation

Row crop farmers and inputs companies have entered a fourth year of revenue and income pressure. These circumstances have been a key driver behind the four mega-mergers since 2015 (ChemChina/Syngenta, Dow/DuPont, Bayer/Monsanto and Agrium/PotashCorp) as corporates “buy” growth and attempt to extract expense savings by merging their operational footprint.

The next chapter in this story however is consolidation among farms, amid continuing pressure on cash flows and the tightening of credit standards, which negatively impacts a farm’s life blood: operating or working capital lines.

Incremental stabilization in equipment

Farm machinery and equipment is showing incremental signs of stabilization as evidenced by recent earnings reports by AGCO and CNH Industrial. AGCO in particular reported consolidated revenue growth of 8.7 percent in the December quarter, with North America growing 4.4 percent and South America growing 53.9 percent (all figures are on a currency neutral basis).

Fertilizer prices appear to be reaching a short-term peak

The Green Markets Weekly US Fertilizer Price Index has gained more than 15 percent since October and is up 25 percent since last summer’s trough. Looking forward to the next three months, Rabobank expects the seasonal upward lift in nutrient prices to dissipate, with the next major move likely to be downwards. These are the key variables across the NPK complex underpinning our expectation:

  • Nitrogen (N)—This oversupplied global market is poised to see new capacity come on-line in the US in 2017 due to, among other projects, planned expansions by CF Industries, OCI and Yara.
  • Phosphate (P)—Recent comments by PotashCorp point to a challenging environment for manufacturers. Record Chinese exports and phosphate plant capacity additions in excess of demand are both likely to pressure prices during 2017.
  • Potash (K)—Although the world’s major suppliers are “talking up” price against a backdrop of stable demand, the important price negotiations for the Chinese and Indian markets will likely place a ceiling on current price levels.

Changing dynamics in digital farming

Ag tech funding has been slowing since the second half of 2016, as farmer adoption of emerging data-intensive products and services has remained low. While the idea of consolidation among software and service providers makes intuitive sense, the lack of visible, recurring revenues makes the business case for M&A very difficult.