A review of the global landscape of the agribusiness industry indicates that 2019 proved to be another challenging year for the entire industry.
Climate can have an immediate impact on the agribusiness industry, which relies on good weather conditions to ensure yields. The extreme weather events seen in 2019, including major floods in the midwest of the United States, India, northern Argentina, southern Brazil and Uruguay, as well as severe droughts affecting Australia and Central America, had negative effects on local agricultural production and the agri-input industry.
The second challenge was the constantly falling commodity prices, which registered 10% to 40% global decline over the last five years. Recent global trade disruptions further brought down commodity prices, lowering the motivation of farmers to grow crops and reducing their demand for agri-inputs.
With regards to Europe, a growing number of pesticide products have been phased out over food safety or environmental health concerns. However, regardless of the simmering debate over whether the EU's increasingly tough regulations are scientifically or politically grounded, there are fewer and fewer products available in the market. With farmers desiring access to more available products and with enterprises pursuing higher profits, the market is eagerly anticipating new products.
Agribusiness companies have invested heavily in Latin America to optimize capital reallocation
In terms of capital, the plight faced by the agribusiness industry can be seen in the statistics in ‘The 2019 Agribusiness Value Creators Report’ published by the Boston Consulting Group (BCG), a renowned consultancy company specializing in business strategic management. The report, which analyzes data from 50 major international agribusiness companies, found that in 2018, the industry's average annual total shareholder return (TSR) stood at only 2%, well below the S&P 500 average of 7%. By market segments, the annual TSR was recorded as 2% in the agrochemical and seed industries, 0% in the agricultural equipment production industry, and -3% in the fertilizer industry.
So far, no data is available to highlight a final overall picture of the industry in 2019. But we can firstly attempt to sense this year’s market based on the performance of leading agrochemical companies during the first three quarters of 2019.
The Q3 2019 financial reports of agrochemical giants highlighted their overall steady performance, but these reports cited the already-mentioned extreme weather conditions, fluctuations in exchange rates and trade disruptions as the top three factors affecting sales.
The performance of these companies in Latin America was compelling. According to the financial statements of the top six global agrochemical companies, during the first three quarters of 2019, five of these six companies that exclude Corteva, which are Syngenta, Bayer, BASF, FMC, and ADAMA, saw strong double-digit growth in Latin America.
Data from the last two years of Brazil, the largest agrochemical market in Latin America, echoed the performance of these multinationals. In 2018, the Brazilian market registered total sales of US$10.793 billion based on the sales performance of market players, rising by 21.3% year-on-year, according to data from the Brazil’s National Association of Agricultural Defensive Agencies (AENDA). This was the first positive growth seen in Brazil following negative growth for four consecutive years. Total sales of Brazilian agrochemical market in 2019 are expected to grow to a further $11.5 billion, according to predictions by Rabobank.
In its report, BCG recommended that companies wishing to increase their TSR should pay close attention to prospects in other regions and goods, while evaluating capital allocation on a global basis. Those companies competing in attractive regions have seen improvements to their TSR over the past five years.
For the agribusiness industry, Latin America is an attractive region. In the past two years, major players are actively developing this market and transferring more capital. For example, ADAMA acquired part of the assets of Brazilian dealer Foco Agronegócios and AgroKlinge, a Peruvian crop protection firm, and in 2019, it launched two fungicide plants in Brazil with an investment of pver R$20 million. ADAMA aims to improve its capacity, expand markets, and increase its channels in Latin America, with the aim of further understanding the demands of the market and farmers, dealing challenges faced by local agriculture, and matching corresponding products and solutions.
Another player focusing on the Latin American market is Albaugh, a US generic pesticide supplier, which currently is focusing on the Brazilian market. Albaugh entered the Brazilian market in 2016, and in the same year saw its market share jump from 0.7% to 1.5%, soaring by 56%. Albaugh planned to raise its sales revenue in the Brazilian market to $500 million within five years and become one of the top 10 global agrochemical companies. By then, the Brazilian market alone will make up a quarter of Albaugh’s total sales. To achieve this target, Albaugh invested accordingly. In 2016, it acquired Consagro, a subsidiary of FMC in Brazil, and announced an investment of $300 million to enhance its brand and expand its share in the Brazilian market. In December 2019, Albaugh opened a new herbicide formulation plant and an R&D lab in Brazil.in terms of product sales, Albaugh focuses on forming strategic partnerships with its distributors to succeed in the market with more cost-effective products and higher efficiency.
Other companies are also expanding their presence in Latin America. UPL completed the takeover of IBC, a Costa Rican agrochemical firm, as its starting point in entering Central America. Japanese firms Mitsui Chemicals Agro (MCAG) and Ishihara Sangyo Kaisha jointly purchased a 25% stake in Ourofino, a leading agrochemical company in Brazil. Sumitomo Chemical launched its own subsidiary in Chile to expand its business in Latin America. US-based Gowan Company completed its takeover of Cross Link, a Brazilian dealer. American Vanguard Corporation (AMVAC) acquired two affiliated Brazilian limited liability companies, Agrovant and Defensive. Koppert bought Argentinian firm Nitrasoil to branch out into the inoculant market. Andermatt Biocontrol purchased a 22% stake in Agricheck SRL in Argentina. Tradecorp acquired Brazil's Microquimica to solidify its position in Latin America and expand into the microbial sector. Bayer also built the largest seed plant in Latin America, while Corteva established the first seed treatment technology center in the region.
Based on the “Big Events of the Agribusiness Industry in 2019” (see Appendix) curated by AgroPages, when it comes to merges and acquisitions (M&As) and restructuring, large companies undergoing internal consolidation and adjustment in the wake of their previous M&A spree were relatively calm in 2019. However, other companies went on expansion drives, mostly through M&As, to achieve market expansion, widen their business scope, and penetrate downstream industry chains.
There is room for more attractive deals in the future, even after this wave of major consolidations has settled down. The fertilizer industry, for instance, still has a low concentration ratio despite its recent significant consolidation, with major global players only capturing a market share of 10% to 20%, therefore, opening the door to international acquisitions by industry leaders. By contrast, up to 60% to 70% of the pesticide and seed markets are already in the hands of companies involved in recent major deals. Nonetheless, leading players in most sub-sectors still have potential for expansion, and companies with large market shares in certain markets are also advised to consider allocating capital in other economies.
Digital agriculture grows in strategic importance and embarks on practical applications
In 2019, the investments of companies and their cooperation projects with other companies took on more outstanding features. Specifically, the new agricultural technology and digital agriculture sectors saw more frequent investments and more in-depth cooperation and investments made by large companies in digital agriculture began to pay off, with a few projects being launched and progressing at a rapid pace. Bayer and BASF are leading examples of this.
Since taking over Monsanto, Bayer has been supporting Climate FieldView, a digital agriculture platform of the Climate Corporation, which acquired by Monsanto in 2013, under its umbrella. Climate FieldView gives farmers a deeper understanding of their fields, so they can make more informed operating decisions to optimize yields, maximize efficiency and reduce risks. Launched in the US in 2015, Climate FieldView now is use in the US, Canada, Brazil and Argentina, as well as in 15 European countries, including the major markets of Germany, France, Spain, Italy, and Ukraine. FieldView currently covers on more than 60 million paid acres across North America, South America and Europe and is on track to achieve over 90 million paid acres globally in 2019. With rapid advances in digital agriculture across the globe, Climate continues to explore cooperation opportunities, to provide farmers with data to improve productivity. Climate has announced partnerships with 60-plus platform partners from around the world.
The year 2019 saw a series of international cooperation projects implemented by Climate, most notably its FieldView platform, which creates a two-way data connection between its users, Climate and many companies, helping Climate quickly expand its user base.
In April 2019, Climate signed an agreement with Lindsay, a leading global irrigation technology service provider. Under the agreement, both sides will set up a two-way data connection between Climate's FieldView and Lindsay's FieldNET, to help farmers connect data seamlessly between the two systems so that they can access more accurate information on irrigation and water use.
In July 2019, Climate reached an agreement with Canadian firms Effigis Geo-Solutions and Croptimistic Technology. According to the agreement, their shared customers can gain new insights from the data on FieldView, by technically integrating it with Effigis' FieldApex fertilizer management platform and Croptimistic's SWAT MAPS that gathers data on soil, water and landform. Also, in July 2019, Climate and Taranis announced a partnership to create a two-way data connection available to the shared users of Taranis and FieldView.
"As the use of digital tools continues to accelerate and data collection capabilities continue to increase, the ability to seamlessly manage multiple data sources within a single platform is essential for well-run operations. FieldView enables farmers to easily access a diverse and interconnected set of services and data sources, to make farm management decisions with increased confidence," said Denise Hockaday, Canada Business Lead for The Climate Corporation.
Like Bayer, BASF is also accelerating its involvement into digital agriculture. In 2018, it acquired xarvio™, the digital agriculture solution business of Bayer. xarvio offers cutting-edge digital conversion technology for optimizing crop production, as well as digital products based on the leading global crop model platform, which provides independent agriculture recommendations on specific parcels of farmland, enabling farmers to sustainably produce crops in the most efficient manner. SCOUTING and FIELD MANAGER, two of xarvio’s products, has users from over 100 countries.
In 2019, BASF conducted a range of global cooperation projects surrounding xarvio. In February 2019, Wirecard, the global innovation leader in digital financial technology, forged a partnership with BASF, providing xarvio with digital payment service.
In June, a partnership between BASF and Nutrien Ag Solutions made the xarvio SCOUTCHING app available on the customer portal of Nutrien Ag Solutions. The app can help planters and agronomists identify field weeds and diseases in a real-time, precise manner.
In November, BASF created new partnerships with the plant protection input and service arms of WinField and Land O’Lakes. Under these partnerships, starting from xarvio SCOUTING, all sides will jointly set up single sign on (SSO) connection from the WinField ATLAS® platform to BASF's xarvio™ digital platform.
In December, Arable Labs and BASF's xarvio™ digital agriculture solution arm reached an agreement, under which all of Arable’s field measurement data will be fully integrated into xarvio’s crop models and recommendations. BASF's digital platform, based on decades of experience in crop production and protection, in conjunction with Arable's local crop and weather data, enables more accurate field decision-making.
"At present, xarvio is taking a leading position in advanced analytics and agronomic artificial intelligence, helping growers optimize crop production efficiency and increase profits while offering them field-level and zone-based solutions," said Paul Rea, Senior Vice President, BASF Agricultural Solutions North America.
Due to frequent global extreme weather conditions in recent years, as well as increasingly tough regulatory policies, and greater difficulty in developing new products, agribusiness companies have shifted their focus to other areas, such as biological products and precision farming. Along with the rapid development of the internet, big data and 5G, as well as changes to demand, these companies are looking to new investment and partnership strategies that focus on end service as their future planning direction, and have taken a wide range of appropriate steps.
Though this agricultural technical revolution led by information and data technology remains in its infancy, and investors are in no position to see the resulting differentiated sales growth and short-term profits, they have shown a lot of enthusiasm. After all, using data to offer farmers better planting decisions resulting in reduced expenditure and increased yields is a good commitment.
Amidst value chain upheavals, agribusiness companies are trying to create a new model of community of interests
As agribusiness companies struggle with supply issues, they should also pay attention to changes at the user end. Multinationals are sitting on high levels of inventory but face a sluggish consumption market. What led to a shift in the purchasing behavior of users is a question we should seriously consider.
Both agrochemical manufacturers and vendors aspire to build close partnerships with end users amidst heated market competition. Price advantages, good quality, or even agronomic recommendation services alone, is unable to influence farmers with regards to their final purchasing decisions.
Compared to companies that sell goods, farmers are relatively weak in handling income losses arising from falling yields. What farmers care most about is their final income. When it comes to addressing emerging challenges under the new landscape, the explorations of Bayer provide an excellent example.
The applications and benefits provided by the FieldView platform were much discussed and will be omitted from here. But recently, what brought my attention to FieldView again was Bayer’s introduction of an “outcome-based pricing model”, a pioneering idea in agriculture.
Currently, this idea remains in the early testing phase. The model involves Bayer setting an expected yield outcome for a product or seed, based on a farm's data and history stored on the company's digital platform, FieldView, as well as its own research on their products. If a farmer's final yield falls below that expected value, the company will rebate a certain portion of the product’s original price, but if the yield instead surpasses the initial set value, the farmer shares a pre-agreed portion of that additional income with the company.
Bayer launched this concept in 2018 when it rolled out Seed Advisor, which uses information typed into the system by farmers to recommend seed selections. In 2019, Bayer piloted the model in the US while working in tandem with a handful of corn farmers.
“Bayer’s data science has improved to the point when it can tailor agronomic recommendations that will greatly boost the odds of a favorable return on investment (ROI). Rather than random prices and value relationships, outcome-based pricing individualizes each field to prescribe the optimum product mix for the desired outcome. If our recommendations are incorrect, we will adjust accordingly. If we are wrong, then that is part of the reconciliation process. As we get better and better with data science, that becomes less probable,” said Aaron Robinson, Bayer Crop Science North American Vice President for Business Model Strategy.
Bayer attempted to cash in on its investment in digital agriculture by promoting its FieldView digital platform to farmers. As mentioned above, though companies offer products and services and farmers have a consistent final goal to improve their final income, they still each face their respective challenges. These companies wish to strengthen ties with farmers while farmers wish to reduce various risks during farming. Bayer’s outcome-based pricing model represents progress in resolving these puzzles and is a refreshing approach.
Recently, agribusiness companies have spared no efforts to get involved in digital agriculture and agtech startups. It is widely accepted by the industry that the digital agriculture sector will become the next driver of the agricultural revolution. However, the jury is still out on when the sector can deliver solid returns. From the perspective of the user, changes are taking place in the way that farmers seek agrotechnique support and select products, therefore, forcing corresponding changes in relevant channels.
Bayer’s outcome-based pricing model piggybacks on the data of its FieldView platform and incorporates it completely, supporting agri-input products while attaining a deep understanding of its own products. With the aim of improving farmers’ income and mitigating their decision-making pressures, the model customizes a package of solutions and shares risk with farmers.
The introduction of the model can deliver many benefits. Firstly, it has expanded the use of the FieldView digital platform. Secondly, it can tackle some data collection issues. Thirdly, it drives up the sales of a company’s seeds and agrochemical products. Finally, by sharing both risks and profits with farmers, it ingrains itself deeply with them, skillfully building a perfect business linked by strategy, products, services and end users.
This pilot project was questioned by some farmers at first, with Bayer also saying publicly that they were in the process of learning about and assessing how the model would operate and be implemented, as well as the problems that might emerge. Nonetheless, due to the effects of disruptive technologies and channel transformation, the enthusiasm of big companies for new business models is starting to take shape.
A similar business model to Bayer's is the AgriClime risk-sharing plan of Syngenta. AgriClime is a platform that monitors climate. In 2018, Syngenta launched AgriClime, which uses CHIRPS data developed by the University of California, Santa Barbara. Having monitored the climate of various US states for over 35 years, CHIRPS data offers accurate climate information by collecting high-resolution photos transmitted by satellites. AgriClime collects region-specific historical rainfall data during sensitive crop periods. If the rainfall fails to meet the need of crops, the invested fund will be returned to farmers later.
In 2019, Syngenta piloted AgriClime in Australia. Syngenta shared with participating farmers the risk of low rainfall from August to October. If they follow Syngenta’s recommendations and sufficient rainfall does not occur, the firm will refund up to 30% of the money spent on Syngenta’s inputs, such as seeds and chemicals. The less the rainfall, the more the refund, which will help farmers offset the risk of low rainfall, giving them more confidence to invest in plant protection products. Syngenta also intends to pilot this plan in North America.
As we can see from the practices of Bayer and Syngenta, the fast-evolving digital agriculture sector is not merely blurring traditional competition boundaries, but is constantly driving transformation in business models as well. Companies competing only in terms of price and sales volume will potentially be replaced by those ones willing to invest in the success of their customers, including farmers and partners along the value chain.
There are reasons for optimism