Crisis in stock levels changed structure of pesticide industry: Rabobank

The stock crisis that agrochemical companies worldwide faced during the COVID-19 pandemic is changing the structure of the input market, Rabobank said. 

According to a report accessed by AgroPages, analysts from the financial institution believed the industry seemed to be "handling the problem well" but needed to "reflect on the crisis to avoid a recurrence and be prepared to mitigate such challenges in the future."

In Rabobank's view, a sequence of events sent asymmetric supply and demand signals up and down an increasingly elongated, fragmented, and commoditized agrochemical supply chain.

"The industry was conditioned to mature demand cycles with sub-single-digit growth," noted the report signed by Senior Analysts Bruno Fonseca, Lief Chiang, Samuel Taylor, and Dirk Jan Kennes (Head of RaboResearch Asia). But in 2020 and 2021, they recalled, there was an annual demand growth in global volume of about 9%, driven mainly by rising agricultural raw material prices and the recovery of planted areas.

This strong demand and the fear of supply shortages accelerated exports from major agrochemical-producing markets—especially China—through 2022. "But product price inflation and a demand deterioration cycle followed in the second half of 2022 and 2023, overloading the global supply chain with inventories," they highlighted. 

Since then, liquidity concerns have echoed throughout the value chain, as high-priced inventories take time to clear.

"The focus has shifted to reducing retail channel stocks and the impact of holding stocks at major agrochemical producers. However, with inventory issues in North American, South American, and Asian markets being resolved at slightly different paces, this issue may persist throughout the rest of this year," Rabobank projected.

Brazil as a Reference

At the end of 2022, global stocks began to become excessively large, according to the report "The Anatomy of a Crisis: How the Crop Protection Industry Was Dragged into Financial Distress." 

For example, using government data from Brazil's Ministry of Agriculture (MAPA), from 2009 to 2021, the supply of active ingredients in Brazil (imports + production) grew at a compound annual growth rate (CAGR) of 7%, which aligned with the growth of planted areas.

From the 2019-2020 to the 2020-2021 season, Brazil increased its soybean planted area by about 11.6% and corn by about 7.6%, and the imports and consumption of active ingredients followed the trend observed in previous years. "But in 2022, rising soybean prices pushed the annual average to $15.51/bu, boosting companies' confidence to import even more active ingredients into the country," the authors pointed out.

Looking at 2022 data, they highlighted that the supply of active ingredients grew by nearly 30% compared to 2021 data. Imports alone increased 46% year-over-year, far outpacing the increase in planted areas in 2022.

"Such high inventories would not be a problem for these companies if raw material prices remained high, which they did until the second quarter of 2022 when markets entered a downward trend with a striking deterioration in raw material prices," they explained.

From the second quarter of 2022 to the second quarter of 2023, soybean prices fell 17%, and corn prices fell 24%. Farmers' operating margins for these crops suffered a significant impact. 

"This marked a turning point for these companies because farmers were still buying their inputs for soybeans (planted from September) and corn (planted from January) during the second quarter," the report emphasized.

Although demand for 2022 increased considerably by 11% compared to 2021 data, it fell short of the 30% increase in the supply of active ingredients on the market, leading to a massive stockpile increase. 

"Eventually, agrochemical companies began reducing their imports from Chinese active ingredient companies, which had also started to accumulate high stocks," they noted.

According to Rabobank, "Brazil is by no means the only market that has suffered from the pressures of divergent supply and demand factors that have led to stock increases. However, the reasons for the divergence have often been local in nature."

Future Trends

According to Rabobank, recent comments and market data indicate that the central growing regions are working through their agrochemical stocks, and the first fiscal quarter profits for 2024 suggested a more positive outlook for stocks. 

"However, it seems that the stocks of public Chinese agrochemical and active ingredient companies remained high in the fourth quarter of 2023, although sales growth has not yet returned to trend," they stated.

Analysts said the biggest risk is that the industry sees this purely as a liquidity issue when something more insidious is beneath the surface. "If the last few years have shown us anything, it is that agriculture is evolving, with rapidly growing niches in different farming.″ 

(Editing by Leonardo Gottems, reporter for AgroPages)