Crop Input Sales Continue Skyward
Crop prices, farm incomes drive pesticide and fertilizer sales, but looming macroeconomic conditions, adverse weather and changing regulations put pressure on ag’s boom times.
February 15, 2013
Crop protection is poised for another record year in 2013. Strong farm incomes and favorable crop prices lifted sales of crop protection products to a new record last year. Demand is expected to remain high in 2013.
Crop protection sales approached $47.3 billion in 2012, according to Phillips McDougall’s preliminary analysis conducted in November. Sales for the year represent a 7.4% increase in nominal global value. Even more encouraging, after adjusting for inflation and currency valuations, real growth was 10%, the highest year-over-year rise since the 2008 bubble, when real growth was 10.2%.
Herbicides and active substances for major row crops are leading crop protection’s boom times. The world’s growing appetite for feed corn, soybeans and small grains continue to drive record industry profits with plenty of upside to come.
The major drivers in 2012 are expected to continue in 2013, including strong prices, yields and demand for crops around the world. Corn has seen the biggest changes with an increasing amount of land dedicated to that crop to capitalize on price and replenish stocks that hit a nine-year low in the U.S. as a result of last year’s drought.
“These factors provide a positive market environment for all inputs, including seed,” says Matthew Phillips, lead analyst of Phillips McDougall. “Fertilizer is more of a commodity market driven by volume and price. As a result, supply-side dynamics for the fertilizer sector have a much greater impact on prices and market value. Seeds and crop protection are more R&D-driven where supply-side dynamics have less of an impact.”
Economic growth in Brazil, Russia, India and China has generally boosted commodity prices since 2006, according to Phillips. These countries have displayed higher demand while adverse weather has negatively impacted supply.
“Demand has been driven by the BRIC countries due to increased wealth and dietary changes, particularly in China and Russia, which import more arable produce than they export,” Phillips says. Demand is also increasing in other late-stage development countries enjoying increased wealth based on economic development, notably Central and Eastern Europe and parts of Southeast Asia.
Indian Wheat Booms; China’s Corn Yields Progress
China’s yields are still below those in the U.S., but they are improving. The government is investing heavily in mechanization, irrigation, fertilizers, pesticides and seeds.
The density of planting (plants per hectare) has been increasing too, though it is still lower than U.S. averages, according to documentation and physical measurements taken by the U.S. Grains Council.
According to the U.S. Department of Agriculture Foreign Agricultural Service (USDA FAS), “The large increase in [world] corn production in recent years is due equally to higher planted area and better yields.”
In northeastern China (primarily Heilongjiang province), land once dedicated primarily to soybeans is now being used for corn where the profit per hectare has been significantly higher than soybeans. Spring wheat and other minor crops have also been usurped by corn in the northeast part of the country. In eastern and central China, cotton has been replaced by corn.
According to USDA FAS, “India is seizing the opportunity to export record quantities of competitively priced wheat. As global exportable supplies tighten, particularly from Russia and Ukraine, India’s wheat is effectively replacing Black Sea wheat in several Middle East and East African countries. It is also replacing Australian wheat (milling and feed-quality) in Asian markets, and even displacing Turkish wheat flour in Indonesia.”
In China, government policy has influenced the corn procurement price for stocks by setting it at a higher level than the world corn price, according to USDA FAS. The stated policy of the Chinese government is to keep farmers interested in planting corn to help improve the income of the rural population.
Citrus and Cotton Hit
Unlike corn, citrus and cotton (particularly in Australia) production has been reduced. According to USDA FAS, “With planting of the 2012/13 Australian cotton crop nearly complete, the estimated area is lower than last year, with dry land cotton area expected to drop by 85% and irrigated cotton area expected to drop by 22%.”
Dry conditions and low cotton prices are two factors contributing to this year’s decrease in area. Relatively high prices for sorghum have made it an attractive alternative for Australian farmers.
For citrus, global production dropped 7% from the previous year to 51.1 million metric tons (MMT). This is largely because of smaller crops in Brazil, Mexico and the EU. Consumption was at 28.5 MMT, down about 2%.
Similarly in the U.S., cotton production is expected to drop about 25% in 2013 in lieu of higher corn plantings.
Major crop commodities futures prices are sustained into 2013, according to Phillips McDougall. That provides confidence for the farm economy.
“If the farmer is confident that the crop price will be high when he comes to sell his crop, or if he can sell it forward at a high price to the futures market, then he is more likely to invest in crop inputs to maximize his yield and his eventual return,” Phillips says. “This is seen in the U.S. particularly, with fungicide usage on maize and soybeans increasing when crop prices are high, but falling away when prices decline.”
There are a couple of factors that could dampen that confidence including “more normal weather resulting in recovery in crop production leading to higher stocks and lower crop prices,” Phillips says. Another factor is profitability of ethanol production. Around 40% of the U.S. corn crop goes toward ethanol production, which is increasingly uncertain amid heightened research for more sustainable biofuel sources.
Those changes in prices have affected the way farmers are responding.
“The general expectation is there will be further increase in the U.S. corn acreage in 2013, although as soybean prices are also high, this may not turn out to be as great as expected,” Phillips says.
High crop prices have also resulted in increased planting in Latin America in August and September 2012. By the time the U.S. is planting in spring 2013, the size of the Latin American crop and the impact this may have on crop stocks and prices will be known, which may alter planting intentions.
For more information on fertilizer, go to page two.