Sector Report

Seed vs chemicals: Are pesticides the new GMOs

by Mark Connelly / Apr 1, 2016

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Arguably, the best places in the world to be a bug are Brazil and India. And unfortunately, for mostly the same reasons, those are also among the very best places to grow food crops, if we leave aside minor issues like ill-conceived government policy, rampant corruption, high FX volatility and lack of infrastructure. As global food production moves south – away from mature, agriculturally sophisticated ag regions like the US and Europe, crop chemical demand is growing faster than farmers can say “we need more GMOs”.

Can seed keep up the growth rates if new countries and new crops come in slowly? The outlook for GM seed has become binary: if Syngenta is sold to the Chinese government, we would expect GM seed to become the default across all of the big Chinese crops, including rice and wheat, and even many fruits and vegetables.

GM seed adoption has had a mixed impact on global crop chemical demand. Crop chemicals can grow faster in the Southern Hemisphere, but growth rates in the north are minimal; chemical spending for US corn crop has been declining for several years. So overall, the growth rates look about the same in the no-deal scenario, but GM wins hands down if China gains control of Syngenta. And the faster GM grows, the slower crop chemicals grow, although the impact on overall chemical growth remains limited, because GM is available in just a few (but big) crops.

While relatively small now, growth in biocontrol products may eventually impact growth of synthetics. Biocontrol products, or “natural” pesticides are big news, but small potatoes. Nearly everybody is spending a lot to chase the market which is about 1/17th the size of the synthetic market, but promises to grow much faster thanks to tighter regulations and more R&D success. But except for a very few, we think these “biologicals” are going to be a tough way to make money, as the resources necessary to compete grow faster than the cashflows they throw off.

Distribution varies by region Distribution has been pretty well sorted out in the US and Europe, and recently announced M&As won’t have a big effect overall. But in the Southern Hemisphere markets, distribution remains fragmented and inefficient. We expect more deals and more consolidation, but the lack of infrastructure in those markets means that working capital needs, which are high even in developed markets, won’t come down quickly. That should keep the M&As coming…