Crop Protection: High Prices On The Farm Sustain Demand

Healthy profits in the farming sector worldwide supported demand for crop protection products for the past year, and demand is likely to remain high in 2012.

Farmers tend to spend more to protect their crops when agricultural commodity prices are high, says Gautam M. Sirur, principal consultant at the crop protection market research firm Cropnosis. This year “could be quite strong in terms of demand for agrochemicals,” he says. “Profitability has been strong for farmers in Europe and Asia-Pacific, as well as in North America and Latin America. Farmers will be more willing to spend on protecting whatever crop there is in the ground.”

Strong demand for pesticides and other crop protection products should translate into healthy profit margins for large agrochemical companies. Farmers worldwide tend to be conservative and to stick to reliable and proven products rather than try to save money by switching to a generic formulation. “Even when Dow or DuPont or Syngenta has a patent that expires, they still can push these products at a premium because they have invested in formulations, technology, manufacturing quality, and so on,” Sirur says.

The major crop protection companies reported strong financial results in 2011, and they expect their performance to remain positive for at least the first part of 2012. In the first nine months of 2011, Bayer CropScience’s sales improved nearly 12% compared with the previous year. At Syngenta, sales were up 16%.

But predicting the future in agriculture is never easy. In recent years, the prices of grain and other agricultural commodities have fluctuated wildly. For instance, soybeans sold for around $10 per bushel early in 2010 but for more than $14 last summer. Corn went from $3.50 a bushel in the summer of 2010 to almost $8.00 a year later. Grain prices have eased in recent months but remain generally higher than in 2009.

The volatility is due partly to increased investor participation in the grain futures markets since the financial crisis of 2008, Sirur says. But farmers are increasingly protecting themselves from volatility by selling forward contracts to lock in favorable pricing, he notes. In addition, growers have built warehouses to store crops during market slumps. “Farmers can have control over the price of the commodity, and this increases their profitability,” Sirur says.

For agrochemical producers, demand is likely to be strong in 2012 for reasons besides good profits on farming. On the basis of weather patterns, climatologists see a good chance of an early thaw this spring that would encourage fungal growth. After two years in which disease was not a major problem worldwide, fungus may come back with a vengeance in the spring.