Value creation in the industry has been price-driven in recent years. Higher prices were caused, in part, by sea lice outbreaks in Norway and algae blooms in Chile, which decimated the global supply of salmon in Prices are expected to stabilize in the coming years, so aquaculture companies will likely need to improve industrialization, mechanization, and efficiency in order to promote value creation going forward.
To enable long-term sustainability, companies must also address mounting consumer concerns over the environmental impact of fish farming.
Processed-protein producers include companies that produce meat, dairy products, and fish—three very distinct markets. Even within the meat category, there are significant differences in the methods and cost structures of chicken, pork, and beef production. But despite these differences, expenses for all protein processors are largely a function of the cost of animal feed. Agricultural commodities, such as corn and wheat, are the main ingredients of livestock feed.
Thus, the decline in crop prices has helped protein processors thrive, and they are the only subgroup posting positive margin growth in our sample. Global trends related to wellness and environmental protection will have a significant impact on protein producers in the coming years, as consumers continue to seek healthier proteins and protein alternatives.
Tyson Foods recently became the first major meat company to seriously investigate protein alternatives, with an investment in Beyond Meat, a company that produces a vegan protein alternative. Although global food demand is increasing, protein producers must be prepared to adapt to shifting consumption patterns.
However, the recent sharp decline in agricultural commodity prices does not bode well for agricultural-equipment producers in the short term. Farmers tend to spend more on equipment when agricultural-commodity prices are high. But they can delay equipment purchases only temporarily, no matter how low commodity prices may be.
The future performance of agricultural-equipment companies will depend in large part on the success of their innovation pipelines and on their ability to respond to disruptive digital technologies. Innovation in precision data collection and cloud-based storage and transfer protocols, as well as improved analytics capabilities, present both threats and opportunities, with the boundaries between agricultural-equipment companies and new competitors in construction machinery and robotic defense technology becoming more and more blurred.
Faced with market uncertainty, companies must increasingly turn to innovation as a means to sustain growth. Agricultural-Chemical and Seed Producers. Farmers purchase seeds annually and apply agricultural chemicals both preemergence and postemergence. Although the business models within this subgroup are diverse, the industry has seen a wave of consolidation, with three megadeals recently announced: As we discuss below, if and when these mergers are completed, the newly formed companies will represent over two-thirds of the already concentrated agricultural-chemical and seed market.
New products must demonstrate significant benefits to farmers in terms of yield or cost reduction. Innovations should focus on applying predictive analytics to help farmers optimize inputs, reduce costs, and increase yields. Two-thirds of the companies in the subgroup sample suffered from negative sales growth over the period. Crop processors can be both buyers and sellers of agricultural commodities, so fluctuations in commodity prices have varying effects on them. When commodity prices are high, crop processors are able to charge customers higher prices to offset higher input costs.
When commodity prices fall, as in recent years, price increases that were passed along to the customer may or may not stick. This illustrates the importance of innovation for crop processors, as high prices are justifiable for value-added products that have been enhanced through processing. Value-enhancing acquisitions and a growth strategy focused on specialty ingredients promoted margin expansion, while consistent dividend payouts and share repurchases returned cash to shareholders.
The company has collaborated with a variety of partners to test new technologies for value-adding processes. For example, startup Ginkgo Bioworks is helping ADM develop custom strains of microorganisms used in the production of cultured ingredients. As noted, depressed commodity prices have also weighed on farmer economics, constraining both volume and price growth for fertilizer producers. Although fertilizer prices typically exhibit a strong positive correlation with underlying crop prices, the cost of producing fertilizer varies depending on the nutrient type.
There are three primary types of crop nutrients: Each has distinct production processes, cost structures, and industry dynamics—and many companies produce more than one type of nutrient.
Nitrogen producers such as CF Industries, Yara, and Incitec Pivot use a chemical process for production; natural gas is their primary feedstock and cost driver. The combined effects of the shale gas revolution and the Great Recession led to a sharp decline in natural-gas prices in North America. The cost structures of potash producers are complex and determined primarily by fuel prices, resource taxes, and labor costs.
However, potash prices have declined dramatically over the past few years owing to a wave of increased production. Price declines also resulted from the breakup of groups such as Belarusian Potash Company, which had managed production to keep potash prices high. New production capacity continues to be developed for potash, which has hurt returns for potash producers. Several of these companies are among the worst performers in the sample, with negative TSR.
Phosphate producers have even more complex cost structures than those of potash producers. In addition to energy and labor costs and resource taxes, a large portion of the cost structure consists of chemical inputs, specifically nitrogen and sulfur. Many phosphate producers, including Agrium, Mosaic, and PotashCorp, also produce potash. Faced with these challenges, the large players are combining in order to achieve a variety of objectives, including:.
Not surprisingly, the regulatory scrutiny has been intense in the US and Europe. The outcome of the regulatory process will dictate how the broader market is affected. Given the requirement for divestitures, other large players such as BASF will have an opportunity to create value by acquiring strategic assets. Regulators are believed to be seeking guarantees to end customers from the consolidated entities in order to ensure that there will be minimal or no price increases.
Such guarantees would protect farmers while placing further price pressure on agribusinesses.
We also conducted a detailed analysis of agtech patent activity since Among the key findings:. The surge in agtech investment has brought the agriculture industry to the threshold of a new agricultural revolution. The major sources of revenues are changing, and new profit pools are being created. They need the flexibility to pursue both offensive and defensive investments and must be open to taking nontraditional investment approaches.
The forces pressuring agribusiness economics show no signs of abating in the near term, as commodity prices are likely to remain range-bound at depressed levels. To emerge as top performers in this challenging environment, agribusinesses must take a farmer-centric approach to value creation that includes these elements:. The question is which companies will weather the near-term challenges, navigate through a crowded field of yield-enhancing technologies, and emerge as the strongest competitors.
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