Agriculture must “direct change or become a victim of it,” the vice president of BASF told the annual meeting of crop-protection professionals recently. But it will require a different direction to meet those challenges.
Speaking to members of the Crop Protection Association of North Carolina, John Rabby of BASF recounted the issues facing agriculture: low prices, declining farmer numbers, foreign competition, consolidation within the crop-protection industry. Then he turned to possible ways to direct the change, namely biotechnology and a more thorough understanding of the people who buy the chemicals those basic manufacturers such as BASF market.
The future will be quite different from the past, meaning that those in the crop-protection industry and agriculture in general must work closer with food processors.
One way to direct is change is by embracing biotechnology, Rabby says.
“Biotechnology is here to stay,” he says. “If we try to go up against foreign countries in cost, we will be defeated. We cannot afford to battle them with our crop costs.
“We've got to change the game,” Rabby says. “The value that we offer in biotechnology and enhanced breeding efforts, enhanced fertilization patterns — the way we grow these crops — are all to our significant advantages.”
None of the changes affecting the agricultural chemical market is more telling than the low commodity prices and the major flight of farmers from the marketplace, Rabby says.
Corn and soybean prices, two major U.S. commodities, as well as other crop prices, are “having a tremendous impact on the profitability of our producers around the country,” Rabby says.
In fact, agriculture leads the pack in the number of job losses — predicted from 1998-2008 — citing government figures. “Farmers lead the pack,” Rabby says. “Some 200,000-plus jobs in the farm-related industry will be lost — those are the people we sell to, people in this audience who will not be in this business in the next 10 years.”
While cost of production soars in the U.S., competition from foreign countries is growing on the strength of low-input costs. “A year-ago, we would have never expected China to be able to produce the corn they're producing,” Rabby says. “Argentina is a world player and their cost per hectare is substantially different from U.S. producers. This is a significant issue that we face.”
Production costs in the U.S. have continued to grow at a pace of about 5 percent per year from 1986, Rabby says.
Farm debt is reaching the levels of the mid- to early-1980s. “That's a disturbing sign,” Rabby says. Land prices, as well as land rent costs, have escalated. Rabby believes the subsidies are being used to compete for acreage, particularly in the Midwest. “That's directly opposed to what I believe the government wanted these payments to do.”
With prices low, land rent high and exports down, farmers have had to rely on those government payments to stay afloat, Rabby says. Of the total net farm income of $51 billion, some $21 billion came directly from the government. “I don't know that we can get much higher than what we are with subsidies,” Rabby says. “In reality, the operational profit on the farm has decreased 15 percent in a two- or three-year period.”
Farmers have focused on cost cutting as well as adoption of new technologies, even while the trend has been toward fewer and larger farms. Non-landowners now farm about 61 percent of the farmland in the U.S. Under these conditions, farm businesses emerge. “These producers have changed,” Rabby says. “They're talking about cash flow; they're talking about asset evaluation; they're talking about depreciation of equipment; they're talking about how can I manage my finances in the next three to five years; how can I market my crop better; and can you help me?”
“If you don't answer that question in the appropriate way, you've got very little time that he's going to be able to spend with you,” Rabby says. “My point is that we're facing operational difficulties with the very people who are buying my products and your services as a channel player.”
The ag chemical sector has not been immune to these changes.
A second wave of consolidation has swept through the crop-protection industry. More consolidation is expected in the coming years.
When Rabby started out with American Cyanamid 20-something years ago, there were 15 to 20 crop-protection companies worldwide. In the last five years, that number has been reduced to 10; now, there are six companies that have 80-plus percent of the global agricultural chemical market. “In the next five years, the number will go to four and possibly three,” Rabby says. “We're only at the tip of the iceberg concerning consolidation.”
The BASF vice president says the consolidation is happening because of the increasing costs of bringing products to market and pressure from environmental groups.
“The cost is high to bring a new product to market,” Rabby says. “The FQPA has put tremendous pressure on us. Consolidation is taking place as we look to join our R&D efforts with other companies to bring a little more mass to the situation.”
In today's market, if a company isn't spending in the neighborhood of $400 million on R&D, then it's not a player, Rabby says. BASF is spending in that neighbor for its R&D efforts in product development.
To be a player in this market, the basic manufacturers have to focus on streamlining core products and services as well as capturing value from enhanced traits and services.
For example, Rabby points to a statement made several months ago in John Deere's annual report: As we look at the 2002-2005 time frame, “we will not make money on the big green machine. We will make money on the solutions and the services that we provide to this industry.”
“Here's a company that has prided itself on its equipment that is moving away from the very jewel that brought them success in the past,” Rabby says. “They're focusing on service and solutions. We can no longer afford to give away services in the marketplace. Services have to have value propositions put on them.
“Our industry in the past has focused on crop-protection products,” Rabby says. “Seeds with the seed companies, fertilizer with the fertilizer companies and feed additives with the feed additive companies — biotechnology changes the way we do business.
“Input traits have been the big growth area we've seen in technology,” Rabby says. “The area of capture has been around the breeders, the seed companies and the crop-protection groups. As we look to the future, value creation will occur in all of these areas. Biotechnology is a way for us to differentiate where we are going long-term as we compete with other countries.
Along with the change toward biotechnology, comes a new major player on the scene: food processors.
Rabby relates a telling meeting that occurred between Simplot, the Idaho potato giant, and McDonald's, to which Simplot supplies 37 percent of the fast-food giant's French fries. “McDonald's said they expected Simplot to have in place in the next three years a database that will tell where the crop was grown, the soil type, varieties, environmental factors, what was used on the crop — every piece of information on that crop,” Rabby says.
Farmers will continue to increase production under contract, Rabby says. It's estimated that between 2006-2010 about 70 percent of the crop production in the U.S. will be grown under contract.
“Now we're having food companies tell us what we are to do and it will get worse,” Rabby says. “We must work more closely with food processors.”
BASF has come face to face with this trend, Rabby told the group. BASF is introducing a new rice product next year. In meeting with Anheiser-Busch, on the heels of the Starlink controversy, the brewer underscored the seriousness of dealing with food processors. “There were six lawyers in the room,” Rabby says. “The head lawyer looked at me and said, “I'll tell you what, “If you guys mess up our brand, you better get a big check ready, because it's going to cost you $35 billion. I didn't take that as a threat, but basically a statement of fact. It was saying, “We in the food industry put a lot of money into our brands.”