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Global trends and industry consolidation

Global affairs and consolidations are some of the factors that affect stocks. In particular, what impact do these elements have on chemical stocks that are related to agriculture? Steve Byrne, an equity analyst for Bank of America Merrill Lynch, brought his insight on this topic to The Chicago Farmers’ October meeting.

Steve who is BofAML’s director of US Chemicals-Equity Research/Global Research, previously dealt with agricultural chemicals. Currently, he focuses on picking winners and losers in chemical stocks. “I try to answer who is going to post a better or weaker earnings outlook than the market thinks,” related Steve.

To get an edge in the chemical field, Steve said it is necessary to have a view of growth prospects or demand better than the market has. “This is a hard edge to get,” he remarked. Steve said he spends a lot of time talking to retail channels and getting into the Corn Belt to talk with farmers. A recent survey BofAML jointly conducted with Purdue University helped him acquire a lot of data that otherwise might not have come his way. Additionally, he has myriad sources as part of the Merrill organization. “I have colleagues all over the world who are able to keep me up to date on the agrichemical industry in China, Russia or South America. For example, if a Brazilian crop looks bad, I could change my outlook on that information,” said Steve.

Steve covers Dow Chemical, DuPont, Monsanto, and FMC. He said there is quite a bit of consolidation activity regarding chemical companies due to the challenging state of agricultural economics. “If a company is a crop or seed producer, the situation is likely to be challenging and remain so for the near future,” Steve said. Currently, Dow and DuPont are moving toward a merger. “If this merger happens, there will be several others,” Steve observed. “This merger will work out only if it has global approval.”

Further affecting consolidation is the fact that a number of patents are expiring and this will move to more use of generics. He also noted that he was bearish on innovation. “The introduction of new active ingredients peaked 30 years ago,” Steve shared.

Regarding the Dow/DuPont consolidation, he noted the two companies have different strengths. The consolidation of the two companies combines their skill sets and will offer strong competition for Monsanto down the road, according to Steve.

Regarding fertilizers, Steve noted that due to the decrease in corn prices, he expects growers to move back to soybeans, and this affects fertilizers and crop seed sales. He said he sees pricing decreasing for potash and nitrogen. He related there was a lot of new capacity coming on in nitrogen in the Corn Belt and there is a new potash mine coming on stream in Saskatchewan. “This could signal a contraction in potash demand. Potash’s pricing this year is down by 50 percent,” he said.

Steve pointed out that potash inventory levels are high in China, but the potash producers in Canada think that 2017 will be a record year. “They are delusional,” related Steve.

He went on to say that China is a key player in the nitrogen market. Forty percent of nitrogen produced comes from China, and it is mostly unprofitable. Steve said that China is losing money on every ton that it makes on a cash basis;however, the Chinese government subsidizes the industry so it is able to stay in business. “If China shudders, we could see a $50 per ton increase in urea,” said Steve.

Other points made by Steve:

• A powerful trend is to farm according to the heterogeneity of your land. It speaks volumes in yield improvement.
• The demand for corn in ethanol has played out; genetics is the growth driver for crops.
• Weather was on the side of the farmer this year and farmers cut back on prophylactic use. If they don’t get burned, the farmers will do this again next year.
• In the last 10 years, seed prices have doubled; crop prices have not.
• Gene editing, which came out of Pharma, is being applied to agriculture. The early developers are small start-up companies. Steve expressed surprise that Monsanto did not embrace this technology, although it is licensing Dow’s technology in this area. Gene editing has support because it does not involve GMOs and does not require USDA approval.