Articles

    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.

    RECORD NUMBER VISIT SUNNY SPAIN ON FARM AND CULTURAL STUDY TOUR

    By Jim Ward, TCF Travel Chairman

    A record breaking 25 travelers embarked on Iberian Airlines for a Study Tour of Central Spain in late September, enjoying perfect weather and a blend of farm visits and historic places. The week-long visit was capped by a “farewell dinner” at the Café de la Opera with performances by local singers during the meal.

    Our walking encyclopedic guide “Gari” took us to Toledo for our first stop. The city is known for its production of steel blades, so we toured a workshop noted for its swords and knives. The next day we moved to the country, and stopped to photograph a lineup of Don Quixote windmills. Next we went on to a Saffron Cooperative, learning about this rare crop in the group’s museum.

    By mid-morning we visited a Manchego cheese factory. The cheese has a unique flavor due to its sheep’s milk origin. For our lunch we stopped in Villa Castilla for a generous meal of local dishes. Next, back to Toledo for a walking tour of the historic city, noted for its cathedral and castles.

    Wednesday morning we were on the road again to visit the world famous Osborne winery, a 200 year old firm that is family owned, yet has an international reputation. They showed us the complete cycle of production and offered us a generous sample of their production.

    After a hearty lunch at a local restaurant, we saw one of Spain’s largest cattle ranches, visiting a Charolais beef breeder. The host’s prize bull had just returned from a Festival in Southern Spain with the runner up ribbon. The rancher’s daughter was on hand and introduced her three sons, who are learning the ropes on the ranch. The rancher also was a big game hunter and invited us to a tour of his trophy hall, a separate building housing his mounted big game trophy heads and show awards. When asked what animal was hardest to bring down, he answered, “A wild buffalo.”

    On the road again Thursday morning, the other side of the cattle business was our morning stop—a bull fighting training ranch owned by a retired (at age 35) matador and his brother. We were given a ride in a tram and driven to the pasture. One of his cowboys whistled for the herd and they came running for feed pellets as we watched from the safety of the tram. The “novice” bulls were not aggressive and some ate the pellets from the cowboy’s fingers.

    Back at the ranch complex we toured the practice bull ring and presented our host with the traditional Chicago Farmers’ cap as a souvenir of our visit.

    Nearby we stopped at a wheat, barley and rape seed farm, with most of the grain crops already harvested. The farmer was proud of his well-maintained equipment that enabled him to farm his acreage all by himself, and, he explained, “365 days a year.” He does have some extra hands during the peak seasons.

    We stayed overnight at the ancient town of Vallodolid and headed out on Friday to visit the Planasa Corporation, one of Europe’s biggest horticultural firms. Their role is to improve the quality and quantity of plant and vegetable production by supplying seeds for growers around the world. We visited their fields and vineyards and were impressed by their techniques.

    Our luncheon stop was just outside the walled village of Gomezerracin. A camera crew was shooting a TV commercial against the town’s wall and we had to pass their security to enter the restaurant! Inside we were served the unusual delicacy of roast suckling pig with flan custard for dessert.

    Next stop Segovia, noted for one of the surviving Roman Aqueducts, as well as for their ancient city wall and cathedrals. Then back to our starting place, Madrid. It is Spain’s largest city and famous for its many museums and the nation’s palace.

    On this final day of our study tour, our city guide gave us a compressed visit past the major attractions from our tour bus seats. We stopped at the Palace and saw the colorful changing of the guard ceremony. During the afternoon we toured on our own, many choosing to visit the world famous Prado Museum.

    The Café de la Opera restaurant was the place for our group picture, with a colorful mosaic wall as the background. During the four course meal we were serenaded by four local opera stars and selections from classic operas.

    On Sunday, we were off to the Madrid airport and the Iberian flight back to the United States, leaving mid-morning and arriving home mid-afternoon as we chased the sun west. It was another successful International Study Tour and a generous contribution to the Chicago Farmers Scholarship Fund.