How a hot summer and expensive R&D could hit agribusiness

 
Michael Bow
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Growth in the multi-billion dollar weed killer industry is set to tank from high single digits to zero next year, according to figures released today, a sign of tougher times ahead for European agribusinesses.

A sizzling dry summer forecast across Europe and the US looks set to lower prices, with forecasts suggesting corn prices could fall below the psychologically important $5 per bushel mark this year.

Coupled with an oversupply of the world’s best selling weed killer – glyphosate – and the unfavourable market conditions looks set to curtail growth this year to 5.5 per cent, with flat growth forecast for the 2014/15 season, according to UBS.

Standing in stark contrast to recent growth rates – the crop protection market grew 7.1 per cent in 2011, 8.9 per cent in 2012 and 9.9 per cent in 2013, according to figures from US data provider Phillips McDougall – the cyclical trends are underpinned by more worrying signs in the R&D of new products in the agribusiness sector.

Bayer, the German chemical company, is today the only large research company maintaining a steady flow of new product introductions, with around 31 products introduced between 1998 and 2013. Its big Swiss rival Syngenta has introduced 12 products over the period, while BASF has introduced 16 and Dow 13.

Meanwhile, overall figures from Phillips McDougall reveal there were less than five new active ingredient introductions last year, compared to nearly 25 during the peak development years of the 1980’s, and the downward trend has been running for some time.

Part of the problem is the cost of bringing a new products to market. As this graph (again from Phillips McDougall), published by UBS demonstrates, the cost has risen 40 per cent since the start of the decade from $184m to $256m, with rising development costs the main driver.

The rising cost of developing a product could be tied to a recent move by the European Union. It decided to judge new products on their potential hazard rather than the risk it poses before approving it – a more onerous style of regulation. It naturally entails more development-intensive research practices to satisfy the tighter conditions, which may account for the increase.

Its size and heritage is more than enough to ensure agribusiness remains a dominant force in industry for some time to come, but a rising cost base and a period of lower market growth points to some troubling times ahead.