Q4 INDUSTRY UPDATE
U.S. farm income dropped for the third straight year in 2016, according to the USDA. Net farm income levels are expected to be 17% below 2015 levels, driven largely by weakness in the livestock, dairy and poultry markets. Cash crop receipts are expected to end up flat year-over-year, with improvements in cotton and soybean markets offset by further weakness in corn. While Canadian producers have been subjected to low global ag commodity prices as well, those low prices have been offset to some degree by high crop yields, a lower Canadian dollar and the stabilizing effect of supply management in the dairy and poultry segments.
The agricultural industries in both the U.S. and Canada rely heavily on exports and rank globally as the largest and the fifth largest, respectively. A rebound in commodity prices does not look imminent until global economy growth rates start to increase, or there is a major regional supply shock. Both countries rely on fair and free global trade of agricultural commodities to prosper and grow, in spite of the inevitable minor trading irritants and ongoing challenges. With a highly integrated North American agrifood supply chain, any disruption to free and open trade of agricultural commodities, via a renegotiated NAFTA, would be perilous for the agrifood community in all three countries.
A LOOK BACK AT 2016
2016 was a year of mega merger announcements that included Bayer’s planned acquisition of Monsanto ($66B), ChemChina’s planned acquisition of Syngenta ($42B before ChemChina’s planned combination with Adama) and a planned merger between Agrium and Potash Corp. ($36B). Many of the biggest deals, including the planned Dow-Dupont merger, announced in late 2015, have yet to be completed due to their complex global operations, extensive antitrust reviews and the numerous multijurisdictional regulatory approvals required. Many believe that significant spinoffs and carve-outs will need to occur in order to satisfy regulators. Bayer announced that there could be as much as $1.6B in divested assets required to complete its merger with Monsanto, of which speculators believe could include its U.S. cotton seed business, its canola seed business and potentially its glufosinate chemical business. Dupont has indicated that it may trim its herbicide business to facilitate its merger with Dow. Potential buyers of business units and product lines include major industry players like BASF, Sumitomo and Nufarm, amongst others, as well as smaller seed and crop protections companies and large private equity funds.
Another large deal worthy of mention is Boehringer Ingelheim’s combination of its animal health business with Sanofi’s Merial, which was completed on January 1, 2017. This deal involved a complex swap of select assets in Consumer Health Care and Animal Health products. The combined Animal Health business has proforma sales in excess of $4B and positions it as the second largest player globally, after Zoetis, and followed closely by Merck and Elanco (which acquired Novartis Animal Health in 2015).
As U.S. farm income dwindled from its peak in 2012, suppliers’ margins were squeezed and topline revenues were under pressure, driving management teams and boards to explore consolidation and M&A activity to compensate.
As such, one underlying theme driving M&A activity in the ag sector in 2016 was building scale to improve operating efficiency. An example of this was the integration of the United Suppliers and Winfield Solutions crop protection and seed businesses, to form Winfield United. While the merger was completed in late 2015, much of the go-to-market, rebranding and repositioning of the combined business occurred in 2016. The second step of the merger will be the combination of their respective crop nutrient businesses, expected be completed in late 2017, along with the integration of western-Canada-based United Suppliers Canada.
Q3 INDUSTRY UPDATE
Farmer sentiment improved slightly in the U.S. as the harvest season began, according to a Purdue University/CME Group survey. While overall market conditions remain sluggish, many producers believe that current prices may have bottomed and will begin to improve. Livestock and dairy producers are slightly more optimistic than commodity crop producers. The USDA predicts that cash receipts for 2016 will drop by almost 7% across both the livestock and crop sectors, while cash expenses will only decline by about 3%1.
We met with numerous CEOs and senior executives at a number of ag-related events during the quarter, including Cultivate’16 in Columbus, Ohio, the Southwest Fertilizer Conference in San Antonio, Texas and the World Dairy Expo in Madison, Wisconsin. At each event, we shared our respective thoughts on the state of the industry.
At Cultivate’16, it became clear that the horticultural industry is rapidly making adjustments to adapt to the burgeoning marijuana industry, with Canada and many U.S. states poised to pass new legislation to legalize either its medical or recreational use. According to Forbes magazine, the U.S. industry will have sales of $7.1 billion this year and is projected to grow to $22 billion by 2020. As such, many companies are forging their positions in the supply chain, from developing/marketing organic fertilizers to high tech equipment such as lighting, watering and ventilation systems. We continue to hear a range of views from investors and financiers about their perspectives on participating. Most investors have flexibility when it comes to financing suppliers of products and services to legal producers; however, those positions often diverge when considering financing direct production. Two of Canada’s top-tier banks announced recently that they will not provide banking services to companies engaged in the production or distribution of marijuana, legal or otherwise.
Year-to-date Venture Capital investments in ag and food technology companies are lagging behind last year’s record-setting volume and dollars invested, according to AgFunder, an online investment forum for accredited investors focused on the space. Food e-commerce continues to be an active theme for early stage companies seeking to raise capital, along with biomaterials, soil and crop technologies (biologicals, genetics/biotech, seed technology, etc.), decision support technology and drone/robotics.
New U.S. FAA rules for the commercial use of drones came into effect on August 29. While some feel that the rules remain too restrictive, such as the “visual line of sight rule,” most in the industry applaud the safety precautions required and appreciate the uncertainty that the rules eliminate.
In other major developments, President Obama recently signed a new GMO labeling law, which is generally considered by the trade as positive, as it takes precedent over a patchwork of state laws that were unworkable for most food companies. While there are many details still to be worked out, generally speaking food companies will be required to identify products with GMO ingredients, perhaps with a 1-800 number or a QR code, so consumers can get more detailed information.
Key M&A Transactions
Agrium and Potash Corp announced recently their plans to merge to form the largest crop-nutrient company in the world with an enterprise value of approximately $36 billion. Shareholders are expected to vote on the proposed transaction by early November, with an expected close date of mid-2017, pending regulatory approvals. The combined company will have strong leadership positions in nitrogen manufacturing, low-cost potash production and North American agri-retail, and is expected to generate $500 million in synergies, much of which will come from reduced freight and logistics costs.
Bayer sweetened its offer for Monsanto to $66 billion and captured board support, but the deal still faces substantial regulatory, political and shareholder headwinds to get to the finish line. The combined business will make up more than 50% of Bayer’s total revenue and command approximately 25-30% of the global seed, ag biotech and crop protection market. Bayer has agreed to a $2-billion breakup fee should the deal not proceed based on regulatory issues. However, it also faces challenges with activist shareholders who feel the premium was too high and political pressure, given the backdrop of other mega-deals in the ag space (e.g., ChemChina’s acquisition of Syngenta and the Dow/Dupont merger).
Certainly, anti-trust concerns over any of the mega-deals outlined above have been heightened by the U.S. Department of Justice’s recent suit to stop the sale of Monsanto’s Precision Planting business unit to John Deere for $190 million. At the center of the case is Precision Planting’s and John Deere’s respective positions and market share in high-speed planting technologies. These technologies allow growers to plant crops like corn at speeds of up to 10 MPH, and together the two firms have approximately 86% of the U.S. market. Currently, Precision Planting licenses its technology to some of the other major players like AGCO and Case IH, both direct rivals of John Deere. Short of a complete block of the transaction, pundits are predicting that these licensing agreements may need to remain in place post-transaction, which likely lowers one of the main acquisition motivators for Deere. As an attempted concession to DOJ concerns, Deere recently announced that select Precision Planting technologies will be manufactured, marketed and sold through AgLeader, a rival precision ag technology company. Interestingly, Monsanto has agreed to sell its Precision Planting business unit, with approximately $100 million in sales, for approximately $20 million below its purchase price in 2012.
Consolidation in the international feed industry continues to accelerate, with many of the largest transactions involving Dutch companies such as ForFarmers B.V., Nutreco, Royal De Heus and Royal Agrifirm. U.S.-based Alltech also has been busy on the acquisition front, acquiring Ireland-based Coppens International and Canadian Feed company MasterFeeds earlier this year.
NEW INDUSTRY OF FOCUS
This quarter, we are pleased to introduce the Agribusiness Report to our line of quarterly industry reports. With the growing importance of the agricultural industry as part of the overall economy, we would like to keep you up to date on the latest M&A trends and activities in the space.
Q2 Industry Update
Crop commodity prices generally remain at stubbornly low levels, despite a spring rally which had raised hopes that the industry was nearing the end of this part of the ag commodity cycle. Purdue University’s Ag Sentiment Index, a monthly survey of producers, improved slightly; however, pessimism remains widespread across most of the major sub-sectors. U.S. net farm income is expected to come in at $54B for 2016, down 3% from 2015 and the lowest level since 2002, after hitting new record highs in 2012/2013. While commodity crop producers have been struggling with low prices for the last couple of years, they are also now experiencing low prices in the poultry, red meat and dairy segments.
We attended the Farm Equipment Manufacturers Association’s spring clinic in April, where members are reporting reduced sales compared to last year. This is true especially on large ticket items such as tractors, planters and combines. Smaller ticket items and replacement parts have been affected to a lesser degree. The Association of Equipment Manufacturers reported YTD sales of high horsepower tractors and combines down 24% and 28%, respectively.
With tight margins, producers continue to be frugal by limiting expenditures to essential inputs and by deferring upgrades to equipment and facilities.
Declining sales have narrowed margins, and in many cases have driven a wave of consolidations across the Agribusiness industry, such as farm machinery manufacturers and dealers, crop protection, biotechnology and seed companies, as well as fertilizer producers…
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