The U.S. Agricultural economy continues to suffer from a low-commodity environment that began back in 2014. Producers’ sentiment started to show some signs of improvement during the summer months, according to a recent survey outlined in the Purdue University/CME Group Ag Economy Barometer; however, in September U.S. Famers’ outlook fell sharply to its lowest level in almost two years. More than half of those surveyed indicated that their financial condition has worsened as 2018 unfolded.
As balance sheets continue to deteriorate over an extended period of time, many producers are beginning to have those difficult conversations with their lenders. According to Sam Miller of BMO Harris Bank, “If you look at the USDA estimates for various sectors and regions of the country, there’s not one of them that is expected to do better in 2018 than they did in 2017.” Miller added that he believes the dairy sector to be the “worst performing.” According to the Wisconsin Department of Agriculture, 382 dairy farms called it quits during the first seven months of the year.
Farm debt is growing in Canada as well, but mitigating factors such as a lower Canadian dollar over the last few years, have offset lower commodity prices to some degree. However, like the U.S., interest rates are rising, with the Bank of Canada raising its overnight rate four times since July 2017, which could further squeeze producers.
Conversely, Ag equipment dealers in both countries have a hint of optimism about their outlook for 2019, according to a recent report by Ag Equipment Intelligence, with most optimism expected in parts and service, as well small-ticket items. Large dealers like Titan Machinery have reported improvements in topline sales as well as earnings in the first half of 2018. According to AEM, year-over-year growth in sales of 4-wheel drive tractors and combines grew 13% and 24%, respectively, by August of this year.
We tracked 69 transactions in businesses participating in and serving the agribusiness sector during the third quarter of 2018, with a median multiple of 7.6x EBITDA and 0.8x revenue. Agricultural Technology & Services was the most active segment, followed by Proteins and Machinery & Equipment.
EBITDA multiples for publicly traded agribusiness companies were 13.0x LTM EBITDA by the end of the quarter, down from 15.9x at the end of Q2, with IDEXX Laboratories, Inc. trading the highest at 41.6x and Arcadia Biosciences, Inc. the lowest at 0.4x.
TRENDS AND INDUSTRY ISSUES TO WATCH
With a revised NAFTA between all three major North American trading partners now settled, most in the highly integrated agricultural community can breathe a sigh of relief.
“It’s good for all of ag,” according to U.S. Agriculture Secretary Sonny Perdue. Former U.S. Secretary of Agriculture Tom Vilsack said the new deal should stabilize and strengthen the market over time.”
Q2 INDUSTRY UPDATE
According to Purdue University’s Ag Economy Barometer, in spite of low commodity prices and on-going trade disputes between the U.S. and its trading partners, producer sentiment improved slightly over the last two months. More importantly, producer sentiment has been slowly rising since early 2017. Nevertheless, the survey indicated that almost half the respondents felt the next twelve months will still be “bad times” for producers, with commodity prices expected to remain soft, and around 60% of respondents believe it is a poor time to invest in their business.
However, you can only wait so long to replace equipment. The Association of Equipment Manufacturers recently reported increasing tractor and combine sales year-over-year by its members. Combine sales, for instance, are up 26.5% year-to-date over the same period in 2017.
EBITDA multiples for publicly traded Agribusiness companies averaged 15.9x LTM EBITDA by the end of the quarter, which matched the average at the end of Q1 2018. The Agricultural Technology & Services segment traded the highest at an average of 27.6x LTM EBITDA and the Proteins segment was the lowest at an average of 10.6x LTM EBITDA.
We tracked 56 U.S. and Canadian-based transactions in the Agribusiness sector during the second quarter of 2018. Animal Health & Nutrition was the most active segment, with 12 reported transactions, followed by Machinery & Equipment and Agricultural Tech & Services, each with nine.
TRENDS TO WATCH
One of the interesting trends to watch is the emerging battle between the traditional agri-retail sector and the newer online crop input sellers such as Farmers Business Network (FBN). Agri-retail has always tried to demonstrate its relevance with producers by making heavy investments in blending equipment and storage facilities, providing extended selling terms for key customers, stocking a broad range of inventory SKUs and providing expertise in precision farming technologies. Generally, these strategies have kept the online channels at bay, with many coming and going over the years, until recently.
While FBN is likely the highest profile “disruptor” with its well-financed platform (raised over $200 million); others such as Agroy, The Farm Element,
AgVend, CommoditAg and HarvestPort are also entering the space. Strategies employed by each vary, with some trying to compete directly with brick-and-mortar Agri-retail and others trying to facilitate efficiency in the system by working with traditional Agri-retailers. Either way, the goal is the same: to reduce an important input cost for all crop producers, large and small…
Q1 INDUSTRY UPDATE
The U.S. farm economy continues to lag the general economy, with the U.S. ERS forecasting net income in 2018 to be the lowest since 2006 and a decrease from 2017 of 6.7%. Cash receipts from crops and animal products are expected to drop slightly; however, production expenses including fuels/oils, labour and interest are expected to rise by approximately 1%. Income is expected to drop across all crop segments, as well as the poultry and hog industries, with the largest declines expected in the dairy and wheat production sectors.
As has been mentioned often in this report, the situation in Canada is quite different. While commodity prices are set on the world market, the lower Canadian dollar has acted as a buffer for Canadian farmers. With oil prices being one of the major drivers of the U.S.-Canadian exchange rate, any rise in the energy markets will mitigate this factor quickly.
Canadian livestock producers should see a slight increase in cash receipts while Canadian crop farmers are expected to see cash receipts rise by 2%, to new record levels, according to Agriculture and Agri-Food Canada.
We tracked 61 M&A transactions in the Agribusiness sector during the first quarter of 2018, with a median transaction multiple of 7.1x EBITDA and 0.9x revenue, among transactions with reported values. Machinery & Equipment was the most active segment with 12 transactions, followed by Animal Health and Nutrition (11) and Crop, Turf & Ornamental Inputs (10).
TRENDS TO WATCH
Given the state of the U.S. ag economy, one area we are watching closely is the new Farm Bill negotiations. With a large federal deficit, there is pressure to reduce spending, particularly on programs like SNAP (Supplemental Nutrition Assistance Program – eg: school lunch program, food stamps etc.); however, there is also strong bi-partisan backing for farmers’ income support, given some of the uncertainties and market challenges facing the industry. The current Farm Bill expires in September of 2018, with one 6-month extension allowed before it must be renewed.
International trade is another major concern amongst participants in the sector in both Canada and the U.S. The growing trade dispute between China and the U.S., with China threatening retaliatory tariffs on a wide range of agricultural commodities, is placing further pressure on the markets, particularly on pork and soybean producers. China is a major export market for U.S. ag products, and tariffs on these products will open doors for major competitors such as Argentina, Brazil and Russia to fill the void. Further, the U.S.’s exit from the Trans-Pacific Partnership (TPP) last year may place further trade barriers for U.S. producers as Asian-Pacific countries ratify the agreement and tariffs are lowered and eliminated for agreement participants…
Q4 INDUSTRY UPDATE
Low prices in the crop, livestock, dairy and poultry segments continue to weigh heavy on the sentiment of U.S. farmers and their outlook for 2018. For instance, many row crop producers in the Midwest had good yields but remain disappointed with prices.
According to a recent USDA ERS report, production of red meat, poultry and milk for the first half of 2018 are expected to be above production for the same period in 2017, driving most commodity prices lower. One exception is eggs, where prices are expected to rise in spite of higher production levels. This is attributed to ultra-low prices from record-setting excess supplies in the first half of 2017.
The ag economy in Canada remains relatively strong, driven by a low Canadian dollar and strong demand for major crops, such as canola.
Publically traded Titan Machinery, a large network of farm equipment dealerships, is reporting improved sentiment in the U.S. farm machinery market. As such, the company announced reduced inventory of used equipment and a planned increase in new equipment inventories. A farm equipment dealer survey in October also indicated renewed optimism on the prospects for sales in 2018, with 55% of respondents projecting an increase in new equipment sales.
We tracked 44 transactions in the Agribusiness sector during the fourth quarter of 2017, with a median multiple of 13.4x EBITDA and 2.0x revenue. Machinery & Equipment was the most active segment, followed by Crop/Turf/Ornamental Inputs and Oilseeds & Ingredients.
TRENDS TO WATCH
While near-infrared remote sensing of agricultural crops via satellite has been used for over twenty years, its widespread adoption has been limited by a host of practical issues, including resolution levels, the frequency of flyovers, the quality of the data under certain conditions and the speed of processing data.
Today, these issues are being rapidly addressed by companies like Planet Labs. The company continues to rapidly deploy a constellation of compact (10×4 inches) orbiting satellites to add to its existing fleet of approximately 200, along with more complex, larger satellites for higher-resolution applications. The goal of the company is to scan the entire earth’s surface every 24 hours. Farmer’s Edge, a leading precision ag technology service provider, recently announced a strategic alliance with Planet Labs to utilize and apply its intensive temporal and high-resolution imagery in crop production agriculture. With frequent low-resolution digital imagery to monitor changes in crop health, supplemented by higher-resolution data processing and diagnostic/interpretation capabilities, Farmers Edge hopes to lead the market in this potentially game-changing technology…
Q3 INDUSTRY UPDATE
THE STATE OF THE AG ECONOMY
According to a Purdue University/CME Group ag economy barometer, U.S. agricultural producer sentiment across the diverse industry waned in September. While the index improved after last year’s U.S. elections, driven by a generally brighter outlook of the overall economy and its impact on the ag sector, pessimism of continued low commodity prices into the future weighed heavily on producers’ near-term expectations.
For producers north of the border, the weaker Canadian dollar against the greenback has tempered the impact of the low commodity price environment. A recent study by the University of Illinois indicated that liquidity ratios have declined to risky levels for many U.S. producers, while a comparison undertaken by the Farm Credit Corporation indicates that Canadian farmer liquidity remains healthy. However, this advantage has been steadily disappearing since the Bank of Canada began increasing interest rates in July and the loonie has since gained strength against the USD.
In spite of lacklustre market conditions, NASDAQ’s OMX Global Ag index (QAGR), a blend of agriculturally related global public companies, was up almost 6% in Q3 compared to the S&P 500’s increase of approximately 4% over the same period. Monsanto recently reported record sales ($10.9B) and gross margins in fiscal 2017 in its seed and genomics segment. Results were attributed to a number of factors including its 2017 launch of its Xtend technology platform, a GMO seed/dicamba herbicide platform that delivers a viable solution to increasing weed resistance issues from widespread, multi-year use of glyphosate. The launch was not without controversy, as many producers have experienced crop damage from dicamba drift, which may have major implications on its future use, as the industry and regulators grapple with viable mitigation strategies.
M&A AND CAPITAL RAISING ACTIVITY
According to AgFunder, an online marketplace that tracks early and growth-stage investment activity across the agrifood value chain, agrifood capital investments for the first half of 2017 totaled $4.4B, up 6% over the same period in 2016, and on track to meet or exceed the record set in 2015. AgFunder also notes that deal size is getting larger and deal quantities are shrinking, particularly deal quantities at the seed and start-up stages. Corporate funds also are slowly becoming a larger proportion of the total invested capital and the industry is starting to see some successful exits…
Q2 INDUSTRY UPDATE
Agricultural commodity prices have now been in a slump for three full years. The S&P GSCI Agriculture index, a sub-index of their broader commodity index, is down almost 44% since May 2014. The old saying that “the best cure for low prices is low prices” doesn’t seem to apply this time, as lower prices are not stimulating significant new demand.
The good news is that it is rare for all subsectors within the diverse agricultural industry to underperform at the same time; as some subsectors tend to be countercyclical to each other. As an example, when crop prices are high, its great for crop producers but high feed prices reduce margins for livestock, poultry and dairy producers. The processing sector often acts countercyclical to commodity markets as well, particularly when supply is the price driver. Some markets, such as fruit and vegetable production, operate somewhat independent from the general ag commodity markets.
The implications of the underlying fundamentals on merger and acquisition activity is highly dependent on the subsector and whether a company is private or public. Many public companies’ reactions to narrowing margins and slowing growth is to look for merger opportunities (Bayer-Monsanto, Dupont-Dow, Syngenta-ChemChina, Agrium-Potash Corp, etc.). The reaction in the private company markets is more situational, however, during the low parts of the cycle; many owners are reluctant to sell and many others may not be in a financial position to buy. Nevertheless, well financed private companies can often have great success if they can find the right situation and acquire quality companies that are a strategic fit at a reasonable value.
One Agrifood segment that currently seems to be fairing quite well, is the Produce industry. According to industry magazine The Packer, 68% of consumers are eating more fresh fruits and vegetables than they were five years ago. Fresh cut melons, pineapple and sliced apples, packaged for convenience, are examples of healthy choices gaining share of the overall snack food category. During the 2nd quarter, we attended the Canadian Produce Marketing Association (CPMA) Annual Trade Show and Convention in Toronto, the SIAL Canada Expo in Toronto and the United Fresh Convention and Expo in Chicago. We met with dozens of senior managers and CEOs to discuss and share our respective thoughts on the prevailing trends and opportunities in agrifood and produce.
In spite of robust demand, the Produce industry is facing a couple of major headwinds that have CEOs concerned. The first issue is labour. In both Canada and the U.S., much of the industry relies heavily on foreign workers for the intensive field and greenhouse work such as harvesting, packing and processing. With uncertainty surrounding U.S. immigration policy, and pushes in some regions for minimum wage increases, accessing cost-effective labour will become increasingly challenging.
Q1 INDUSTRY UPDATE
According to a recent survey by Purdue University, U.S. farmer sentiment showed some weakness over the last couple of months after improving dramatically late in 2016 from earlier in the year. In general, U.S. producers remain relatively pessimistic about their financial condition in the near term (next 12 months). Some input costs, such as fertilizer, have edged higher since the beginning of 2017. While they still are generally below 2016 values, this may be one contributing factor to the shift in sentiment.
The financial condition of farmers in Canada has been less volatile due to the offsetting impacts of supply management in the dairy and poultry sectors, high crop yields in 2016 and the low exchange rate of the loonie (thus driving exports and strengthening the basis).
Some ag segments in both countries, such as dairy, are showing short-term optimism and expectations are higher in 2017 than they were in 2016.
The Purdue survey results outlined above are corroborated by a USDA report, released in February, which states that overall cash receipts are expected to remain relatively flat year-over-year, and they will remain well below recent peaks in 2012-13. The analysis suggests that dairy and cotton will show the strongest improvements in 2017, and that cattle and wheat will show the largest declines.
Nevertheless, over the longer term (next five years), both U.S. and Canadian producers are becoming more optimistic. A recent DTN/Progressive farmer poll and Canadian Federation of Independent Business (CFIB) survey each indicated that long-term producer optimism is strengthening.
During the last quarter, we had the opportunity to meet with many ag and food-related CEOs at both the World Ag Expo in Tulare, California and the International Production and Processing Expo (IPPE). Across much of the entire agrifood supply chain, participants are generally focused on reducing operating expenses in a tight margin environment, and they remain relatively cautious. You can read our full synopsis from IPPE here.
Processors and manufacturers are continuing to automate and use technology to reduce labour costs and increase speed and efficiency, while remaining flexible with customized offers and short lead times.
Meanwhile, dealers are consolidating to reduce operating expenses. Online publisher Farm-equipment.com has reported no less than fifteen mergers or acquisitions by and between farm equipment dealers in the quarter.
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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