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.
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