2H 2023 Agribusiness M&A Report

Today’s farming is far from simple, and it’s anything but removed from the same global issues affecting many industries. In 2023, as talk of climate change and mitigation strategies captured headlines, so too were environmental initiatives the talk of Agribiz. From carbon gas capture to greenhouse gas reduction to novel ways to reduce fertilizers and develop more sustainable livestock feeds, environmental concerns were a big part of the agricultural scene.

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Previous Agribusiness Reports

Farmers and ranchers have a lot to overcome. Farmers get one crop a year and a whole bunch of things must go correctly to turn a profit. Ranchers are subject to the whims of the weather and water. Raising poultry for eggs and meat involves lots of birds packed together with high vulnerability to everything from heat waves to any old virus that comes along. The world in 2022 and 1H23 threw everything it had at agriculture, creating hard times for farmers and higher prices for consumers. When the farmer suffers, everybody suffers. Supply chain issues, global weather events, plant diseases, and bird flu conspired against agriculture, plus the war between two powerhouse grain and fertilizer producers, Russia and Ukraine.

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Sometimes the next best thing is not exactly “next.” In the agribusiness industry, we’re always watching for emerging fields and opportunity to get in on something new. But in at least one area, “vertical farming,” enthusiasts may have gotten ahead of themselves. The industry – using robotics and controlled environments to produce leafy greens (and to a lesser degree other crops)– is learning a hard lesson: Not only do they need to produce greens, they need to make greenbacks….

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Agribusiness Report 2H 2022

Looking back on the first half of 2022 there were many forces tugging at the Agribusiness Industry, but they all boil down to a common theme of input costs and market rewards. Whether those forces were working for or against the business of producing food for the world depends on where you stand. But wherever we see a flux, we see an opportunity to engage and maximize value.

Producers were inundated in 1H22 by rising fuel, fertilizer and input prices, drought, and disease. However, supply pressure on the commodities market offers a ray of hope as grain and other commodity prices rise. And as the federal Farm Bill is up for renewal, a tug of war looms between ethanol producers and food production, and some in the government eye both a moratorium on mergers and acquisitions and potentially an entirely new branch of government to regulate food safety. Those considering deals in the Agribusiness Industry walked a gauntlet of uncertainty.

If ever there were an industry with more moving parts than a game of Tetris, Agribusiness in 2022 is it. Keeping track is not an option this year when considering any merger and acquisition activities…

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Amid the turmoil of a global pandemic, international tensions, and political discord in 2021, the Agribusiness sector continued to innovate and progress, leaving us optimistic as we look to 2022 and beyond.

In the past year we saw real, tangible progress in soil carbon sequestration incentives, advances in agricultural technology, and major advancements in fully autonomous farm machinery operation. M&A activity demonstrated an accelerating move into all things tech, imagining a maximally efficient supply chain, progress towards reducing greenhouse gas emissions, and autonomous equipment that allows farmers to tend vast operations from a phone app.

Despite nagging supply chain woes and difficulties obtaining everything from ag chemicals to replacements parts and a trucking and transport snarl that hampered efforts to bring crops to market, M&A activity in the sector reflected a progressive view of modern farming, with deals that hint at a shift to more efficient farm management partnerships…

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If necessity is the mother of invention, agribusiness may be in for a renaissance because this year’s scorching heat and drought have backed farmers into a corner. Parts of the wheat belt in the Northwest saw little rain through 1H21. Parts of typically wet Oregon were declared drought zones.

By July, the U.S. drought map painted every western state in deep shades of red to indicate severe drought, with abnormally dry and drought conditions stretching across northern wheat, corn, and cattle state clear to Chicago and parts of the upper Midwest. Some areas are reporting as little as a quarter of anticipated rainfall over the preceding 90 days. Canada’s farmlands, too, baked this spring, threatening the wheat belt and other crops from Vancouver to Quebec. Colorado reservoirs were drained to supply downstream farmers all the way to California, and scientists predicted a “megadrought,” the second-worst in 1,200 years and perhaps the start of permanent drought, caused in part, some said, by human-caused climate change.

As farmers struggle to keep up with global demand, consumers can expect higher prices. And it’s not just farmers who are suffering. Ranchers, faced with the prospect of too many cattle for available water and grazing lands, either need to cull herds through early slaughter or purchase hay. Both will likely result in higher prices for consumers. The federal government by the end of 1H21 was already reporting earlier than usual slaughter periods…

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The business of agriculture in the United States and Canada – like many other sectors this year – bounced through months of uncertainty brought on by a global pandemic, continuing trade disputes, and supply and demand mismatches. All this after 2019 brought devastating floods to the U.S. Midwest and South, delaying planting across a swath of the country, and hurricane-related damage in 2017 and 2018. The farming industry, it seems, can’t catch a break.

Lockdowns and stay-at-home orders cut deeply into the restaurant and hotel business – important markets for many producers. Nearly 100,000 restaurants closed in the U.S. alone. A drop in total miles driven cut into demand for biofuels. And while supply chain challenges left some supermarket shelves bare – including meat shortages – other farm products experienced an oversupply and farmers were forced to dump milk or destroy herds.

Looking deeper, we did find some interesting trends and opportunities for M&A activity amid all the bad news. For one, plant-based protein such as “meatless meats” and plant-based dairy and egg substitutes appear to be on a major upswing. Companies ranging from startups to traditional consumer packaged goods (CPG) players are getting into the trend as consumers are lured by better taste, price, and availability…

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Like almost every industry, the global coronavirus pandemic has been incredibly disruptive on many parts of the Agribusiness Industry. In developing countries, issues such as border closures and supply chain disruptions have amplified food security issues. In much of the developed world, massive changes in consumer behaviour have created huge imbalances in supply and demand. Labour intensive agricultural production and processing operations have struggled with virus outbreaks among the workforces which have led to shutdowns in many cases, while others operate at reduced capacity in order to help ensure worker safety.

Nevertheless, we all must eat, and the virus has had much less impact on agriculture and food than it has on other more sensitive industries, such as travel and tourism. It has, however, exposed weaknesses and vulnerabilities in the industry, such as labour supply and supplier concentration in segments such as Protein Processing.

According to Purdue University’s latest Ag Barometer Index, almost two-thirds of respondents remain very worried about the pandemic and its impact on their business, down from three-quarters of the respondents in the March survey. More than half plan to reduce their capital expenditures and approximately 40% expect their financial performance in 2020 to be worse than last year…

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In June, Purdue’s Ag Barometer, an index tracking U.S. farmer sentiment on current and future economic conditions, dropped to its lowest level in almost three years, only to be followed by its largest one-month increase since its inception in July.

“The agricultural economy weakened considerably this spring” said James Mintert, the barometer’s Principal Investigator and Director of Purdue University’s Center for Commercial Agriculture. However, the coinciding relief that the difficult spring was finally over, coupled with the Federal Crop Insurance “Prevent Planting” program, were likely contributors to the dramatic sentiment turnaround.

Corn and wheat futures prices responded to lower anticipated supply by increasing approximately 25% and 15% respectively, by the end of June. Soybeans can be planted later in the season than corn which resulted in less dramatic planting delays, and markets were up only slightly over the last three months. Additional pressure to the soybean market is coming from China’s 25% tariff on U.S. soybeans coupled with reduced demand by the Chinese pork industry as it battles to contain a major outbreak of African Swine Fever; a highly contagious disease with no cure or treatment other than containment by culling. An estimated 1.2 million hogs have been euthanized in China since the outbreak began.

Rapidly deteriorating diplomatic relations between Canada and China during the first half of 2019 have also pressured Canadian crop and livestock commodity markets, such as canola, pork and beef. In March, China halted all canola sales from Canada based on an unspecified “quality” issue, and in June, halted all beef and pork imports because it claimed the Canadian government inspection system had failed to detect the presence of a banned feed additive and inauthentic veterinary certificates. China represents 40% of Canada’s canola export market and approximately 20% its pork exports.

SDR tracked 97 transactions involving businesses participating in and serving the Agribusiness Industry during the first half of 2019, with a median multiple of 2.1x revenue. This compares to 118 transactions, with a median multiple of 0.7x in the second half of 2018 and to 117 transactions, with a median multiple of…

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In June, Purdue’s Ag Barometer, an index tracking U.S. farmer sentiment on current and future economic conditions, dropped to its lowest level in almost three years, only to be followed by its largest one-month increase since its inception in July.

“The agricultural economy weakened considerably this spring” said James Mintert, the barometer’s Principal Investigator and Director of Purdue University’s Center for Commercial Agriculture. However, the coinciding relief that the difficult spring was finally over, coupled with the Federal Crop Insurance “Prevent Planting” program, were likely contributors to the dramatic sentiment turnaround.

Corn and wheat futures prices responded to lower anticipated supply by increasing approximately 25% and 15% respectively, by the end of June. Soybeans can be planted later in the season than corn which resulted in less dramatic planting delays, and markets were up only slightly over the last three months. Additional pressure to the soybean market is coming from China’s 25% tariff on U.S. soybeans coupled with reduced demand by the Chinese pork industry as it battles to contain a major outbreak of African Swine Fever; a highly contagious disease with no cure or treatment other than containment by culling. An estimated 1.2 million hogs have been euthanized in China since the outbreak began.

Rapidly deteriorating diplomatic relations between Canada and China during the first half of 2019 have also pressured Canadian crop and livestock commodity markets, such as canola, pork and beef. In March, China halted all canola sales from Canada based on an unspecified “quality” issue, and in June, halted all beef and pork imports because it claimed the Canadian government inspection system had failed to detect the presence of a banned feed additive and inauthentic veterinary certificates. China represents 40% of Canada’s canola export market and approximately 20% its pork exports.

SDR tracked 97 transactions involving businesses participating in and serving the Agribusiness Industry during the first half of 2019, with a median multiple of 2.1x revenue. This compares to 118 transactions, with a median multiple of 0.7x in the second half of 2018 and to 117 transactions, with a median multiple of…

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