Fitch: US Agricultural Chemicals Remain Challenged through 2016

Agricultural productivity will outpace food demand in the near term, Fitch Ratings believes. This will likely result in low grain prices and farmer demands for reduced costs including rents, fertilizers, crop protection chemicals, and seeds. For fertilizers, pricing pressure also comes from a stronger dollar and growing excess capacities that are expected to persist beyond 2018. We expect greater consolidation in the fertilizer industry to drive lower costs and de-risk investment in capacity, new products, or distribution capacity.

Low crop prices stem from three bumper crops in a row and strong grain stocks. Global agricultural production is expected to increase in the 2015/2016 season and weigh on crop prices and farmer incomes in 2016. Crops have benefitted from favorable weather and high planting but also from high performance seed, fertilizer application, and application of targeted crop protection chemicals.

Brazil is a key agricultural growing region and imports the vast majority of its fertilizer. In Brazil, farmers are challenged by tight credit and an over 40% depreciation of the Brazilian real. To some degree, Brazilian farmers exporting their crops benefit from crop prices denominated in the U.S. dollar. Brazil's potash imports were down 10%, monoammonium phosphate imports were down 20%, and urea imports were down 38% in the year through September 2015 compared with the same period of 2014.

North American nitrogen fertilizer production benefits from low feed stock costs, domestic short supply, and inability to skip application. Domestic production has been consolidating while expansions go forward to take advantage of low natural gas prices.

North American phosphate fertilizer production exceeds consumption but can be globally competitive if integrated into quality phosphate rock, sulphur, and ammonia. Production based on purchased rock has been closing down.

Potash production is consolidated in few geographic locations based on mineralization. North American production costs are higher relative to production from Belarus and Russia and margins will continue to decline as new capacity is added.

Weaker farm economics has driven a shift toward lower yielding, less expensive seeds. Seed prices will need to be re-rated to reflect the drop in crop prices while pricing the newest higher yielding seeds, at a premium. Crop protection chemicals are generally suffering sales declines as generic competition grabs share.

Seed and crop protection producers are expected to continue to engage in mergers and acquisitions given the need for scale in research and development as well as germplasm.

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