One Industry That Will Do Wonders For Your Portfolio: Part I
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The fertilizers and agricultural chemicals industry consists of makers of agricultural fertilizers, pesticides, seeds, and lawn and garden products. In 1950, America began industrializing U.S. farming operations through a mix of policy decisions and innovation. This in turn allowed the world’s agricultural production to grow over 2.5 times its size over the last 50 years, though the cultivated area has grown by only 12%. Crop production growth goes hand in hand with crop yield increase and/or expansion in the physical area (arable land) allocated to crops. Crop yields need to continue to grow to feed the expanding population, and fertilizers and pesticides are used to help fuel the increase in yields.
In the first part of the chemicals-agriculture fertilizer industry analysis, I will provide a life cycle analysis of the industry, introduce the key players in the industry and provide a geographic breakdown of sales for these companies.
Life Cycle Analysis
The agriculture chemical fertilizer industry is in the introductory, growth, and mature phase in its life cycle depending on the location. The fertilizer industry in the U.S. and other wealthy countries has matured, while there’s still room for growth in developing nations. Demand for fertilizer has more than doubled between 1970 and 2012 in the developing world, while in rich countries; farmers have been growing more food with less fertilizer from about 1990 on.
The leading companies in the crop protection industry are mainly agribusinesses or large chemical companies based in Western Europe and North America. Companies compete on the basis of strength and breadth of product range, product development and differentiation, geographical coverage, price and customer service. Today, Asian and Indian farmers are the major users of fertilizer. One-third of the increase in cereal production (grain used for food) worldwide, and half of the increase in India’s grain production during the 1970s and 1980s has been attributed to increased fertilizer consumption. Looking at the table below, DuPont’s sales are much higher than the other comparables because their product diversity. Agriculture is the company’s largest segment, accounting for roughly 24% of 2011 sales (click here to see why DuPont is one of Barton Bigg’s top picks). The remaining companies’ operations are in one way or another derived from agriculture.
Syngenta (NYSE: SYT) is geographically diversified and employs an estimated 260,000 people in over 90 countries. Syngenta sells seed products that are developed using advanced genetics and related technologies in all major territories. Syngenta has more sales from EAME than any other comparable, and even with poor economies in Europe, Syngenta managed to grow sales in the continent at 9% year-over-year. North America is Syngenta’s second largest market and accounted for 28% of Syngenta’s sales in 2011 (U.S. 24%, other 4%). Total N. American sales in 2011 grew 9%, recovering from the 8% decrease in sales in 2010. In Latin America, Syngenta has focused on developments in breeding and transformation activities on corn and sugar cane. Latin America is Syngenta’s third largest market. The region contributed to 25% of total sales in 2011. From 2009 to 2011, sales in this region have grown annually by 20%. The Asia Pacific accounts for 15% of Syngenta’s total sales, and Syngenta expects this market to grow in the future due to various emerging markets such as China, Malaysia, the Philippines, South Korea, Vietnam, and Bangladesh.
*Net sales and long-lived assets are attributed to the geographic areas of the relevant Monsanto legal entities. For example, a sale from the United States to a customer in Brazil is reported as a U.S. export sale.
Monsanto (NYSE: MON) specializes in everything from seeds to crop protections. The company had over $1.5 billion in sales from EAME, or roughly 13% of their 2011 sales. EAME was Monsanto’s third largest region in terms of sales, and they had more sales than both Agrium and Potash. North America makes up more of Monsanto’s sales than any other region. Monsanto had more North America sales than every comparable other than Agrium and DuPont, and in 2011 the region account for over 60% of their total sales. Looking at Latin America, Brazil is extremely important for global agriculture, and therefore has been a major priority for Monsanto. Only behind the United States, Brazil is the second-largest exporter of soybeans, and there are vast opportunities for increasing yields through fertilizers. Latin America was Monsanto’s third largest geographic segment, accounting for over 17% of 2011 sales.
With over 750 farm stores across the United States, Agrium (NYSE: AGU) is the largest agricultural retail operator in the United States. Their services expand outside of retail. Agrium also produces and distributes nitrogen, potash and phosphates. In 2011, Agrium had North American sales over $11.5 billion, the second among the comparables, behind only DuPont. North America accounted for nearly 75% of Agrium’s 2011 sales. The Asia Pacific is Agrium’s second largest region in terms of sales, accounting for nearly 15% of sales in 2011. Both Latin America and the EAME were miniscule in comparison to North America and Asia Pacific.
E I Du Pont De Nemours NYSE: DD) has a moderately diversified line of products and services. DuPont did not break down their geographic sales by product/service, but they did state that 24% of their 2011 sales came from their agriculture segment. They have focused a large amount of their attention toward becoming a global seed provider. Analysts expect their seed segment to be a major growth contributor in both North America and emerging markets. DuPont had the largest sales among comparables in every region. The largest percentage of their revenues stems from North America, where they had $12.4 billion in sales in 2011. DuPont has increased their North American corn and soybean market share at the expense of Monsanto.
Potash Corp (NYSE: POT), the largest independent potash producer, has an oligopolistic position in the market. With only a few major players in the industry, Potash is comfortably positioned to sustain their competitive advantage. The potash producer has focused their marketing efforts toward North America, which explains why the largest amount of sales came from the region. In 2011, Potash received nearly $5.5 billion in sales from North America, or over 60% of their total sales. Relative to their comparables, Potash has the smallest exposure to EAME.
Part II of this industry analysis will discuss demographics information, key inputs used, and will assess the valuation of the various players mentioned above.
This article is written by Mike Pate and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article.The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.