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Chemical firms eye 3-4 percent hikes

You knew it was coming, didn't you? If oil and natural gas prices are rising faster than they can change the signs at the pumps, could crop protection chemicals be far behind?

They aren't giving specifics yet, but farm chemical manufacturers say prices of some commonly used products could rise 3 percent to 4 percent between now and the beginning of the 2006 crop season.

Spokesmen for the companies concede it isn't the best time to be raising prices for farmers, but they say they also cannot continue to “eat” the rising costs of raw material the way they have for the last two to three years.

“If you look at all of the increases in input prices, you'll see that chemical costs per acre have been relatively flat for the last three years,” says Vern Hawkins, head of U.S. commercial operations for Syngenta Crop Protection. “This time the agriculture industry is going to feel it because we can't continue to absorb these increases.”

Farmers are all too aware of the numbers Hawkins was referring to: anhydrous ammonia, up 177 percent since 2002; diesel fuel, up 109 percent; natural gas, up 231 percent; propane, up 164 percent; all fertilizer per acre for corn, up 42 percent; fuel, lube and electricity for corn, up 37 percent.

Chemical costs per acre for corn, on the other hand, have held fairly steady at around $26 per acre, increasingly only 2 percent since September of 2002.

“There's no question that the costs for any crop with glyphosate as a mainstay have been down,” said Hawkins. “But rising raw material costs for other products will force increases next year.”

Industry efficient

“For two and a half years or more our industry has done all that it can to mitigate the impact of escalating feedstock and energy costs,” said Andrew Liveris, chief executive officer of Dow Chemical Co. “We've been sharply focused on reducing operating expenses, improving energy efficiency and generally controlling things we were able to control to address this unprecedented challenge.”

Spokesmen for BASF and DuPont & Co., said their companies also plan across-the-board price increases for all of their products, including crop protection chemicals, due to rising energy and raw material costs.

“We've taken significant actions over the last few years to drive down costs under our control to offset the effects of rising feedstock and energy prices during that period,” said Klaus Peter Loebbe, BASF chairman and chief executive officer.

He said the increases are necessary “to maintain a healthy business and to continue to meet our customers' supply requirements.”

Hawkins said Syngenta has been able to absorb or offset higher costs to a degree through futures contract hedges, longer-term contracts, competitive sourcing, using innovative new manufacturing processes and formulating products nearer their predominant markets.

Another source of savings has been the $647 million the company estimates it has saved annually since the merger that created Syngenta from two other crop protection chemical companies in 2000.

While the recent spikes in oil and natural gas prices following Hurricanes Katrina and Rita certainly played a role, the rising costs of other raw materials are also contributing significantly to the increases.

“Some molecules (of farm chemical ingredients) are used globally,” says Hawkins. “Agriculture often has only a small impact in those markets. We're seeing an across-the-board increase in demand in those other sectors of the economy as well.”

Ingredients in common

The key ingredients in Syngenta's AAtrex brand of the widely used herbicide atrazine are natural gas, ammonia, chlorine and sodium hydroxide, all of which are also ingredients in non-agricultural products.

The cost of a short ton of chlorine, which is also used in Syngenta's Bravo fungicide, rose from $210 in September 2002 to $270 in September 2004 to $340 in September of this year, an increase of 62 percent over three years.

Sodium hydroxide was selling for $132.50 per short ton in September 2002, $120 in September 2004 and $295 last month for a 123-percent increase. (Sodium hydroxide and chlorine are delivered by pipeline to Syngenta's manufacturing plant in St. Gabriel, La. The plant experienced only brief disruptions in supply from the two hurricanes.)

Other common crop protection product raw materials such as ethylene, methanol, propylene and xylene have registered price increases of 45 percent to 114 percent since September 2002.

But natural gas, which has risen from $2 per 1,000 BTU in early 2002 to more than $10 per 1,000 BTU in September, continues to be a major cost driver, accounting for about one-third of Syngenta raw material purchases in North America in 2004.

Hawkins said Syngenta is still working to finalize its prices for 2006, but that he wouldn't be surprised to see increases on the order of 3 percent for several of its crop protection products.

“We are trying to make sure farmers are getting value from the products we sell,” he said. “And that we're pricing our products consistent with the value they deliver to our customers.”

Liveris said Dow Chemical is working with the government to try to heighten awareness of the implications of the “astronomically high oil and natural gas prices,” which, he said, threaten the long-term health of the U.S. chemical industry.

Passage of the Energy Policy Act of 2005 by Congress earlier this year will help over time, he said. “Although the legislation makes progress toward reducing demand and increasing the availability and diversity of fuel sources in the United States, it needs to go further — particularly in relation to closing the projected gap between natural gas demand and available supply.

Offshore reserves

“In the near-term, focusing on energy efficiency and conservation can help, but this alone cannot resolve the nation's energy needs. We absolutely must drive toward environmentally sound production of our nation's vast offshore energy reserves.”

He said Dow would continue to focus on managing price and volume in a way that would allow it to re-invest in its existing facilities, including seeking price increases across its portfolio of chemical and plastic products.

“At Dow, we have done much to manage our own cost structure and to offset the impact of ever-higher energy and feedstock costs. At this point, however, we have no choice but to ask our customers to pay more for their products to safeguard supplies in the future.”

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