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Mature and shrinking fast

The ag chem industry is changing almost daily with layoffs, spin-offs, ventures with enemies, and merger plays where human drugs take priority over agriculture. What's next and what does it mean for you?

After almost 60 years since 2,4-D ushered in the herbicide era that helped reinvent production agriculture in America, some chemical makers are facing judgment day. It's driven by technology, price/value competition, a brutal farm economy, overcapacity, distribution inefficiency and demanding stockholders.

Such consolidation isn't new. Just take a quick scan into the past: Stauffer and ICI into Zeneca; PPG, Chevron and Sumitomo into Valent; Union Carbide, Mobil and now Hoechst/AgrEvo into Rhone-Poulenc to become Aventis; Velsicol, Sandoz and Ciba-Geigy become Novartis; Shell and Pioneer into DuPont; Dekalb and Holdens into Monsanto; Mycogen into Dow AgroSciences; Shell International into Cyanamid into American Home Products; and on and on. The latest speculation at press time is that DuPont or Monsanto will merge with Novartis.

Cost cutting. "Large chemical companies are inefficient and must figure out how to lower the delivered cost of goods to the grower," says Fulton Breen, president and CEO of, an Internet-based "exchange floor" for specific ag inputs. "This is a natural response for industries in the mature phase of their life cycle and shareholders are demanding it. Companies must consolidate sales, marketing and R&D because this industry can't support 2,200-plus sales reps, $1.5 billion in marketing programs and $1.5 billion in distribution channel markups.

"For the industry in general and growers in particular, it's a good thing and the right thing to happen," Breen responds. "Free and efficient markets have long made America great; it's just that change is uncomfortable for many people."

John Rabby, vice president and general manager of Cyanamid's U.S. crop protection group, says that this is a sign of the times. "The market has been devalued by hundreds of millions of dollars, but the needed corrections being taken will result in a much stronger industry," he states.

Price of technology. Jim Wilbur, stock analyst covering the ag industry for Salomon Smith Barney, sees one unique aspect of a maturing market. "A difference here is you don't often have a major new technology [Roundup Ready] compound an already competitive market by forcing long-term price reductions on the rest of the industry in order for them to compete," Wilbur says. "So to survive, you see companies like Cyanamid and DuPont take deep product discounts, which are great for the farmer's bottom line, but has inevitably led to cost cutting, layoffs and more mergers in an effort to retain profits and stock prices in this competitive environment."

Rhone-Poulenc (R-P), in the midst of merging with Hoechst/AgrEvo to form Aventis by the end of the year, finds itself, like many farmers, at a crossroads. "In this brutal farm economy full of overproduced commodities, farmers are looking at every aspect of their operations to cut costs, evaluate systems and reduce risks," says R-P's Dave Downing, herbicide and fungicide team leader. "So are we, just on a much larger scale. But we're both trying to establish or find our critical mass to compete."

Applying focus. Breen, an ag chem company marketing veteran prior to his current e-commerce foray, says that industry survival, for chemical companies and farmers, comes down to leveraging your core competency. "In general, companies have to look at what they're great at relative to their competitors and make a bet on developing that attribute to its extreme.

"Monsanto made a very big bet on biotech 15 years ago, and it is now beginning to pay off," Breen continues. "DuPont, with Pioneer, has made a bet on the output side of biotech grain traits that will probably pay off down the road. At, our bet is that a neutral trading floor for buyers and sellers of ag inputs will make American agribusiness more efficient. Will that guarantee our success? Who knows?"

Price/service relationship. As the Internet begins to play an increasing role in how farmers buy chemicals, seed and other goods, companies are spending time online to judge its impact on their businesses. "E-commerce will definitely have an impact on pricing, distribution structure and the service sector, but it's too early to judge value," Wilbur adds.

Breen, obviously a believer in the Internet, feels that farmers will pay for exactly the amount of service they desire, whether it's tied to a product purchase or not.

"The farmer understands the value of services based on his local experiences. With the advent of the Internet, he'll now know the market value of his inputs as well. The amount he has been paying above that is the 'relationship premium,'" Breen says. "But, in tough times, farmers can ill afford to pay a hefty premium to suppliers. In a neutral trading exchange, they can now quickly gather price information on inputs and negotiate fair market values for services from their suppliers."

Downing believes more access to information "will make the farmer a more critical buyer in the future to reduce his costs, but we still see him keeping his local dealer and/or custom applicator in the loop to provide the services and perhaps bundled products he desires."

Who will handle products? Cyanamid, the champion behind the AgriCenter concept that is now synonymous with all ag chem retailers, is now looking to streamline the channel. "Given tougher economic times, we realize that we must get product to the market in a more timely and efficient manner," Rabby says. "This means that we'll be focusing more on key distributors and less on invoicing relationships with retailers. That doesn't mean we'll drop relationships, but they will change in the future to be more business focused."

Breen thinks that distributors and dealers will continue with warehousing and delivery but expects dealers to not only expand their services to farmers, but also to basic manufacturers. "We'll see chemical companies paying dealers to do some tasks that sales reps used to handle, as well as create the warmth and goodwill."

New products? Considering the fact that farmers currently have a wide variety of effective herbicides now that control most any weed at economical prices, industry sources don't see much new chemistry being developed for Midwest row crops.

"It is so extremely difficult and expensive to develop new products that could beat current efficacy and value in the marketplace," Downing adds.

"Companies are becoming more efficient at R&D, and the research effort will shift from mass screening of molecules for new herbicidal active ingredients to the use of functional genomics to develop new compounds," Breen says.

Issues that cloud. While genetically modified (GM) crops met a wall of resistance in Europe, no one predicts that this attitude will reach our shores with any serious impact. But you can bet it is causing potential merger partners to think twice before leaping.

"The issue of GM crops is causing a huge quagmire right now," Wilbur says. "And when the real growth potential of most chemical company mergers is in pharmaceuticals, the ag divisions that deal in GM technology may cause negotiations to change."

Downing believes the industry and the American consumer will ultimately get past this issue but says, "It may take a few years and some good output traits to help consumers understand the good science behind the technology."

Cyanamid's Rabby also says that it is unfortunate that the current emotion behind the issue of GM crops isn't based on sound science. "Once consumers have the choice of foods that offer them health or nutritional benefits, they probably will look at this technology differently. We have to do a better job as an industry in understanding public acceptance issues in introducing this new technology," he says.

Despite the challenges and survival-of-the-fittest mode occurring in the ag chem business, and down on the farm, lessons gained from tough times can make for better input and service suppliers in the long run.

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