Rocky road for commodities

BANFF, Alta. — Lower commodity prices are going to prove challenging not only for farmers but also for the companies that sell services and products to them, says a senior analyst at Rabobank.

“Over the next five years, we see with 75 percent probability corn prices will be at or below $4.10 a bushel,” Kenneth Zuckerberg said at Bayer’s Agronomy Conference in Banff Nov. 15.

“So that’s the challenge near term for the farming community that has been operating at much higher levels.”

Less growth in the U.S. ethanol sector and lower Chinese demand for feed grain, partially because of improvements in feed use efficiency in that country, will stall demand for corn.

“When you think about the commodity super cycle, a lot of the growth in corn in particular came from the ethanol trade and that’s sort of no longer part of the picture,” Zuckerberg said.

The U.S. is also coming off three strong production years, and the country’s corn carryover is reaching record highs.

“That is bringing more supply on a market that already has a lot of supply,” he said.

Many U.S. growers are already losing money and need to become lower cost operators, which means they will have to gain in scale and efficiency, he said.

“We think now is an interesting opportunity for them (farmers) to consider mergers or consolidating with other entities,” he said.

“Another factor here is that the average age of U.S. farmers is approaching 60, and to the extent that one doesn’t have a succession plan, it sort of gives us another impetus to consider this,” Zuckerberg said.

Zuckerberg said larger farming operations will be able to invest more in technology, including better seed, process and equipment.

“As grain prices have fallen, farmer spending in general has come down,” he said.

“So with the pressure of farmer bottom lines, it also translates to the pressure on the farm input companies selling to those farmers.”

There has already been significant consolidation of companies on the farm input side.

“We have had a plethora of deals in the past 18 months: Dow-Dupont, Chem China-Syngenta, Agrium and Potash (Corp.) right here in Canada, and of course the proposed acquisition of Monsanto by Bayer,” Zuckerberg said.

Zuckerberg expects a rough road ahead for companies that offer agricultural technology services, and he sees only a handful of larger companies making it through the lower end of this commodity cycle.

It might not be the best time to invest in smaller agricultural technology companies, he added, because it is hard to generate revenues when the primary business model is selling to farmers at a time when their revenues are down.

“I think with the farm management software companies, there are two or three of them that are in pretty good shape, but there are a lot of me-too products that I think will run out of funding,” Zuckerberg said.

However, Zuckerberg thinks some agricultural tech companies will be able to secure funding and stay profitable, even through a period of lower crop prices. They are companies that have proven technology that marries agronomic science with innovation, such as specialty plant nutrients, biological products and other seed advancements.

“Companies without either large revenues or proven technology to improve soil health and plant life — If you don’t have either of those, I think it will be difficult to get additional funding.”

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