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The fickleness of Mother Nature is hitting home with U.S. farmers.
Crop prices, thanks to favorable weather, have been shriveling for the past three years. That has put U.S. farm income in a severe downward spiral. The Department of Agriculture estimates U.S. farm income is in a drought, perhaps falling 36% this year to the lowest level since 2006.
If farmers don’t have money, they don’t spend on new farm equipment, fertilizers, pesticides and seeds. That in turn puts pressure on the bottom lines of companies whose business is to provide these items to U.S. farmers.
These same companies are under additional pressure from the deep recession in Brazil. That country, along with the U.S., is the breadbasket to the world. The plunging Brazilian real is making the products and services of the big agricultural corporations too expensive for Brazilian farmers.
There is one likely result of the current hard times in farm country when looking at the ag companies. Just go back and look at history.
The Players
The start of the last decade saw low crop prices too. It resulted in the seed and agriculture chemicals industry consolidating into a “big six.” The lineup consists of: DuPont (NYSE: DD), Dow Chemical Co. (NYSE: DOW), Monsanto Co. (NYSE: MON), Syngenta AG (NYSE: SYT), Bayer AG (OTC: BAYRY) and BASF SE (OTC: BASFY).
Fast forward to today and many of these same companies are under pressure from activist shareholders to improve returns.
DuPont is being pushed along by Nelson Peltz’s Trian Fund Management, while Daniel Loeb’s Third Point is prodding Dow.
Monsanto is also under pressure to upgrade its image and performance. Syngenta is in the midst of a management change, and even Germany’s Bayer is undergoing a complete corporate renaissance.
It wasn’t at all surprising then when Dow Chemical CEO Andrew Liveris said that “everyone is talking to everyone” in the industry. DuPont’s new CEO Edward Breen also said he has been in deal discussions with many of his counterparts.
Get a Scorecard
The possible combinations between all the companies are almost too much to get one’s arms around. So grab your merger scorecard.
Here are the current top three in both seeds and ag chemicals:
- Seeds: Monsanto, DuPont, Syngenta
- Chemicals: Syngenta, Bayer, BASF
Bayer and Monsanto are looking to add to their ag businesses, as is BASF. The latter was rumored to be ready to step in and break up the Syngenta-Monsanto deal with an offer of its own for Syngenta.
Syngenta and its shareholders are definitely in sell mode. The only question there is which of the remaining “big six” will end up with most of Syngenta.
DuPont and Dow are a tougher call. Each could be a buyer or a seller. If either firm does become a buyer, I would expect the newly beefed-up agricultural unit to be spun off into a separate entity because of activist shareholder pressure.
In fact, I would not be shocked to see the two firms combine their ag units into a new company, which would be No. 3 in the ag chemicals segment and still No. 2 in seeds.
Dow’s seed business would likely have to sold off – perhaps to BASF, which has already shown interest in Syngenta’s seed business.
With all the potential ag mergers, I would also expect that regulators demand that some juicy pieces be sold off to smaller players, with FMC Corp. (NYSE: FMC) and Platform Specialty Products (NYSE: PAH) being likely candidates.
Who Will Make the First Move?
The question for me is not if these next rounds of mergers in the agriculture space will happen, but when the opening gun for merger mania will sound.
Which company is the best investment in the sector?
Again, it’s a tough call until we see how it all plays out. As I said earlier, a combo of Dow’s and DuPont’s ag businesses would be great. If it becomes a stand-alone company, that would be my choice.