The WWF just released its Living Planet Report for 2016, its key research and thought piece put out every two years. As a real-estate reporter, I write a lot about development. But the other half of my brain is adamantly in favor of conservation, and as a South African (OK, half -- on my Dad's side) I have a passionate desire to protect the world's amazing wildlife. I am also an avid scuba diver, and I have witnessed first-hand how the waters of Asia have been depleted in the 15 years I have lived and dived in Asia.
I'm going to explore how investors can benefit from the need for wise use of our natural resources, particularly when it comes to growing food. I took a look at Chinese agricultural stocks at the time of China's full-moon harvest festival, and then Chinese farm stocks. This article looks at seed and farm chemical producers.
The WWF report has plenty of depressing information. Wildlife populations fell 58% between 1970 and 2012, and will likely be down 67% by the end of this decade. The report concludes that we are in a new era, the "Anthropocene," in which humans rather than natural forces are the primary drivers of changes in the planet.
But the report also offers hope. Humans are beginning to recognize how much we depend on nature. This year looks to be the hottest on record, but it seems that carbon-dioxide emissions have peaked. The huge amount of coal that China burns also seems to have turned lower.
Humans must respond to the challenges we ourselves have created, the report states, in particular when it comes to the production of energy and food. The concentration on measures such as gross domestic product has created short-term thinking that does not think about the long-term health of the planet.
CLSA has put out some interesting research on seed and agricultural-chemical production that suggests how companies in those industries can help us feed ourselves -- ideally without poisoning our environment while we're at it.
The most contentious issue is the proposed acquisition for $43 billion of the Swiss pesticide and seed group Syngenta (SYT) by the state-owned enterprise China National Chemical Corp., better known as ChinaChem (SNP) . The European Union last week launched an in-depth investigation into the deal. That sent Syngenta's shares down 8% in October. CLSA says the deal has a 35% chance of approval "at best."
If ChinaChem does win out, genetically-modified seed markets will likely boom and become the default for all Chinese crops, including rice, wheat, fruit and vegetables. All "GM" stocks should benefit, including Monsanto (MON) , which had earlier bid for Syngenta, as China rapidly adopts GM technology.
It is in Asia that the battle to produce enough food to feed the planet will be won or lost. Agricultural production is "moving south," away from Europe and North America and into the southern hemisphere. Asia dwarfs the developed world in terms of agricultural acreage, but yields in China are a fraction of the West, and Indian yields are a fraction of those in China.
India holds the most potential as a result. It also has only 5% of its "ag acres" as pastureland, which produces goats and cows well, but not food crops. In China, 70% of the ag acres are pastureland. But India's farmers are largely impoverished, and resort to illegally burning their rice straw, creating disastrous air quality in New Delhi and other parts of northern India. They cannot afford the $1,900 cost of a machine called the Happy Seeder that would allow them to plant wheat over the rice straw, despite a 50% government subsidy.
Japanese crop-chemical producers are the global leaders in the production of new crop products. Combined, they accounted for 239 patents between 2008 and 2013, 24% of the global total, behind only the 27% held by Bayer (BAYRY) .
In terms of sales, Sumitomo Chemical (SOMMY) , UPL (UPL) from India, Nihon Nohyaku T:4997, Kumiai T:4996 and Mitsui Chemicals (MITUY) are the largest Asian crop-chemical producers, aside from UPL, all being Japanese. Mergers and acquisitions in the sector are likely given the cost of developing new products and the heavy regulatory burden.
Western-based multinationals such as Bayer, Syngenta, BASF (BASFY) , DowDuPont - soon to be the product of a merger between Action Alerts PLUS charity portfolio holding Dow Chemical (DOW) and DuPont (DD) - are the heavweights in ag chemical and seed production.
The Japanese companies could be prime targets. "While the Japanese are the biggest molecule innovators, their failure to expand much beyond Asia has left their footprint smaller than less-successful innovators elsewhere," CLSA notes. Then again, Sumitomo Chemical has been one of the most-acquisitive crop-chemical producers, moving heavily into the U.S. and Europe. It makes its products at five Japanese plants, but is a world leader in molecule discovery of new products.
In terms of nations, Asia accounted for nine of the top 10 producers of rice last year, led by India and China, the only exception being Brazil. But China plants 30% fewer acres and delivers 46% more rice than India. China and India also rank among the largest producers of soy and wheat globally, joined in the Asia Pacific region by Australia and Pakistan for the latter crop. India has plenty of room to grow in terms of agriculture, while ag in China has largely been driven politically, rather than by the market.
Interestingly, the CLSA report cites counter-intuitive research from the University of Göttingen in Germany that shows that genetically modified seed use reduces overall crop chemical use by 37%, as well as increasing rather than harming biodiversity. Europe is the biggest user of crop chemicals - led by France - but their use is expected to boom in Asia as purchasing power improves.
Chemicals giant DuPont has a strong Asia bias, with crop-chemical production facilities, particularly for insecticides, in Australia, China, Indian, Indonesia, the Philippines, Taiwan and Thailand. Pioneer, a company it acquired in 1999, is the leading seller of seeds globally, and represents 27% of total sales, with crop chemicals accounting for 12%. Its brand ranks behind only John Deere, CLSA says. But the creation of DowDuPont, without the use of the Pioneer brand in the name, will render it an "also ran," in the brokerage's eyes.
ChinaChem in 2011 bought what's now called Adama Agricultural Solutions, an Israeli producer of generic crop chemicals. The company is attempting to rebrand itself as an Israeli owner of Chinese assets, rather than an Israeli subsidiary of a Chinese state-owned enterprise. It is diverse in terms of its crop coverage, and has branched out into research, although R&D accounts for only 1% of sales for now. Europe is currently its largest market, but its movement into China adds geographic diversification, and could see it benefit from repurposing existing crop chemicals for use in the mainland.
So ChinaChem is worth monitoring with or without Syngenta. It might offload Adama to a second-tier player, raising that company's profile -- CLSA says that's exactly what a Western company would do. But of course ChinaChem is government-backed, and Beijing may have other ideas.
UPL -- previously called United Phosphorous -- and Australia-based NuFarm (NFRMY) are Adama's main competitors when it comes to the production of generic crop chemicals. NuFarm has grown through acquisition, and in 2012 tried to offload one of its Chinese subsidiaries only for that to fall through. Instead, it sold a 20% stake in itself to Sumitomo. That should help NuFarm reduce a heavy reliance on herbicides, while increasing Sumitomo's geographic footprint.
The generic makers have plenty of room to grow in R&D. It will be interesting to see if those companies do help improve food production, and ultimately our quality of life and the planet's biodiversity. Let's hope they have a shot.
PI Industries, listed on the National Stock Exchange of India under the ticker RN, is a niche player worth keeping an eye on. It licenses technology from the Japanese players for use in the highly complex Indian market, where distribution is essentially a mess.
