To Boost Investor Returns, Agribusinesses Must Foc

CHICAGO, July 24, 2017 (GLOBE NEWSWIRE) -- Agribusiness has hit a rough patch for investors. The industry’s five-year shareholder returns are among the lowest of 34 sectors analyzed recently by The Boston Consulting Group (BCG) . This marks a 180-degree reversal from 2007 through 2011, when agribusiness was the best-performing industry, according to the management consulting firm.

An infographic accompanying this announcement is available at http://www.globenewswire.com/NewsRoom/Attachm...c3a6563aa5

What triggered this sharp reversal in performance? And how can agribusiness companies regain momentum and create outsized returns for their shareholders? These are among the questions answered in BCG’'s 2017 Value Creators report on agribusiness, Sowing the Seeds of Recovery , which is being released today. The study also predicts that industry M&A activity will likely rebound in the near future.

The 40 global agribusiness companies in BCG’s sample generated an average total shareholder return of 7% annually from 2012 through 2016—lower than all but two other industry groups surveyed. (TSR is the annual percentage return to owners, which comes from capital gains plus any dividends.)

For many agribusinesses, depressed prices for agricultural commodities have been the main factor impeding value creation. Corn prices, for example, have fallen by more than 50% since 2012. In the US, the collapse of commodity prices has driven down net farm income to less than half of the peak reached in 2013. Farm indebtedness has risen sharply, forcing farmers to delay or refocus investments. Considering projected increases in fuel costs and rising interest expenses on higher debt levels, the US Department of Agriculture forecasts that farmer spending on inputs (seed, fertilizer, and chemicals) per acre will remain flat in the coming years. A similar dynamic is evident in other regions.

“Given farmers’ financial stress, it is no surprise that many agribusinesses that sell to farmers have struggled to create value,” says Decker Walker , a BCG partner and a coauthor of the report. “To sow the seeds of recovery in this challenging economic environment, agribusiness executives must recognize that creating value for shareholders goes hand in hand with creating value for farmers.”

“The forces pressuring agribusiness economics show no signs of abating in the near term, as commodity prices are likely to remain range-bound at depressed levels,” says Torsten Kurth , a BCG senior partner and report coauthor  who coleads (with Decker Walker) BCG’s global work in agribusiness . “To emerge as the winners in the increasingly intense battle for a share of farmers’ spending, agribusinesses must place farmers’ economics at the center of decision making.”

Agribusiness Profit Pools Are Shifting

An analysis of average annual TSR performance from 2012 through 2016 by industry subgroup reveals a dramatic shift in agribusiness profit pools since 2011. Fertilizer producers have been hit the hardest by farmers’ belt-tightening: after leading the agribusiness peer group in TSR from 2007 through 2011, these companies have seen falling fertilizer prices drive negative TSR. Processed-protein producers became the top TSR performers, as higher feed-to-price ratios for livestock promoted stronger revenue growth and higher operating margins. An increase in valuation multiples across industry subgroups reflects the market’s expectation that a cyclical recovery of commodity prices will boost performance over the long term.

The top ten agribusiness companies each had average annual TSR greater than 13%. These top performers provided shareholders with an approximately 3.5 times return on investment from 2012 through 2016, while the rest of the sample generated barely any return on investment. Sales growth and an increase in valuation multiples were the most important factors contributing to the TSR performance of the top ten, seven of which are processed-protein producers. (See exhibit.)

Coming Soon: The M&A Revival

The study also found that M&A activity appears ready to rebound from a recent steep decline. Proposed mergers of industry giants—Dow and DuPont, Bayer and Monsanto, ChemChina and Syngenta, and PotashCorp and Agrium—have resulted in a large pipeline of deals (exceeding $200 billion in value) involving agricultural-chemical and seeds producers. Big Ag players have turned to M&A because they have not escaped the effects of farmers’ constrained economics. Farmers’ price sensitivity has driven down revenues and margins, while R&D productivity has declined and R&D costs steadily increased. Faced with these challenges, the large players are combining in order to capture cost synergies, provide fully integrated seed-and-chemical offerings, grow through geographic expansion, and increase R&D effectiveness. Those companies unable to find the right M&A partner may find themselves at a competitive disadvantage.

A Playbook for Weathering the Downturn

The authors present a playbook for a farmer-centric approach to weathering the agribusiness industry’s near-term challenges. The playbook includes basing innovation decisions on farmer economics, developing an integrated product portfolio, focusing on cost efficiency, and rigorously targeting M&A opportunities to achieve strategic and operational objectives. For example, to make the right innovation decisions, agribusinesses must gain an in-depth understanding of how farmers’ costs can be fundamentally improved and use those insights to reassess their R&D portfolios and set new priorities.

A copy of the report can be downloaded at http://on.bcg.com/2gO79Fi .

To arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or gregoire.eric@bcg.com .

About The Boston Consulting Group The Boston Consulting Group (BCG) is a global management consulting firm and the world’s leading advisor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 85 offices in 48 countries. For more information, please visit bcg.com .

The Boston Consulting Group Eric Gregoire Global Media Relations Manager Tel +1 617 850 3783 Fax +1 617 850 3701 gregoire.eric@bcg.com