Bearish Outlook for Agricultural Chemical Producers
Factors that will effect change and a move towards sustainable agriculture by farmers and increase the pressure on the agricultural chemical sector.
1) Seed cost.
2) Fertilizer cost.
3) Soil erosion.
4) Decreased margins based on above costs.
5) Failure of bio-fuels as alternatives to petroleum products.
6) Water pollution created by fertilizer run-off.
At $3.00 per bushel, herbicides cost nearly 7 bushels per acre, seeds cost 30 bushels per acre, fertilizer costs nearly 60 bushels. At $4.00, herbicides cost 5 bushels, seeds cost about 23 bushels, fertilizer costs about 45.
Sustainable agriculture can produce results near that of chemical farming. If a farmer can produce 120 bushels of corn per acre without the use of chemicals, he needs to produce nearly 190 bushels at $3.00 bushel to have the same result. At $4.00 per bushel, he needs to only produce 170 bushels using chemical fertilizers. But at 150 bushels per acre the sustainable agriculture farmer exceeds profitability of the chemical farmer and studies have shown that yields greater than 150 bushels per acre using sustainable farming methods are reasonable.
The energy required to produce bio-fuels exceeds the energy value of the fuel produced thus bio-fuel production from crops are essential a negative sum gain. Any abandonment of current bio-fuel policy would have severe immediate implications upon the price of corn, which in turn would pressure agricultural chemical companies in a similar manner.
The implications of environmental regulation of the runoff would infer a decreased usage of agricultural chemicals, a forced acceptance of sustainable agriculture, a decrease in overall crop size, and an increase in corn prices.
With the cost of chemicals and seed rising, at what point do farmers begin to realize that the cost is a risk that they would be better off not accepting and move towards lower cost sustainable agricultural methods.
While not a believer in global warming caused by carbon dioxide, returning crop residue to the soil will restore organic matter to the soil as well as sequester 10 to 50 percent of current carbon emissions. With increased organic matter in soil, the soil requires less irrigation and is less vulnerable to erosion caused by wind and water.
For these reasons, I believe that the long term trend for agricultural chemical producers is bearish. The only possibility for price support comes from developing nations with very poor soil quality whose immediate needs for food stocks are greater than current sustainable agriculture practices can produce, and that is assuming there is no competing bio-fuel needs.
Studies by Iowa State University, Sustainable Agriculture Systems Laboratory, and Rodale Institute were used in the preparation of this report.
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