Commodity prices have fallen significantly over the years. As a result, several companies’ margins have been squeezed. Players within the agricultural chemical space (IYM) can’t do much about these prices due to the commodity nature in the business. However, these companies can lower their production cost to protect their margins or increase their market share through consolidation to increase the sales volume.
Earlier in this series, we saw that the Potash Fertilizer segment will form the largest portion of the PotashCorp (POT) and Agrium (AGU) merger. The above chart shows that average potash realized prices for PotashCorp for a merger that’s horizontal, vertical, or both would help the companies tackle falling fertilizer prices in the following ways:
- It would optimize their combined production facilities and achieve greater economies of scale. The cost-per-product ton goes down and the margin spread increases assuming that fertilizer prices remain at the current levels.
- It would lower the cost by eliminating redundancies including SG&A costs.
- It would leverage the logistical network which helps lower the transit costs for products.
The case is similar for nitrogen as well as phosphate prices. Fertilizer prices have fallen significantly due to falling crop prices denting the farm income. Optimization of farm technology created a safety net for the growing population by increasing the output. However, this also impacted the companies engaged in the sector.
More mergers to come
Recently, Monsanto (MON) and Bayer AG announced a merger, while Dow Chemicals (DOW)-DuPont (DD) and Syngenta (SYT)-ChemChina are pending mergers. It wouldn’t be surprising if we see more mergers announced. Companies within the agribusiness space continue to consolidate. Read Monsanto and Bayer Ink Merger Deal, but It’s Not Over Yet to learn more.