Mercer Capital's Value Focus: Agribusiness | Q2 2018 | Segment: Crops and Crop Services
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The document summarizes recent performance and outlook for the crops and crop services industry. It notes that the industry experienced losses from 2013-2017 due to falling commodity prices, rising costs, and trade disputes. While another year of margin contraction is expected, projections foresee a slow recovery starting in 2019. The trade dispute between the US and China is expected to further hurt farmers' profits by reducing exports of soybeans and wheat. Mergers and acquisitions activity in the industry continues, led by the merger of Agrium and PotashCorp to form Nutrien, the world's largest crop nutrient company.
Mercer Capital's Value Focus: Agribusiness | Q2 2018 | Segment: Crops and Crop Services
- 1. VALUE FOCUS Agribusiness Segment Focus: Crops and Crop Services Second Quarter 2018 www.mercercapital.com Segment Focus Imports/ Exports Seeds Crop Services Government and Regulatory Activity Mergers and Acquisitions Agribusiness Industry Commodity Prices Publicly Traded Agribusiness Companies Indices: One Year Performance Historical EV / EBITDA Multiples About Mercer Capital 1 2 3 4 4 5 6 8 9 9 10
- 2. © 2018 Mercer Capital // www.mercercapital.com 1 Mercer Capital’s Value Focus: Agribusiness Industry Second Quarter 2018 The crops and crop services segment experienced significant losses in the period from 2013 to 2017. Slipping agricultural product prices, trade disputes, and rising expenses have made matters worse in the first two quarters of 2018. Certain commodities demand more production, while others are becoming less profitable, leading to a mixed-bag result for farm income statements. Another year of margin contraction is a realistic expectation for the industry; however, long-term projections predict a slow recovery starting in 2019. Given the U.S. economy’s dependence on the overall industry, long-term negative growth is not likely. Figure 1: U.S. Farm Sector Income Statement, 2013–2018F SEGMENT FOCUS Crops and Crop Services 2013 2014 2015 2016 2017 2018F Crops 220.8 211.4 187.6 195.0 195.4 197.6 Livestock 182.7 212.8 189.5 162.8 176.0 175.3 Direct Government Payments 11.0 9.8 10.8 13.0 11.5 13.8 Other Farm-related Income 41.0 36.6 34.4 27.9 32.9 35.0 Gross Cash Income $455.5 $470.6 $422.3 $398.7 $415.8 $421.6 Noncash Income 17.7 16.9 17.8 17.1 18.6 19.8 Value of Inventory Adjustment 10.6 (4.3) 0.5 (4.1) (5.0) (8.4) Total Gross Income $483.8 $483.1 $440.5 $411.7 $429.5 $433.0 Total Expenses 360.4 391.1 359.4 350.2 354.3 369.8 Net Farm Income $123.4 $92.0 $81.1 $61.5 $75.2 $63.1 Source: U.S. Department of Agriculture
- 3. © 2018 Mercer Capital // www.mercercapital.com 2 Mercer Capital’s Value Focus: Agribusiness Industry Second Quarter 2018 The overall state of international agricultural trade has been thrust into uncertainty during the second quarter of 2018. The U.S. dollar index depreciated over 10% in 2017, making U.S. goods relatively cheaper abroad and stimulating trade. Agricultural exports are still in a long-time expansion, and a depreciated dollar drove demand even further up. China, the United States’ largest agricultural export market, has continued to purchase U.S. agricultural products including soybeans and wheat. This overseas market has made exports a necessary and reliable revenue stream for U.S. farmers. However, during the second quarter of 2018, the United States announced a series of tariffs on all international imports, and then specifically on Chinese imports. These tariffs were met with retaliatory actions from China, who placed their own sanctions on the U.S. This trade dispute is expected to hurt farmers’ bottom lines, effecting downstream demand for all agribusiness products and services. With a falling Agricultural Price Index (API) already cutting into profits, the trade dispute is expected to hamper agribusiness profits across each different industry segment. Soybean and wheat exports are already down 10% and 16% respectively since the sanctions have taken hold. Imports/ Exports U.S. Agricultural Trade Balance 1976-2018
- 4. © 2018 Mercer Capital // www.mercercapital.com 3 Mercer Capital’s Value Focus: Agribusiness Industry Second Quarter 2018 The seed industry is expected to grow to $60 billion in 2018. The widespread adoption of genetically modified seeds has made farms more efficient, and producers of these seeds are reaping the benefits. These new seed technologies yield healthier plants, larger har- vests, and resistance to insects/insect repellent chemicals. Four large companies dominate the industry, and synergies created from mergers and acquisitions has allowed these firms to cut costs, increase research and development funding, and streamline global distribution networks. The market for seeds has experienced shifts in demand thus far in 2018. For example, there is a growing need for grains, oils, and vegetables. As the global population continues to grow, the need for these staples will grow with it. Corn has had the largest growth in demand during 2017 due to increased production from ethanol producers. Last year, 40% of all corn harvested was used in the produc- tion of ethanol. If these trends continue, ethanol producers could occupy a large portion of U.S. farmland in the years to come. Moving forward, some external factors that could impact corn production are EPA regulation changes or shocks in the price of oil. Seeds Adoption of Genetically Engineered Crops in the United States 1996-2018 Source: USDA
- 5. © 2018 Mercer Capital // www.mercercapital.com 4 Mercer Capital’s Value Focus: Agribusiness Industry Second Quarter 2018 Crop services like harvesting, ginning, and fertilizer application have carved out a stable position in the agribusiness industry. Industry revenue has flattened out over the last five years (0.3% annualized growth ’12-’17), showing signs of sector maturity. This slow growth is expected to increase to 0.7% annual growth from ’18-’22. Some external drivers of this growth are increased crop production, rising lending rates, and demand from fruit farms. As agricultural inputs and seeds themselves become more sophisticated, farmers across the United States are producing fuller har- vests. This growth in crop volume has led the farming community to call on crop services providers to pick and transport these har- vests. The crop services industry has also benefitted from an increase in lending rates. These higher rates make it more expensive for farmers to purchase and upgrade equipment. Aging fleets, in turn, spurn demand for crop services, as it is often cheaper to outsource the work than to upgrade old machinery. Farmers rely on support from the U.S. government in the form of subsidies, disaster relief, conservation payments, and other payment programs. These resources are allocated to U.S. farms in the Farm Bill. Farm Bills must be renewed every four years by the House and Senate, and 2018 is another chance at renewal. There are many questions regarding changes that might be made, including extra funding that lawmakers might want to award farmers, or programs that might see funding cuts. If lawmakers want a smooth transition that involves no gaps in farmer aid, then getting the Farm Bill passed by the end of 2018 is necessary. Given the great number of other issues demanding congressional attention, passing the bill before December seems highly unlikely. Crop Services Government and Regulatory Activity Government Farm Program Payments to Farm Producers, 2009-19F $ billion (nominal) Note: F = forecast. 1/ All other payments include supplemental and ad hoc disaster assistance, tobacco transition, Cotton Ginning Cost Share, dairy, and miscellaneous programs (such as the Market Facilitation Program). 2/ Includes Price Loss Coverage (PLC), Agriculture Risk Coverage (ARC), counter-cyclical payments (CCP), Average Crop Revenue Election (ACRE) payments, loan deficiency payments (excluding grazeout pay- ments), marketing loan gains, and certificate exchange gains. CCP and ACRE were not continued in the 2014 Farm Bill. PLC and ARC payments began in 2015. 3/ Includes direct fixed payments portion of Direct and Counter-Cyclical Program (DCP) and Cotton Transition Assistance Program (CTAP) payments (in 2014/15). Source: USDA, Economic Research Service, Farm Income and Wealth Statistics. Data as of August 30, 2019.
- 6. © 2018 Mercer Capital // www.mercercapital.com 5 Mercer Capital’s Value Focus: Agribusiness Industry Second Quarter 2018 Aside from the uncertainty of future government aid to farms across the country, FDA regulations heavily affect the crops and crop ser- vices industry. Post-harvest activities make up 41.8% of industry revenue, and constantly shifting food safety laws require compliance. In 2011, the Food Safety Modernization Act (FSMA) was passed, requiring food processing companies to prevent food-born illnesses and reach certain standards of food safety. Any future FDA legislation aimed at food safety concerns might marginally affect industry net income through rising costs, but firm specific risks are much more likely as compliance on a large scale can be tricky. The crops and crop services industry includes several distinct subsectors with big players in each niche. There were deals in each subsector, and consolidation is the trend in the industry. Out of all the deals that have been transacted in 2018, one merger stands out as a disruptive move. On January 2, 2018, Agrium and PotashCorp finalized a merger to become Nutrien (NYSE: NTR). Both Agrium and PotashCorp were major players in the fertilizer industry. PotashCorp, formerly headquartered in Saskatoon, Saskatchewan, has a large portfolio of potash, nitrogen, and phosphate products. Agrium, formerly headquartered in Calgary, Alberta, is known for its global fertilizer distri- bution network. This merger created the world’s premier provider of crop inputs and services. Nutrien has over 20,000 employees, 1,500 farm retail centers, and operates in 14 countries. The merger is set to create around $500 million in synergies, and Nutrien is expected to sell 25 million tons of fertilizer product per year. Nutrien’s estimated worldwide market share in the fertilizer industry is around 23%, with a 60% market share in North America. The estimated market capitalization of the merged entities is approximately $27 billion. Government and Regulatory Activity (continued) Mergers and Acquisitions
- 7. Mercer Capital’s Value Focus: Agribusiness Industry Second Quarter 2018 © 2018 Mercer Capital // www.mercercapital.com // Data Source: Bloomberg 6 Corn Soybeans Wheat Cotton Rough Rice Oats Source: Bloomberg Source: Bloomberg Source: Bloomberg Source: Bloomberg Source: Bloomberg Source: Bloomberg
- 8. Mercer Capital’s Value Focus: Agribusiness Industry Second Quarter 2018 © 2018 Mercer Capital // www.mercercapital.com // Data Source: Bloomberg 7 U.S. Gulf Coast Ultra-Low Sulfur No 2 Diesel Spot Price (Dollars per Gallon) Ethanol Lean Hogs Live Cattle Source: Bloomberg Source: eia Source: BloombergSource: Bloomberg
- 9. © 2018 Mercer Capital // www.mercercapital.com 8 Mercer Capital’s Value Focus: Agribusiness Industry Second Quarter 2018 Company Name Ticker Price 6/30/18 52 Wk Perform (Market Cap) LTM Revenue ($) Enterprise Value ($M) Debt/ MVTC EBITDA Margin EV / LTM EBITDA (x) EV / Nxt Yr EBITDA (x) Price/ LTM Earnings (x) Diversified Agribusiness CF Industries Holdings, Inc. NYSE:CF 44.40 58.8% 4,226 17,189 27.3% 32.2% 12.65 12.33 17.63 The Mosaic Company NYSE:MOS 28.05 22.9% 8,215 15,522 32.3% 18.1% 10.42 7.95 NM Intrepid Potash, Inc. NYSE:IPI 4.10 81.4% 148 564 10.5% 27.5% 13.82 10.11 NM Yara International ASA OB:YAR 41.47 10.8% 11,941 14,371 28.9% 9.2% 13.09 7.80 114.46 Nutrien Ltd. TSX: NTR 54.38 N/A 13,416 44,532 27.1% 19.8% 16.73 11.66 63.13 Archer-Daniels-Midland Company NYSE:ADM 45.83 10.8% 63,491 33,894 22.5% 4.3% 12.34 10.46 13.33 Bunge Limited NYSE:BG 69.71 -6.6% 45,816 17,402 45.9% 2.6% 14.47 8.48 NM Median - Diversified Agribusiness 17% 11,941 17,189 27.3% 18.1% 13.09 10.11 40.38 Agricultural Machinery & Equipment Manufacturers Deere & Company NYSE:DE 139.80 13% 32,969 84,178 49.8% 16.1% 15.89 16.05 24.69 AGCO Corporation NYSE:AGCO 60.72 -10% 9,059 6,672 29.2% 8.5% 8.71 7.99 21.86 Lindsay Corporation NYSE:LNN 96.99 9% 556 1,048 11.1% 10.9% 17.27 13.47 48.06 Median - Manufacturers 9% 9,059 6,672 29.2% 10.9% 15.89 13.47 24.69 Dealers Titan Machinery Inc. NasdaqGS:TITN 15.55 -14% 1,172 687 59.3% 3.5% 16.95 15.00 NM Rocky Mountain Dealerships Inc. TSX:RME 8.37 9.3% 787 452 67.6% 4.8% 11.86 12.97 10.05 Cervus Equipment Corporation TSX:CERV 10.83 27.1% 981 359 50.9% 4.5% 8.19 8.13 9.91 Median - Dealers 9% 981 452 59.3% 4.5% 11.86 12.97 9.98 Source: Capital IQ Publicly Traded Agribusiness Companies
- 10. © 2018 Mercer Capital // www.mercercapital.com 9 Mercer Capital’s Value Focus: Agribusiness Industry Second Quarter 2018 Historical EV / EBITDA Multiples Mercer Capital Agriculture Indices: One Year Performance Source: Capital IQ Source: Bloomberg
- 11. Mercer Capital Agribusiness Industry Services Contact Us Copyright © 2018 Mercer Capital Management, Inc. All rights reserved. It is illegal under Federal law to reproduce this publication or any portion of its contents without the publisher’s permission. Media quotations with source attribution are encouraged. Reporters requesting additional information or editorial comment should contact Barbara Walters Price at 901.685.2120. Mercer Capital’s Industry Focus is published quarterly and does not constitute legal or financial consulting advice. It is offered as an information service to our clients and friends. Those interested in specific guidance for legal or accounting matters should seek competent professional advice. Inquiries to discuss specific valuation matters are welcomed. To add your name to our mailing list to receive this complimentary publication, visit our website at www.mercercapital.com. Mercer Capital has expertise providing business valuation and financial advisory services to companies in the agribusiness industry. Industry Segments Mercer Capital serves the following industry segments: • Agriculture Machinery, Equipment, & Implements • Crop and Crop Services • Agriculture Real Estate • Agriculture Chemicals Contact a Mercer Capital professional to discuss your needs in confidence. Nicholas J. Heinz, ASA 901.322.9788 [email protected] Timothy R. Lee, ASA 901.322.9740 [email protected] John T. (Tripp) Crews, III 901.322.9735 [email protected] Mercer Capital 5100 Poplar Avenue, Suite 2600 Memphis, TN 38137 901.685.2120 (P) www.mercercapital.com BUSINESS VALUATION & FINANCIAL ADVISORY SERVICES Services Provided • Valuation of agriculture companies • Transaction advisory for acquisitions and divestitures • Valuations for purchase accounting and impairment testing • Fairness and solvency opinions • Litigation support for economic damages and valuation and shareholder disputes