July 5, 2008

Crop Fortunes Favor Chemical Companies

By Sabine Vollmer, The News & Observer, Raleigh, N.C.

Jul. 5--John Rabby's eyebrows rose as he scanned the prices spring crops were fetching on the Chicago Mercantile on Tuesday.

"Wow," said Rabby as he scrolled down corn futures on the computer in his office at Makhteshim Agan of North America in North Raleigh. Commodities traders were paying about 12 percent more for a bushel of corn that will be delivered in May than for one available now.

Crop futures offer a glimpse of where food prices are going. It's not a pretty picture for consumers struggling with skyrocketing energy costs, a credit crunch and mounting job losses. But as CEO of Makhteshim Agan, Rabby liked what he saw.

Higher crop prices are good news for the Israeli chemical giant that makes pesticides, herbicides and fungicides from active ingredients that are off patent. Business is booming and the company plans to expand its North American headquarters in Raleigh, buy laboratory space and add about 15 employees in the next two to three years.

"We're having a very good year," Rabby said.

Farmers are penny pinchers. Exposed to the vagaries of the weather and the volatility of the market, the best control they have over their income is to minimize costs for planting, protecting and harvesting crops.

But adverse weather around the globe -- prolonged droughts in Australia and Russia, recurrent floods in Europe and last year's late spring freeze in this country -- has cut into supplies. Meanwhile, increased biofuel production is diverting nearly 30 percent of the U.S. corn crop to make fuel ethanol and dietary changes in developing countries are boosting U.S. exports. As a result of the demand-supply mismatch, U.S. commodity prices have jumped about 70 percent since January 2006.

Rising crop prices, in turn, are spurring farmers to plant more acres. Despite the flooding in the Midwestern corn belt, U.S. farmers are expected to produce the second largest corn harvest on record and generate a record national farm income of $92 billion this year.

Chemicals to protect valuable crops will be in high demand, said Ed Estes, assistant head of N.C. State University's Department for Agricultural and Resource Economics.

"If [farmers] have a weed problem, they want the weeds gone," Estes said. "Weeds will hurt yield."

Vic Swinson, a Duplin County farmer for more than 30 years, regularly uses a Makhteshim Agan fungicide on his peanut plants. "You have to spray the peanuts or your crop will die," Swinson said. "It's all about pounds and bushels. You've got to make the most of the crop that you can just to survive."

Crude oil prices that are nearing $150 a barrel are squeezing farmers, too, Swinson said. In the past two years, the cost to grow corn has increased from about $200 an acre to about $450 an acre because of higher prices for diesel fuel and fertilizers, which are made from oil.

"One bad year can put me out of business," Swinson said.

Rainfall and temperature remain a farmer's main challenges. But Makhteshim Agan is working on broadening its product line to offer something for every weather.

With agrochemical product sales increasing 20 percent to $1.9 billion last year, Makhteshim Agan was ranked seventh behind other crop protection giants like Bayer, BASF and DuPont. But it was also the second-fastest growing company in the industry.

As the head of Makhteshim Agan's North American business, Rabby oversees five business units that employ about 160, including about 50 in Raleigh.

The company makes most of the active ingredients for its about 250 products at plants in Israel, Brazil and Colombia. Twelve contract labs come up with the final recipes for products aimed at a variety of plants, including corn, soybeans, cotton, turf, fruit trees and ornamental shrubs and flowers.

The Raleigh headquarters handles marketing and planning. But to further increase the variety of products, Rabby plans to do more development in-house, and he is looking for lab space in the area. North Carolina and the Triangle are on top of his list of locations for the same reason that Makhteshim Agan moved its North American headquarters from New York's Fifth Avenue to Raleigh's Falls of Neuse Road three years ago: the area's labor pool.

Five of the top eight agrochemical companies worldwide have U.S. headquarters or research and development facilities in the Triangle, an area better known for drug development. That's no coincidence. The agrochemical industry depends on some of the same scientific skills as pharmaceutical and biotech companies.

Makhteshim Agan's new lab will be in charge of formulating products that farmers can use and combine whether it is wet and cool or hot and dry.

"We're not trying to predict Mother Nature," Rabby said.

Instead, the company wants to have products ready for every weather, he said. "If it's too hot, too cold, too dry, too wet, we can change [products] with the weather."

That'll help with another company goal: Boost annual sales by about one-third.

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