The pesticide industry will boom in 2024

In 2023, the pesticide market as a whole is in a downward cycle of destocking, and by the fourth quarter of 2023, the destocking has come to an end, and the pesticide boom is optimistic in 2024. In addition, in terms of economic elasticity, we believe that under the factors such as deglobalization, geopolitical conflicts, and climate change, the enthusiasm of sovereign countries and farmers to stockpile and grow grain will increase, and the demand for pesticides will be rigid in the next two or three years.

In the long run, pesticide demand is positively correlated with population growth. According to the World Bank, the global population reached 7.832 billion in 2020 and is expected to reach 10 billion by 2050. With population growth and economic development, the global demand for food is increasing, and food production is facing great challenges due to factors such as limited cultivated land resources and environmental changes. To improve the efficiency of grain production, pesticides are indispensable agricultural materials. Therefore, with the increase in the demand for food as the population grows, the demand for pesticides is also expected to increase, which in turn promotes the steady expansion of the pesticide market.

In the medium term, under the background of deglobalization and geopolitical conflicts, the demand for pesticides is relatively rigid, and the supply-side structural reform continues to exert force, and the prospects of pesticides are good.

First, global food security will drive demand for pesticides. Russia and Ukraine are both major grain producers and exporters, rich in wheat, corn, barley, oats, and play an important role in the world food trade. The conflict between Russia and Ukraine has had a great impact on food production and trade between the two countries, and has also had a great impact on the global food supply chain. In addition, global health events since 2020 have adversely affected food production and supply, and more extreme weather in a warming world also poses a threat to food security.

Due to frequent extreme weather and the Russia-Ukraine conflict, global crop production in 2022 is expected to decline. According to the Food and Agriculture Organization of the United Nations, global cereal production in 2022 will be 2.789 billion tons, down 1% year on year; Global coarse grain production in 2022 was 1.469 billion tons, down 2.7% year-on-year.

Therefore, in the medium term, in the context of deglobalization, geopolitical conflicts, and climate change, the world's major economies are paying more and more attention to food security issues, and the enthusiasm for growing grain has been improved globally, and the central rigidity of pesticide demand is relatively strong.

Second, the supply-side structural reform is expected to further promote the concentration of the domestic pesticide industry. China is an important production place of pesticide intermediates and generic technicals/formulations in the world, but the overall concentration is still low, and the overall pattern is "big industry, small business". Since 2017, the deepening of supply-side structural reform has brought important opportunities to the pesticide industry. According to the National Bureau of Statistics, China's production of chemical pesticides fell from a peak of 3.78 million tons in 2016 to 2.5 million tons in 2022. Subsequently, with China's requirements for environmental protection and safety gradually moving closer to developed countries, backward production capacity is expected to be further withdrawn, and advanced leading enterprises such as Yangnong Chemical are expected to benefit from the further improvement of the concentration of China's pesticide industry.

At present, we think that the pesticide to the warehouse or has come to an end, the pesticide market is fading. 

Under the impact of global health security events, logistics is not smooth, and the downstream of pesticides actively purchase and actively replenish the inventory. By the fourth quarter of 2022, the impact of the epidemic and logistics risks have dispersed, and under the pressure of high inventories, the market demand for pesticides has declined rapidly, opening the destocking cycle.

As of late November 2023, the pesticide economy has been in a downturn for more than a year. How far pesticide destocking will go by March 2024 is a matter of debate. And we have captured a more optimistic market signal, the pesticide market is gradually cold, the economy is continuing to repair and resilient.

It needs to be mentioned that the pharmaceutical end of the company is closer to the downstream than the technical, formulation companies predict the market, and the technical companies usually know later. China's excellent pesticide brand formulation company Rainbow shares, in the first half of 2023 performance was also affected by the pesticide market and year-on-year decline, but the three quarterly reports in 2023 have been significantly repaired.

Latin America and the United States are the largest overseas demand markets, and their market conditions reflect the strength of the global market. First look at the Latin American market, according to Chinese customs data, the first two quarters of 2023, China's exports to Brazil and Argentina, the number of pesticides fell by 68%, 49%, and the third quarter of 2023 achieved positive growth, a single quarter growth of 12%, although the amount is priceless, but we believe that this means that the Latin American market inventory has basically returned to normal. There has been a significant recovery in demand.

According to public data, as of September 2023, factory inventories in the US agrochemical market are still high, but lower than the same period in 2022 and on a downward trend. The US agrochemical market usually peaks in the first quarter, so we expect the US market to return to a relatively normal level by the end of the first quarter of 2024.

In addition, we also observed a rapid decline in the inventory of Glufosinate ammonium and a rise in prices, which to some extent reflects the current market price of pesticides is highly sensitive to supply and demand. Overall, we believe that the pesticide market is now in the end of the inventory, and the economy will continue to repair. Moreover, the disturbance of the inventory cycle is removed, the demand for pesticides is rigid in the background of deglobalization, geopolitical conflicts, and climate change, and the supply-side structural reform continues to advance, gradually outlining the outline of the next round of pesticide business cycle.