Prospects for plant protection mergers and acquisitions in Central America and Mexico

In recent years, the crop protection market has undergone a series of large mergers and acquisitions, such as Bayer's acquisition of Monsanto, the merger of Dow and DuPont to form Corteva, UPL's acquisition of Arystar, and Syngenta's merger with SinoChem which have led to a considerable degree of consolidation in the crop protection market. Since then, mergers and acquisitions in traditional crop protection have been relatively subdued. However, we are seeing a significant increase in M&A activity in the biopesticide and biostimulant sectors, which is ultimately driven by strong growth in the end markets for these technologies. 

AgbioInvestor predicts that if the sharp rise in active ingredient prices is explained in terms of the 2021 benchmark price, which ultimately drives a substantial market growth in 2022, then the global crop protection market will remain relatively stable over the next five years. As a result, many industry stakeholders are already thinking about where the next investment opportunity might emerge in a challenging market.

Traditionally, mergers and acquisitions have followed some established patterns: 

In challenging market conditions, companies seek mergers to outperform major competitors, creating new, leaner entities with a larger market share/channel, lower cost base, broader technology/product portfolio, and a stronger brand image. 

Disruptive and innovative technologies can also trigger a wave of investment activity, resulting in a high level of dealmaking. 

Emerging markets have previously had low technology adoption rates and therefore attract foreign investment. M&a activity is often used to facilitate market access through distribution capabilities and local awareness.

In the case of Central and South America, it stands to reason that the region falls into the latter two categories, not only because of the development of the agricultural economy in the region in general, and Mexico in particular, but also because of the biologics market and other emerging technologies, such as precision agriculture, drone applications, irrigation technologies, and new traditional chemistry.

Mexico 

In 2022, the Mexican crop protection products market grew by 17.4% to reach $1.155 billion. At this level, the country ranks 13th in terms of crop protection sales in 2022. Between 2017 and 2022, the Mexican crop protection market has grown steadily with an average annual growth rate of 5.9%, slightly higher than the industry average. 

Mexico's agricultural sector is growing faster than the country, with agricultural GDP growing faster than the total GDP. Between 2017 and 2022, in current dollars, total GDP grew from $1.15 trillion in 2017 to $1.41 trillion in 2022. At the same time, agriculture and forestry GDP grew from $39 billion to $59 billion.

The growth of the crop protection market and agricultural GDP has made Mexico an increasingly attractive investment target. In recent years, the country has sought to establish and maintain its position as a leading exporter of agricultural products, mainly fruits and vegetables. This facilitates the adoption of new technologies in traditional crop protection and biologics markets. 

Notable recent activities in Mexico include the 2022 acquisition of SIFATEC by Grupo Duwest, a Guatemalan company with operations in crop protection, animal health, seeds and agricultural machinery. This is DuWest's first foray into Mexico and perhaps an indication of how many companies feel about the Mexican market.

Other distribution agreements include a partnership between Spanish biopesticide and biostimulant manufacturer Futureco Bioscience and Innovak Global for the exclusive distribution of Bestcure, a plant extract-based biocide (citrus and orange extract).

Guatemala 

In 2022, the Guatemalan crop protection products market grew by 15.6% to reach $185 million. Between 2017 and 2022, the Guatemalan crop protection market has grown steadily at an average annual rate of 11.6%, significantly ahead of the industry average. 

In Guatemala, the basic production of active ingredients is limited and is mainly carried out by DuWest and Foragro. However, companies such as Quilubrisa (a Disagro subsidiary), Agrocentro/Cindeco, and Inquisa have significant formulation capabilities.

There are many agrochemical importers and distributors in Guatemala, including GBM (based in Mexico and now part of Arysta/UPL), Hendrix, Tikal Agros, Agrofortress, Anasac, La Quinsa and Cosmocel. In addition, there are many chemical companies, formulation companies and trading companies in Central America that serve the market. 

The main factors affecting investment and ultimately M&A activity in Guatemala are the growth of export markets for fruits and vegetables and plantation markets such as palm oil. This is likely to drive growth in the adoption of new technologies such as biologics, new conventional products, and formulation technologies. Distributors and pharmaceutical companies may merge, but external partnerships between multinationals and local companies are more likely. This will help bring innovative technologies to market and facilitate the development of new formulations to cope with increasingly severe weather patterns, such as biostimulant products with abiotic stress tolerance. These factors could ultimately facilitate greater investment in local distributors and formulation businesses that understand the local market and build relationships with growers.

Nicaragua 

Agriculture remains an important part of the Nicaraguan economy, employing about a third of the workforce despite accounting for only 16.8% of GDP. The use of agrochemicals per hectare is high compared to other developing markets, although similar to other Latin American countries such as Bolivia, Guatemala and Ecuador. Nicaragua has limited capacity for agrochemical formulations, importing only 1 per cent of its raw drugs from the United States, China and India. The most important sources of products are China, the United States, the European Union and India. The low level of pharmaceutical capacity means that any M&A activity in the country is likely to come in the form of distributors looking to import finished products from other parts of Central America and beyond to gain scale. As with other markets in Central America, weather patterns can be erratic and higher levels of biostimulant products for abiotic stress and biologics use can be expected, although pre-adoption will be slower compared to more mature markets such as Mexico, which has a large export market for fruits and vegetables. Due to low awareness and acceptance among growers, adoption of biologics in Nicaragua may initially be lower than in Mexico.

Crop protection yields in Central America remain low compared to more developed markets

 GDP data comes from the World Bank. Production data are calculated from the average of FAO STAT data for 2016-2022

 Looking across the Central American region, it is evident that the cultivation intensity of the main cultivated crops in the region is low compared to agriculturally advanced economies such as the United States and Brazil. Average corn yields are typically 68 percent lower than in the United States and 33 percent lower than in Brazil. The average rice yield is about the same, 42% lower than in the United States and 23% lower than in Brazil, and the average soybean yield is 48% and 45% lower than in the United States and Brazil, respectively. 

Lower production in the region raises the question - is Central America poised for further intensification and will this be a driver of M&A activity? It is true that consolidation within the region helps companies reduce costs and expand distribution, but the regional market is ultimately influenced by the farm economy. 

In Mexico, about 70% of the number of farms belongs to small farmers, similarly, the number is also high in the rest of Central America, with about 80% in Guatemala and about 90% in Nicaragua and Panama.

In Mexico, about 70% of the number of farms belongs to small farmers, similarly, the number is also high in the rest of Central America, with about 80% in Guatemala and about 90% in Nicaragua and Panama.

Subsidies in Central America are also lower than in advanced agricultural economies. In Mexico, for example, the estimated producer support (PSE- an annual monetary value measure of the total value of consumer and state transfers to agricultural producers) for 2019-21 is about 9% of total agricultural income, about half the OECD average. In Costa Rica, agricultural policy support for producers averaged 6.3 percent of total agricultural income in 2018-20, further below the OECD average. Most subsidies usually take the form of market price support (MPS). Market price support artificially increases the price farmers receive through a mix of tariffs and minimum reference prices. 

Fundamentally, the agroecosystem in Central America is still less developed financially and more fragmented geographically and socioeconomically. This, combined with varying degrees of political instability, liquidity/access to credit challenges, high interest rates and rural crime, has made the region less attractive for foreign investment. A notable exception is Mexico, which exported about three-quarters of its fruit and vegetable products to the United States in 2022. In addition, due to the increasing demand for organic produce in the United States, the acreage of organic farming in Mexico has also grown, and the growing middle class in Mexico has also fueled the growth of organic farming in part.

With these factors in mind, the outlook for M&A activity is likely to be split in two: Mexico will continue to maintain moderate M&A activity and expand investment in the crop protection sector as the government looks to promote agricultural investment and food security after COVID-19; Elsewhere in Central America, M&A activity will be more modest, with international players making smaller strategic acquisitions to improve market access for certain specialty crop groups that require improved technology. Typical examples of this include banana producers seeking to solve the problem of black leaf spot, or the ever-challenging problem of the grass armyworm, which is resistant to many commonly used generic insecticides.

Nor should we lose sight of the fact that M&A is only one lever in a company's toolkit when it seeks to build market share and competitiveness in a particular market. Distribution agreements (such as the one AgBiome signed in early 2023, which gave Summit Agro Mexico exclusive distribution rights to Howler's fungicide) suggest an alternative to a company-wide acquisition. While this approach carries less risk, the downside of this approach is that profit margins may be lower and the IP holder himself may be acquired. Product rights may also be acquired by others. Robust contract negotiations from the outset can alleviate some of these concerns.

Companies can also establish joint ventures or open local subsidiaries to hire local experts who understand local processes, market conditions and customer bases. For example, in 2022, Japanese pesticide subsidiary Nichino America, Inc. A new subsidiary, Nichino Mexico de S. de RL de CV, was established to grow its crop protection business in Mexico.

Biological product 

Mexican exports of large quantities of fruits and vegetables to the United States may also facilitate the integration of distributors and distribution agreements in the field of biopesticides and biostimulants. The Mexican market has a relatively small number of local bio companies compared to more developed bio markets, suggesting that mergers and acquisitions by external partners and domestic bio companies will be more limited. However, the role of distributors is likely to be a driver of M&A and investment activity.

In Mexico, ABI's biologics market research highlights the importance of building relationships between growers and agronomists/consultants, distributors, manufacturers' representatives and cooperatives, as these are seen as the main sources of information and advice. In row-crops such as corn, other growers are the most important source of information, followed by agronomists/consultants and distributors. The fact that word of mouth plays an important role in establishing biologics adoption highlights the potential importance of ensuring strong product efficacy, as well as establishing a unified brand image. In this area, mergers and acquisitions could eventually help build a previously established corporate profile in the Central American region. International companies seeking market access can build local brand awareness, distribution capabilities, and relationships between growers and agronomic consultants. In other crops surveyed, such as tree nuts/nuts, grapes, horticulture and sugar cane, agronomists/consultants were clearly leaders in influencing the decision-making process and final product adoption.