U.S. Agribusiness Industry Feels Ripple Effect of Tumultuous Agrochemical Markets in China, India

2020 has brought major changes in the world’s top agrochemical-producing nations. It’s important to keep an eye on what these could mean for U.S. ag players.

Syngenta and the Sanctions Question

One bit of news caught the eye of the ag industry over the summer, when the U.S. Department of Defense added both Sinochem and ChemChina to its list of entities it considers “Communist Chinese military companies” operating directly or indirectly in the United States.

How the designation will ultimately play out in terms of impact on Syngenta’s massive U.S. presence is uncertain — but it will be important to keep watch in the coming months.

Syngenta, of course, was purchased by Chinese state-owned ChemChina for $43 billion in 2016; earlier in 2020, ChemChina and Sinochem announced they were consolidating agricultural assets into the new Syngenta Group holding company. A merger between ChemChina and Sinochem is in progress, the successful completion of which would easily catapult it to world’s largest agricultural player in terms of size.

More than 97% of Syngenta’s business is outside China. In the first half of 2020 alone, the company posted $1.5 billion in crop protection sales and $478 million in seed sales in North America — its largest sales region just behind Europe/Africa/Middle East.

As a Bloomberg report noted, the Defense Department’s designation gives the White House broad powers to impose crippling sanctions on any company doing business with them. Bloomberg noted that, “if sanctions were imposed, nothing less than full separation from SinoChemChina would be sufficient to preserve it from ruin.”

“It’s a bark, not a bite, if sanctions (to include prohibition from doing business in the U.S.) don’t follow,” according to Axios, quoting a former (unnamed) senior intelligence official.

The list, which was required as part of the 1999 National Defense Authorization Act but was not previously assembled, includes a couple dozen entities such as telecom giant Huawei, China Railway Construction Corp., China Telecommunications Corp., and Hikvision, which was blacklisted by the U.S. in October 2019 for building surveillance tools that aided in the oppression of Uighur Muslims in Xinjiang.

The Department of Defense, explaining its listing of such companies, said it is “determined to highlight and counter the People’s Republic of China’s (PRC) Military-Civil Fusion development strategy, which supports the modernization goals of the People’s Liberation Army (PLA) by ensuring its access to advanced technologies and expertise acquired and developed by even those PRC companies, universities, and research programs that appear to be civilian entities.”

Trade War Situation

Just four agrochemicals were allowed exemptions from the Tranche 3 China 25% surtaxes, all of which expired on Aug. 7, 2020. Of the four, only paraquat has been extended until Dec. 31, 2020. Therefore, effective Aug. 8, 2020, the 25% surtax is again payable on clothianidin, diuron, and fosamine.

“While the rhetoric from the leaders of both the USA and China has been heated, it appears that ‘the guys in the trenches’ are proceeding to try to make the Phase One agreement work,” said Jim DeLisi, international trade expert and Chief of Fanwood Chemical. Therefore, the following U.S. tariffs against Chinese imports, impacting agrochemicals remain in place:

Tranche 3: 25%. This rate was scheduled to increase on Oct. 15 to 30%. That increase remains on hold. The period for requesting exclusion has elapsed. U.S. Trade Representative is currently reviewing exemption requests. According to the terms of the Phase One agreement, it is likely these tariffs will be in place at least until a Phase Two agreement is reached thought to be a minimum of six to eight months away. Plan accordingly.

Tranche 4a: On Sept. 1, 2019, tariffs of 15% were imposed for products on this list. Exception requests window is open until Jan. 31, 2020. The 15% tariff for products in this tranche were cut to 7.5% on February 14, 2020.

Tranche 4b: On Dec. 15, 2019, tariffs of 15% were scheduled to kick in. These tariffs were held in abeyance because of the agreement on a Phase One deal. However, if there is a breakdown in this agreement, it is likely these tariffs will be imposed on very short notice.

India Faces COVID Fallout, Pesticide Bans

India’s government in May moved to ban 27 pesticides, including key products like mancozeb, 2,4-D, and chlorpyrifos, after its Ministry of Agriculture and Farmers Welfare concluded the products are “likely to involve risk to human beings and animals.”

The country’s agricultural industry submitted individual rebuttals for all 27 pesticides along with their task force before mid-August. The three big associations – CropLife International, Crop Care Federation of India, and Pesticides Manufacturers & Formulators Association of India — also went to the Delhi High Court against the proposed ban. As of this writing, there is no word on a final resolution from the government.

While exports will still be permitted, the challenge, if the bans succeed, according to Subhra Jyoti Roy, Vice President of International Business for Rallis India Ltd., is that some countries will not allow imports of a product not registered in the country of origin. If products are banned in India, they are automatically unable to supply those countries.

“Prices of replacement products are almost three to six times higher than existing prices of Indian products. This will be added burden on the Indian farmers,” Pradip Dave, President of PMFAI added, explaining that many organophosphorus compounds can cost Rs 500 ($6.80)/liter, which would need to be replaced with far more expensive imports.

According to David Li, Business Manager at Beijing-based SPM Biosciences, the banning order from India “will affect mancozeb supplies from India, which has around 220,000 metric tonnes (Mt) in total capacity.” India’s mancozeb capacity from UPL, Coromandel, and Indofil accounts for about 70% of the global supply.

“From my point of view, the ban will force UPL to take mancozeb production elsewhere worldwide, using U.S. or Chinese facilities. If UPL wants to keep a high return of investment for the AI, there is a possibility it will cooperate with a Chinese source or invest further outside of India,” Li said.

Moreover, banning of molecules nearing the end of their life value will create global regulation challenges for the food industry. Countries may further review banned pesticide residue limits for food exports and imports, Li said.

Beyond regulatory issues, India continues to experience heavy fallout from COVID-19. For example, the country’s sweeping lockdowns that began in March created a nightmare for some 150 million to 200 million poor unemployed migrant workers who were left stranded trying to get home to their villages.

Some crops were not harvested as migrant laborers went home or were on lockdown; hence these farmers lost their income and were thrust into cash-tight situations for buying inputs for the next crop.

To cope with limited manpower, plants are increasing shift hours to the extent permitted under COVID restrictions. “Factories that are automated are less impacted, while labor-intensive plants are badly impacted and overall output has come down significantly,” Roy said. “Most contract laborers who went to their native places in April have yet not returned. We have big challenges with infection rates increasing.

“In the long run, the supply gap may build up to an alarming extent. Therefore, we will probably see some deficit in the supply position of agrochemicals,” Roy continued, warning that challenges in the second half of 2020 are likely.

From a macro perspective, the Indian economy is most likely to experience a lower growth during the latter part of fiscal 2020 than in the first half of the year. According to FICCI, if the spread of coronavirus continues, growth may remain subdued in the first quarter of FY 20-21 as well.