A global chemical company is acquiring a California producer of biopesticides, which experts say is a major milestone for the industry. Bayer CropScience, based in Germany, is buying AgraQuest of Davis, Calif., for about $425 million plus "milestone payments" based on the company's performance.
The deal is likely a harbinger of future mergers and buyouts in the growing biopesticide industry, said Bill Trimmer of the market research firm Dunham Trimmer.
"The Bayer acquisition, I believe, is just one of the first ones," he said.
Biopesticides rely on naturally occurring substances and microorganisms to discourage pests.
The products can serve as standalone measures of control, but more often farmers use them in combination with conventional modes of action, said Bill Stoneman, executive director of the Biopesticide Industry Alliance.
Demand for biopesticides has been growing because farmers use them to ensure they don't exceed residue limits for conventional chemicals on crops, Stoneman said.
The products also help slow down the development of tolerance to crop protection chemicals among pests, he said. "It's been developing significantly and the interest level is high."
Global biopesticide sales are pegged at about $1.4 billion a year, which is roughly double from a decade ago, Stoneman said.
The industry is composed of about 120 companies with about 1,500 products, said Dunham. To compare the conventional pesticide industry is dominated by about 40 companies that have $45 billion in sales.
Many of those smaller companies don't have the critical mass to generate enough profit and maximize distribution, he said. However, the technology is proven and sales are rising by up to 15 percent per year.
"It's one of the strongest growing segments in the crop protection industry," Dunham said.
The success of biopesticides and the fragmented market mean that the industry is ripe for consolidation, signaling major changes to the industry's structure in 2012 and 2013, he said.
Some of the consolidation will be driven by acquisitions by large corporations like Bayer, while in other cases several smaller companies may merge, Dunham said.
"There's all kinds of options for how this will take place," he said.
The AgraQuest acquisition is an indication of the market's maturity, said Stoneman. "It's a strong statement about the viability and the value of our industry."
Aside from being a "vote of confidence in the sector," Bayer's buyout may increase the distribution and market penetration of biopesticides produced by AgraQuest, said Paul Jepson, director of the Integrated Plant Protection Center at Oregon State University.
By providing AgraQuest with more production and marketing muscle, the acquisition could benefit growers-if volume and capacity increase, prices may decrease, he said.
"If anyone is going to enable the growth of this market, it will be a large corporation like Bayer," Jepson said.
Growers are feeling market pressure from major fruit and vegetable buyers to reduce their reliance conventional pesticides, he said. Many are seeking certification that recognizes reduced chemical usage.
Growers who rely on integrated pest management-which relies on monitoring and other measures to minimize pest risk-are also gaining a reputation among packers and shippers as being more reliable suppliers, Jepson said.
These factors spur demand for biopesticides, but many farmers are also able to cut costs by using integrated pest management to reduce pest pressure over the long term, he said.
"Part of it is market pressure, part of it is cost," Jepson said.
With the market growing, Bayer and other companies must be cautious not to over-emphasize marketing of biopesticides at the cost of teaching growers how to use them, he said.
If growers don't learn to properly use biopesticides, the products are rendered less effective, Jepson said. "It's more of a precision approach."
SOURCE: Mateusz Perkowski, Capital Press
http://www.capitalpress.com/newsletter/mp-bayer-takeover-072412