The mood among (foreign) arable farmers has been better. Sales prices have dropped considerably compared to two years ago. The costs for inputs are also lower, but the margins for the grower are not improving on average. This has an impact on the supplying companies, including crop protection products. Whether or not it has anything to do with the mood in agriculture; two major German players in the field of chemistry both have a different approach. However, the differences are less than they seem at first glance and investors look at things through a completely different lens than farmers.
Chemical company BASF is preparing to spin off the company's agricultural division. This recently became clear during the presentation of the company's new strategy. "Agricultural Solutions has a leading position in the market and strong innovation in the pipeline," BASF writes in its vision for the future. In 2027, the agricultural division must be legally and administratively separate from the parent company. After that, the way will be clear to bring shares of the agricultural branch onto the stock exchange, whether or not in the form of a minority share.
The rationale for the spin-off is to make the company more efficient and streamlined. "We need to change so that employees can take more responsibility, decisions can be made faster and our performance can be improved," said Markus Kamieth, CEO of BASF, during the presentation.
Een brug te ver
This is somewhat reminiscent of the messages from Bayer a year ago. That company also put its agricultural division up for sale. Splitting up the company was also an option that came up. The individual parts would namely be worth more than what Bayer as a total company would be traded for in 2023. Five years earlier, Bayer took over American industry peer Monsanto. In retrospect, not the happiest decision of the company. In addition to the large takeover sum, image and financial damage followed due to the Round-up lawsuits in the US.
In March of this year, during the presentation of the annual figures, Bayer CEO Bill Anderson stated in response to questions from the audience that the plans to sell parts of the company or to split the company are on hold for the time being. "Our answer is not now and that should not be misunderstood as never."
Perspective
According to various stock market analysts, things may be a little different. German industry, including the chemical industry, ran on relatively cheap energy. Russia was the main supplier. This has changed since February 2022. With the invasion of Ukraine, the ample supply of cheap energy has disappeared. The energy-intensive industry is struggling with the consequences. Profits are under pressure and that does not make shareholders happy.
Optimizing business operations is high on the agenda. Downsizing or selling business units are among the possibilities. The role of the agricultural divisions is interesting in this respect. Although the mood in agriculture is moderate (and results have been better in the past), analysts say it is still a solid sector.
Crop protection products and related products that both Bayer and BASF produce provide a reasonably solid cash flow. According to some financial experts, Bayer needs the cash flow from the agricultural division to support the perhaps even riskier pharmaceutical branch. The backtracking on the idea of splitting up the company may well have been born out of necessity. At BASF, selling the healthy agricultural branch is precisely an opportunity to cash in and thus keep the shareholders happy and free up working capital. The cautious conclusion is that the agricultural sector and the supply companies are viewed differently by investors than through the eyes of farmers.