Demand for crop seeds had been strong and growing as indicated by increase in both selling price and organic growth in volume in 2016/17, driven generally by population growth and the resulted growth in livestock and other crop sector, which are also the reason that demand/volume of crop seeds declined in 2017/18. Unfavorable currency’s impacts have dragged down the profits of companies.

Sector’s current, trend, causes behind trend, and future

Current and Trend

• Demand for crop seeds had been generally strong and growing as indicated by increase in both selling price and organic growth in volume in the past three years while sale volume varies among different seed products.
• Demand for crop seeds may be becoming weak in 2018 as indicated by the declining volume.
• Driven by increased production costs, selling price of crops seed has been increasing and provided a space for seed companies to further improve their margins that have already been at high level.
• Continuing strong dollars has been the negative impacts on companies’ profits.

 

Causes behind the trend

• Demand for crop seed is apparently consistent with the demand for animal feeding and food for people, which has been driven generally by demographic factors, economy factors, or consumers’ preference.
• Gradually growing population firstly provide solid base for seed companies to grow. And increasing global demand for high quality protein may provide extra support for the growth in demand for animal feeding crops. However, alternative protein food may be creating uncertainty in demand for crops and crops seeds.

Industry Future

We did not see any potential changes that will fundamentally alter the upward trend of demand for crop seed products. And the existing companies in this sector still have large opportunities to keep their high profitability from seed and traits products.

General Financial Performance of Companies In the Sector

General demand from farmers for crop seeds has been stable and strong as indicated by organic increase both in volume and price in 2016/17. While the increase in average selling price has been, to large extent, driven by increased costs, it seems that companies have been able to pass on those extra costs to consumers thanks to the strong demand. However, the upward trend had pause in the first half of 2018 as indicated by decreased volume probably due to decreased demand for seeds resulted from decreased crop price.

Because increased in selling price of seeds had been a result of rising production costs, gross margin for those seed and trait products did not swing much away from 61% as percentage of sales in 2015/16 as it had been before 2015 but jumped to 66% in 2018 attributable to accelerating increase in price and sales in 2017.

However, the real profits of seed companies have been negatively impacted by unfavourable currency in the past several years and thus experienced large decrease in sale and as well in operating income and cash flow. For example, the portion of decrease in sales in 2016 and 2015 attributable to negative impacts of currency is about 4-5%. Strong demand of 2017 helped improve profitability of most of companies.

A typical gross margin of companies (sales of 70% from sales of seeds and traits) comes in about 55% and operating margin 23%.

According our analysis, companies’ enterprise price/EBI is 30 with an interest/EBITDA ratio of 9%.  

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