The trade issues with China magnified the developing issues with sourcing active ingredients for pesticides. The effect has played out during the 2018 and 2019 crop years, and it has already influenced planning for 2020. For manufacturers, it’s led to closer and constant communication with their retail channel to tighten forecasts and expand supply options.
“Ultimately, you want your cost of doing business as low as you can and keep costs down,” says Jake Brodsgaard General Manager ADAMA US. “Because if costs rise in China it will eventually hit the US. So in light of these current dynamics, the best way to manage our business is to get as close to the market as we can.”
Brodsgaard says his company’s perspective as being a subsidiary of ChemChina has been advantageous in helping provide additional on-site insights into the Chinese supply.
At the core of the issue is there are many active ingredients used in the U.S. crop protection industry that are no longer produced in the U.S., and China has been a primary source for many.
Agribusiness Intelligence reports the U.S. was the top destination for Chinese exports of active ingredients in 2017 at $821.2 million, and it ranked fifth for formulation exports at $147.8 million.
When the supply was disrupted, all manufacturers had to react, and it wasn’t just tariffs causing the changes to supply. The Chinese government has been increasing regulation of its factories, leading to reduced production and factory shut downs. Additionally, there was a fatal accident in March at a manufacturing facility that brought further governmental intervention and supply tightening.
“We have to be nimble from a sourcing stand point,” says Mike Henderson of Atticus, LLC. Atticus solely markets post-patent products, of which the majority of its actives are being sourced from China. “We have to manage the business with a lot more intensity.”
As Crop Life America testified in Washington DC in June, downstream users would face increased costs of more than $393 million per year if the Chinese tariffs were raised to 25%.
“If you aren’t making decisions along the way, it can be detrimental,” Henderson says. “The reality is that as long as these things continue, there will be a level volatility in the market.”
He explains while the company has been working on 2020 forecasting since the beginning of 2019, the recent experience with Chinese supplies and pricing have forced his team at Atticus to be sharper.
“There’s no way you ever stop your sourcing discussions,” he says. “It’s a part of every day. Our ability to engage our customer in that process is what it means to be demand driven. We have to be doing the right things with procurement to deliver on that,” he says.
With an uncertain Chinese supply in terms of volume and cost, manufacturers have tried to identify other sources where tariffs would not have such a great effect on pricing. For example, ADAMA has manufacturing facilities in addition to China Israel, India, South America and Poland.
ADAMA’s Brodsgaard says navigating all of the variables is uncharted territory.
“For example, if the tariffs get lifted overnight, or in 30 or 60 days, manufacturers will still have tariffed inventory,” he says. “And in 2018 and 2019, sitting on inventory pre-tarrif was an asset. But for 2020, we don’t know. And on top of that, we still have the increased regulatory efforts in China that are ongoing.”