Food for investors in crop yield challenge

Food and farming may lack the glamour of oil and IT. But an impending crisis in world food supplies finds several companies poised to play an important – and profitable – part. Robert Tyerman reports

While markets fret over a potential threat to oil supplies posed by North African turmoil, there is a longer-term issue of even greater importance gaining urgency across the globe. Food supplies are set to become more and more stretched as the world’s population grows and the newly prosperous nations of Asia and South America command improved nutrition.

The Food Price Index of the United Nations’ Food and Agriculture Organisation (FAO) rose 42 per cent between the end of 2008 and last December, with ingredients such as food oils and sugar showing much larger increases. The FAO has indicated the world’s farmers will need to double their output by 2050 to meet the consumption needs of a rising population.

That means they will have to make dramatic improvements in productivity, amid rising pressure on available space. Yet, as Doug Hawkins of equity research group Hardman points out, in recent years the trend has been all in the opposite direction.

Crop yields grew by roughly 2 per cent a year from the 1970s to the 1990s, helped by the liberal application of chemicals and fertilisers. But, observes Hawkins, that growth rate has slipped to 1 per cent and is falling further, as those methods have reached the limits of their effectiveness and, in some cases, are damaging the sustainability of the farmland they were intended to nurture.

This developing crisis is throwing the spotlight on biotech and other companies developing technologies to improve agricultural yields by sustainable means. Peter Blezard, founder and chief executive of AIM-quoted yield enhancement specialist Plant Impact, is not alone in speaking of the prospects of ‘explosive growth’ in its markets.

Many of the big players in this field are overseas multinationals, led by US-based agri-chemical group Monsanto, noted for its controversial genetic modification of crops and now riding high on Wall Street with a market tag of £23 billion. Swiss-based Syngenta, similarly popular on the Zurich exchange with a value of £18 billion, focuses on crop protection and sustainable agriculture.

Smaller US concerns, such as genetic modifier Arcadia Biosciences, frost protector Mendel Biotech, fungicide resister Agriquest and Nasdaq candidate Arbogen, are making a mark. But several UK companies are also beginning to attract attention.

Plant Impact, for example, has particularly close links with Syngenta, a group which has its origins in a merger of the agro-chemical divisions of multinational pharmaceutical giants Novartis and AstraZeneca, a deal led by Dr David Jones. The former chairman of another sector player, Arysta LifeScience, Jones later served as Syngenta’s head of business development and only the other day became chairman of Plant Impact, well placed to steer the company to strategic partnerships to put more of its products on the map.

Profits in prospect
Preston-based Plant Impact appointed him to spearhead its expansion drive. The company, which cites dramatic yield improvements achieved by its products, is forming strategic partnerships in America and elsewhere and believes Jones can open the door to key alliances in the industry.

Plant Impact is already in partnership with Syngenta, Brazilian government agencies, Del Monte and others. According to Blezard, apple growers have improved returns on investment by 100 per cent and potato growers by 60 per cent using its products, which also win ‘green’ credentials by saving water use, growing plants in salt water and curbing the outflow of nitrogen from fertilisers into the soil.

Contemplating growing international awareness of the mounting pressure on food supplies, Jones declares, ‘I am delighted to be invited to lead the development of Plant Impact’s science into what I consider will become an appreciable global business.’ As yet unprofitable, with £1.2 million losses in the six months to September, the company should break into profit in 2012-13, suggests Blezard.

Floated at 38p in 2006, Plant Impact shares have hardly been stunning performers so far. However, they have now rallied from a 15p year’s low to 29.5p, valuing the company at £13 million, and should grow further if Jones and Blezard clinch the deals they have in mind.

Another AIM-quoted company developing new plant-yield enhancement and disease resistance and also hoping to break into the black in 2013 is Plant Health Care, whose technology impresses savants such as Hawkins
but which has suffered in the short term from problems with a key customer, none other than Monsanto.

Plant Health Care’s annual losses have soared elevenfold to $7.6 million (£4.75 million) as an overstocked Monsanto slashed purchases. The company’s turnover plunged 57 per cent to $7.1 million last year. Chief executive John Brady explains that Monsanto heavily overstocked in 2009 and drastically cut purchases in 2010.

This hit sales of Harpin, one of PHC’s flagship products, which improves agricultural yields by provoking plants’ own defence mechanisms against blights and other assailants and also, importantly, extends their shelf lives. Brady says Monsanto has sold half its excess stock to a leading US seed treatment distributor, Direct Enterprises, which has undertaken to buy the rest by the end of the year. This will enable Monsanto to come back into the market, where Brady argues Harpin should be able to make 30 to 40 US cents an acre profit in soya beans alone.

PHC manufactures Harpin mostly in China, where it also makes much of its Myconate product, which works through fungi in soils to expand plants’ roots by up to 1,000 per cent, thus enabling them to find water and thrive in arid or drought conditions. Brady, who cites 20 to 40 per cent crop-yield gains from Myconate, points to fungicide deals the company has done with Syngenta and other groups.

According to Brady, PHC has £11.3 million cash, enough for three years’ development, and is developing a new, more ‘crop-specific’, generation of products. He argues Monsanto will be able to start buying again by the first
half of next year and says PHC expects to start chalking up profits in 2013.

PHC shares have plunged over the past year from 239p to 62p. Given current concern over future food supplies,
they should reward a strong-nerved recovery punt.

Fertile fields 
Fertilisers, modified in whatever form, must play a crucial role in boosting crop yields and that puts the spotlight on key fertiliser ingredients, potash and phosphate. Current AIM star Sirius Minerals recently clinched a deal to buy ambitious York Potash in a £125 million share deal, which makes York’s boss, entrepreneur Chris Fraser, head of the enlarged company. Sirius agreed to issue shares to buy hitherto privately-owned York, which has mineral rights between Whitby and Scarborough in North Yorkshire and has set itself a formal exploration target of between three and six billion tonnes of ore containing between 19 and 27 per cent of polyhalite, a source of premium potash products, and 330 to 400 million tonnes containing 35 to 40 per cent potassium chloride.

Fraser founded York Potash, which lost some £362,000 in the year to January, and has a £177,000 outstanding loan to the company, which will be repaid as part of the takeover deal. Sirius chairman Chris Catlow welcomes Fraser’s ‘entrepreneurial abilities... vision, energy, skills and experience’ as new managing director.

Sirius says the integration of York Potash is proceeding well. The company is working to develop a memorandum of understanding with Chinese group Sino-Agri Mining Industry Co into a long-term partnership.

Floated in 2005 at 5p, Sirius shares soared over the past 12 months from 2p to 20.75p, before sliding to 13p, valuing the company at £114 million. This deal suggests there is more mileage yet.

Elsewhere, phosphate player Sunkar Resources (SKR) is talking to potential partners after a bullish report on its $880 million (£550 million) Chilisai project in Kazakhstan. The AIM-quoted company says preliminary results of a feasibility study into the project envisage annual output of 2.5 million tonnes of phosphate rock, crucial for the production of agricultural fertilisers, with estimated costs of $200 a tonne, against current prices in the region of more than $520 a tonne.

Chief executive officer Serikjan Utegen, a prominent Kazakh oilman and entrepreneur, says booming oil production in the region will ease Chilisai’s costs by increasing the supply of sulphur, a key phosphate ingredient which those who generate it are obliged to dispose of safely. He points to steady interest from India and China to secure future food production and supplies.

Aiming to start production at the rate of 400,000 tonnes a year in 2015 in Phase 1 of the Chilisai project, Utegen concedes Sunkar must tap the markets again before clinching a big joint venture. But, if the project bears out present expectations, it could be a big winner.

Sunkar, which lost £3.5 million in the first half of last year, has been a volatile stock market performer so far. But, having risen from a year’s low of 17.5p to 31p, it could repay a strong-nerved punt, as the food production sector gains stock market prominence.

PLUS-quoted biofuel farming and logistics concern ESV, headed by entrepreneurial Masoud Alikhani, has an agreement to source organic fertilisers applicable to desert and near-desert conditions from Sichuan in China. The company, which has cut annual losses from £1.2 million to £160,000, hopes to establish joint ventures in North Africa and the Middle East — politics permitting — and, with contracts already to grow grain in the Ukraine, is considering moving into dairy farming. At 20.56p (with a 5p spread), the shares are for gamblers.

Remoter prospects beckon African Consolidated Resources, an AIM company focused on Zimbabwe, whose ownership of rich mineral prospects has been threatened by the Mugabe regime. Speculative at 9.88p, the company insists, however, that its Chishnaya phosphate project is proceeding, with high hopes of benefiting from efforts to improve Africa’s agricultural productivity.

Also working to cash in on an African farming boom is entrepreneurial ex-Test cricketer Phil Edmonds’s loss-making Agriterra, another punt at 3.7p. Created out of his White Nile oil flop, the company is involved in food transport, logistics and port development in several countries, including Mozambique and Guinea.

Most of these companies carry an element of risk. But, as the potential food crisis gains increased attention, they offer the possibility of medium- to long-term growth, coupled with possible partnerships or bids.