By: Jessica Wharton, American Soybean Association
Soy farmers across the country have a direct interest in ensuring a competitive marketplace for crop production inputs – including seeds and crop protection chemicals, which makes organizations like the American Soybean Association (ASA) especially interested in the accelerating trend of high-profile mergers and acquisitions in the agriculture industry, and specifically within the industry’s seed and input segment.
Over the last few months the four proposed mergers and acquisitions between Dow and DuPont, ChemChina and Syngenta, PotashCrop and Agrium Inc., and finally Monsanto and Bayer AG have illustrated the rapidly shifting landscape within the agriculture industry, and to understand these consolidations in an appropriate context, it’s vital to first look at today’s farm economy.
Unlike many sectors in the U.S. economy, agriculture experienced a boom over the last ten years. Commodity prices are driven primarily by increased international demand for livestock feed, domestic demand for biofuels, Chinese oilseed imports and general liberalization of global trade. As demand rose, U.S. producers faced three years of below average yields. The combination of these factors drove farm prices and farm income to near record levels which, in turn, led to a much-needed revitalization of rural America.
Subsequently, as weather patterns returned to more normal levels, agriculture production rose and lagging global economic growth led to a significant reduction in commodity prices. Over the last two years, net farm income has fallen 55 percent and farm debt‐to‐asset ratios have climbed to levels not seen since 2002. These financial indicators reflect a weakness in the farm economy that is now reverberating through the agribusiness industry. Layoffs in the agriculture equipment industry and the crop input sector are a natural and expected response to the drop in farm income.
Just as lower commodity prices are forcing changes at the farm level, agribusiness companies are looking for ways to adapt to today’s changing economic environment, looking for synergies and how consolidation through a merger or acquisition could help market positions in the long run. They also are looking to mergers and acquisitions to build economies of scale, increased research and development budgets, and complementary seed and crop protection businesses to accelerate innovation and product offering.
While ASA, and most farm organizations, would be seriously concerned about the loss of individual competitive market players as a result of ongoing consolidation, it’s also easy to recognize the potential benefits to farmers from consolidation if robust competition can be preserved.
In a joint written testimony submitted at a Senate Judiciary Committee hearing on consolidation and competition in the U.S. seed and agrochemical industry, the American Soybean Association and the National Corn Growers Association (NCGA) argued that a competitive marketplace is measured by more than the number of competitors, but also their size and relative ability to compete.
“True competition is not based solely on the number of players within a given market. Strong competition can result from having several evenly-matched companies fighting for market share within the seed, chemistry and trait development markets,” the written testimony states.
For example, joint research between ASA and NCGA showed that the Dow-DuPont combination would bring together Dow’s trait development expertise with Pioneer’s germplasm and distribution network- making the new company a far stronger competitor within the industry.
In addition to stronger competition, the combination of resources that results from a consolidation may provide farmers with better access to technology. Again, ASA and NCGA analysis showed that Dow’s seed products have been delivered primarily through a retailer network, while DuPont-Pioneer has relied extensively on its farmer‐dealer network for seed delivery. By merging and taking advantage of the existing dual system for delivering seed to farmers, farmers could see greater access to a broader range of seed products coming from a new company.
Finally, domestic regulatory hurdles for crop protection chemicals and delays in international approvals for new seed traits represent significant barriers to market entry, slowing down and even stopping new innovations from coming to market and driving up the cost of seed and chemistry products. A larger entity as a result of a merger or acquisition may be better equipped to contend with the range of expensive and resource-consuming regulatory hurdles encountered on the way to market.
While industry consolidation is an intricate new reality, the speed at which the industry continues to consolidate, and the tenuous state of the farm economy, dictate that farm organizations, in conjunction with the government, work diligently but quickly to ensure that American farmers will still have access to a range of technologies without bearing higher costs, and that competition must be maintained to ensure innovation, research and competition in the marketplace.