“Oh, one more thing,” says Ray Gaesser, as he holds out two fingers pointing to his shiny green 24-row corn planter on a bluebird April day. “Would you believe when I began farming over 50 years ago, I started with a two-row planter? Then I went to four, then 12, and now 24 rows.”
The mix of largely family-owned and some national seed companies from which the Corning, Iowa, farmer bought seed from in 1967, though, has taken the opposite direction. These days, the plaid shirts and work boots of Ma-and-Pa seed company owners have morphed via mergers and acquisitions into Armani power suits and wingtips worn by multinational seed company executives. The most recent 2015-2019 merger and acquisition wave had:
- Bayer buying Monsanto for an all-cash offer of $63 billion.
- ChemChina buying Syngenta for an all-cash offer of $43 billion.
- Dow and DuPont agreeing to a merger valued at $130 billion. This created a standalone agricultural firm, Corteva Agriscience.
These moves have keyed market concentration concerns beyond premerger market share levels of four companies – Monsanto, DuPont-Pioneer, Dow AgroSciences, and Syngenta – that controlled 82% and 76% of U.S. seed corn and soybean sales in 2014-2015, respectively. That’s according to a 2016 working paper by Texas A&M University agricultural economists. The top four seed firms – Bayer, Corteva Agriscience, ChemChina, and Limagrain – held a 66.5% share of the global seed market in a 2018 analysis by Pat Mooney, founder of the ETC Group. This Canadian firm monitors socioeconomic and ecological issues surrounding new technologies.
This concerns Joe Maxwell, executive director of the Organization for Competitive Markets, which monitors agricultural antitrust issues. Seed industry consolidation has keyed apprehension regarding fewer market choices and higher prices that federal agencies have ignored, Maxwell says.
“This is not by accident or natural occurrence,” he says.
As recently as the 1970s, the seed industry was characterized by thousands of small, mostly family-owned companies, says Phil Howard, a Michigan State University associate professor in the community sustainability department and the author of several market consolidation papers and books.
Consolidation started increasing in the 1970s due to European and U.S. measures that strengthened intellectual property rights for seeds. These rights further increased due to a 1980 U.S. Supreme Court decision, which decided that a living organism like seed could be patented. This decision gave companies the right to exclusively patent genetically enhanced seed.
“Giving intellectual property protection to seeds encouraged firms to put more more money into research and development (R&D),” says Jennifer Clapp, Canada research chair in global food security and sustainability at the University of Waterloo. “To do that, they often had to get bigger through mergers.”
Agricultural firms that produced mainly chemicals, like Monsanto, started buying seed companies in the 1990s. “Once seeds became patentable, chemical companies realized they could stylize seeds to their chemicals,” says Clapp.
The 1996 debut of Roundup Ready soybeans by Monsanto linked glyphosate herbicide with glyphosate-tolerant soybeans. This led to subsequent herbicide-tolerant and insect-resistant systems developed by Monsanto and other companies.
Digital agriculture technology acquisitions – such as Monsanto’s Climate Corporation that was included in the Bayer purchase – also occurred. All this required more R&D money, which could be gleaned by combining R&D efforts of firms, she says.
“There have also been some basic financial incentives that encouraged mergers, one of which is really low interest rates,” adds Clapp. “It’s been easy for companies to borrow money to close merger deals.”
Ditto for recent low commodity prices. “If farmers aren’t making as much money and are scaling back on inputs and expansion of their farms, demand for the products of these companies becomes weaker,” she says. “So, when these companies experience flagging profits, one response is to merge with competitors to gain more market share.”
Seed technology comes with a price. Clapp and Mohammad Torshizi, an assistant professor in resource economics and environmental sciences at the University of Alberta, have written a working research paper attributing 58% price increases for U.S. corn, soybean, and cotton seed farmers paid from 1997 to 2017 to intellectual property protection for commercial seed vs. farmer-saved seed. (Before hybrid corn and intellectual property protection, many farmers saved their own seed for planting.)
They also determined that industry consolidation has also spiked seed costs. Their research shows market concentration keyed 6% to 14% hikes in 1997 to 2017 U.S. corn, soybean and cotton seed prices.
This finding is echoed in a 2016 Texas A&M University working paper that predicted the DuPont/Dow merger that formed Corteva Agriscience and Bayer’s 2018 Monsanto purchase will trigger expected price increases of 2.3% in seed corn and 1.9% in soybean seed.
Lack of market contestability is one factor, according to the working paper. Ease of entry and exit creates a contestable market. Due to high research investment and intellectual property protection, the Texas A&M researchers rank the agricultural seed market low in contestability. This means it’s easier to raise prices than in highly contestable markets and makes it difficult for new market players to enter. (This paper was written before antitrust concerns keyed divestments in both cases.)
Then there’s the phenomenon of common ownership that’s keyed by the popularity of stock index mutual funds and exchange-traded funds. Index investors aim to match returns of a stock market index like the S&P 500 at much lower costs than those for an actively managed stock fund. Index investors invested approximately $8.3 trillion out of an estimated $24.6 trillion managed by asset management firms in 2015, says Clapp. This level grew to $10 trillion in 2018, she adds.
Rather than aiming at specific companies as an actively managed stock fund does, index investments blanket a wide market index. This can lead to asset management firms owning significant market shares between market competitors. Clapp and Torshizi found that five asset management firms – BlackRock, Capital Group, Fidelity, State Street, and Vanguard – collectively held 10% to 33% of the shares in Syngenta, DuPont, Dow, and Bayer at the end of 2016.
Theoretically, competing companies with common owners like asset management firms reduce the incentive to compete against each other, says Clapp.
“Common ownership appears to be responsible for a significant amount of seed price increases,” adds Clapp. She and Torshizi found 6% to 15% of U.S. seed price increases in corn, soybean, and cotton seed markets from 1997 to 2017 were linked to common ownership patterns in global seed markets.
Many disagree, though. No evidence exists that common ownership by diversified (index) asset managers results in anticompetitive effects in concentrated markets, says Carolyn Wegemann, a Vanguard spokesperson. “Asset managers (for index funds) lack the incentive to exert control over the competitive behavior of those companies, including pricing practices,” she says.
Mark Douglas, FMC president and chief operating offier, agrees.
“Vanguard is one of FMC’s largest (index shareholders), and is a passive investor,” he says. He adds that actively managed stock funds have more influence.
WHY SEED COSTS MORE
Better breeding and genetic modification of seeds have helped farmers boost net returns per acre. This innovation partially accounts for a 13% price increase in U.S. corn, soybean and cotton seed from 1997 to 2017, say Clapp and Torshizi. They add that when farmers make money, seed firms can charge more for seed. Other factors, though – such as commodity prices – have also played a role in net revenue increases, they add.
The higher cost for better seed is money well spent, says Gaesser.
“Our seed costs have risen, but so has our production,” he says. “That’s the reason farmers pay up.”
Production has been keyed by a ten-fold nationwide corn R&D investment over the last two decades ago, says Mark Herrmann, chief executive officer for AgReliant Genetics. “This has delivered increased yields with less resources,” he says.
Last year’s U.S. average corn yield of 176.4 bushels per acre was the third time a record yield occurred in the last four years, he says.
“Those levels would have been unheard of in the 1980s,” Herrmann adds.
This comes with a price. Seed companies not only have higher R&D costs, but also increased regulatory and business risk expenses keyed by genetic development and modification, he says.
Recent business risks incurred by such firms include Syngenta’s 2018 $1.51 billion settlement in a lawsuit involving a corn trait then unapproved by China that ended up in a 2013 Chinese corn shipment. Bayer has lost three lawsuits and faces over 13,000 more (at presstime) relating to alleged development of cancer from use of its glyphosate-based Roundup products.
“Farmers are smart business people, and they are not going to pay a premium for anything that does not increase their profits, regardless of the developer’s costs or risks,” Herrmann says.
“At this point, I think it’s the technology portion and the cost of getting products to market that is really driving prices more than just increased barriers to entry and fewer players,” adds Lon Swanson, an agricultural sector manager for Wells Fargo. “It’s just expensive to get a set of genetics through the pipeline and to market.”
85%: The number of transgenic seed corn patents held by the top 3 seed firms.
Academic seed price predictions often don’t account for efficiencies resulting from mergers and acquisitions that slice costs and ultimately benefit farmers, adds Tim Glenn, chief commercial officer for Corteva Agriscience. Product choice is now higher in some areas than in past years, he says.
“Twenty years ago, you had one technology (Roundup Ready) if you wanted to plant herbicide-tolerant soybeans,” he says. “There are now four herbicide-tolerant technologies (glyphosate, glufosinate, 2,4-D, and dicamba) that farmers can choose from in many different brands.”
Price competition still exists, adds Herrmann. “I don’t believe anyone has the market power to charge whatever price they want, without the balancing factor of a competitor who also wants to earn that business,” he says.
WHAT WILL COME
One rough rule of thumb states that anticompetitive behavior can occur when four firms control 40% or more of a market, says MSU’s Howard.
“When you get down to just a few firms, the other firms can benefit from matching a price increase by one firm,” he says. “A clear example in recent years was when Anheuser Busch InBev announced it was going to raise prices, and MillerCoors immediately matched them. A few years later, it happened again. With communication the way it is now, even less concentrated industries can have that kind of price signaling.”
Federal regulators likely won’t boost antitrust regulations, though. In the late 1970s, the U.S. began moving away from the original intent of antitrust laws toward more of a hands-off approach, Howard says.
Many times, (as happened in the Bayer and Dow-DuPont deals) firms divest of products to meet antitrust standards, says Swanson.
“I think these companies are trying to figure out their structure and how they’re going to market,” Swanson adds. “We can talk about farmers having uneasiness. Well, these companies and their employees are having uneasiness, too, about decisions being made.”
He advises farmers who are assessing the new landscape to monitor company R&D commitment.
“If a company isn’t bringing more products through the pipeline, that’s where you might have concerns,” Swanson says.
THE LATEST MERGER MERRY-GO-ROUND
The latest round of acquisitions and mergers in the agricultural seed and chemical sector began in 2015, when Syngenta rebuffed a $46 billion combination cash and stock offer by Monsanto. In 2017, ChemChina firm bought Syngenta for a $43 billion all-cash offer.
One factor that makes the Syngenta-ChemChina deal different from others is that ChemChina is a state-owned entity ultimately owned by the Chinese government. ChemChina previously had been active in the agricultural chemical sector, having bought the Israeli generic agricultural chemical company, Makhteshim Agan Group (now ADAMA Agricultural Solutions) for around $2.4 billion in 2011.
A $130 billion “merger of equals” closed in September 2017 between DuPont and Dow. Ultimately, the agricultural component of this merger between Dow and DuPont – Corteva Agriscience – will debut this month.
To garner U.S. and foreign regulatory approval, DuPont divested parts of its crop-protection portfolio to resolve concerns that the deal would stifle competition and raise consumer prices. This led to FMC buying DuPont’s:
- Global chewing pest insecticide portfolio
- Global cereal broadleaf herbicides
- A substantial portion of DuPont’s global crop-protection R&D capabilities
“We could see the consolidation occurring in the agricultural space, and we wanted to be part of it as a pure-play crop protection company,” says Mark Douglas, FMC president and chief operating officer. “We are totally agnostic about which seeds farmers will buy. Our job is to bring the best innovative chemistries to increase their bottom line.”
BAYER BUYS MONSANTO
Monsanto’s seeds and traits business is what initially attracted Bayer to Monsanto, says Liam Condon, CEO of Bayer CropScience. He says both companies were complementary with each other, with Monsanto being strong in seeds and traits and Bayer being strong in crop protection.
To head off potential antitrust concerns from the Monsanto purchase, Bayer had to part ways with a considerable part of its businesses in a sale to BASF that included Bayer’s:
- LibertyLink technology, a glufosinate-tolerant-based weed-control system in corn, soybeans, and cotton
- Canola hybrids in North America under the InVigor brand using the LibertyLink trait technology
- Credenz soybeans
- Certain seed treatment products including Ilevo, a seed treatment that helps soybean farmers manage sudden death syndrome
- Wheat hybrid research platform
- Xario digital farming platform
To download a flowchart of the mergers and acquisitions, click here.
WHAT FARMERS CAN DO
Here are some ideas for how farmers can make the most of the newly merged seed industry landscape.
SHOP, SHOP, SHOP
“Shopping around ensures that you have competitive pricing,” says Michael Gunderson, Purdue University agricultural economist. “Note that competitive price doesn’t always mean the lowest price. Many farmers have established relationships with key input suppliers who understand their business, and can help bring them products and service offerings that create the greatest value that allow the farmers to thrive and succeed. It’s sort of a (President) Reagan ‘Trust, but verify’ situation where doing a bit of shopping can help you understand the value key suppliers bring.”
SEARCH FOR DISRUPTORS
Higher prices and fewer input suppliers are a concern farmers may have regarding market consolidation. Conversely, consolidation akin to what’s going on in the seed industry can spur complacency, says Gunderson.
“Four competitors who sort of settle into their routine can make the industry ripe for innovation and start-ups,” he says.
Pat Duncanson, Mapleton, Minnesota, found what he terms a disruptor in the Farmers Business Network (FBN). The San Carlos, California-based farmer-to-farmer network has published studies that show shared genetics between seed brands. FBN officials and some FBN members say such reports pierce the opaque world of corn and soybean seed pricing, and enable farmers to better buy seed.
“Gaining value from data, data sharing, and transparency was a strong attraction for me,” Duncanson says. “Early on in the process, I was able to use the database and make practical decisions about seed.”
FIND LOW-COST ALTERNATIVES
Duncanson purchased all non-GMO corn to plant on his family’s farm for 2019.
“I am a huge supporter of genetically modified technologies,” he says. “I just didn’t feel the value in the corn traits was worth the cost. I figured that I would need a yield increase of 15 bushels per acre to pay for the increased seed costs. By planting non-GMO seed, I have a 15-bushel-per-acre head start toward profitability.”
70%: The number of nontransgenic seed corn patents held by the top 3 firms.
Planting non-GMO corn has a drawback in that not as many hybrids are available as traited ones. However, he says, there’s less turnover in non-GMO, too.
He doesn’t think yield potential is lost, either. “Seed starts out as non-GMO, with traits added,” he says. “I feel I have enough choice in genetics that I’m not leaving significant bushels on the table.”
SEARCH FOR SMALLER REGIONAL BRANDS
Merger and acquisition activity may have opened up niche opportunities for privately owned regional seed companies, says Lon Swanson, Wells Fargo agricultural sector manager.
“These varieties may meet a certain region or climate better than ones from a large seed company,” he says.
So how much consolidation is too much consolidation?
“There is a rule of three when it comes to consolidation,” says Rob Robinson, president of Rob-See-Co, who previously headed Golden Harvest and managed Golden Harvest as part of Syngenta. “There’s a market leader, a fast follower, and a differentiated third option.”
Still, Robinson says, consolidation can be overdone. “Sometimes, industries can overconsolidate, and there can be differentiated spin-offs,” he says. “You are seeing that in the seed industry now. Some have left and come back.”
Rob-See-Co is one example of a historic brand name owned by Robinson’s family back in the 1930s that’s being brought back.
“You’re also seeing venture capital coming in,” Robinson says. One venture capital-financed firm is Inari. It’s a Cambridge, Massachusetts, company that’s tapping natural genetic diversity via plant breeding using biological and data sciences.
Inari is breeding corn, soybeans, and wheat to better tolerate climate change and to better use water and nitrogen. Inari is working with seed companies to develop new localized varieties in three years at 10% of current breeding costs, says Ponsi Trivisvavet, Inari CEO.