The Flawed European Remedy to Bayer-Monsanto Deal

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By Allen Grunes and Maurice Stucke

Farmers in the United States have been battered for years by the rising costs of seeds and chemicals. It looks like things are only going to get worse. There were news reports last week that the U.S. Justice Department has reached an “agreement in principle” to give the green light to Bayer AG’s acquisition of rival Monsanto Co.

Bayer is the second largest supplier of pesticides worldwide, and is an important global seed company. Monsanto is the world’s largest supplier of seeds and sells the world’s most used pesticide. The combination of these two giants would violate U.S. antitrust laws on multiple counts.

The two companies have reached an agreement on remedies with the European Commission. The European remedy allows the acquisition to proceed with Bayer divesting overlapping assets and transferring “digital farming” technology. Subject to commission approval, German chemical giant BASF will acquire the divestitures and technology.

The details of the “agreement in principle” between Bayer, Monsanto and the Justice Department are not public. It is a safe bet, however, that the Justice Department is poised to sign on to the European deal, perhaps with a few tweaks. Even so, the Bayer-Monsanto transaction is likely to harm U.S. farmers. This is true regardless of what sweeteners the companies have decided to throw in to secure Justice Department approval.

In January and February of this year, a coalition of farm groups polled nearly 1,000 full-time U.S. farmers in 48 states. Over 90 percent of the farmers surveyed were concerned about Bayer acquiring Monsanto. What were some of the top concerns? The poll showed the farmers believe the acquisition would result in even higher seed prices, less innovation in seeds and chemicals, and fewer seed varieties.

Major differences between European and U.S. agricultural and economic systems highlight three big weaknesses in the proposed European remedy, regardless of how it is tweaked. These three weaknesses reflect the concerns of U.S. farmers in the poll. That is not surprising, as U.S. farmers have seen this movie before.

Higher Seed Prices: Europe has a “common agricultural policy,” which was created during a time when Europe was unable to meet most of its own food needs, and designed to encourage farmers to produce food by guaranteeing farmers’ income. The majority of European farmers currently receive billions of Euros in annual direct government payments. This means that European farmers have potential protection from price increases resulting from the Bayer-Monsanto transaction. If European farmers have less reason to worry about seed price increases, so does the European Commission. By contrast, farmers in the U.S. are not shielded by government protectionism. One cannot expect Bayer’s deal with the European Commission to protect U.S. farmers from higher seed prices.

Less Innovation in Seeds and Chemicals: Harvard Business School professor Michael Porter has emphasized that the fundamental benefit of competition is to drive productivity growth through innovation. Innovation, writes Porter, “is the single most important determinant of long-term consumer welfare and a nation’s standard of living.” Bayer and Monsanto are the two leading companies developing pesticide-resistant and herbicide-tolerant genetic traits in seeds. Genetic traits go into genetically modified organisms, or GMOs. Whatever one’s views on GMOs, this intense competition is relevant in the U.S., which permits GMOs, but irrelevant in most European countries, where GMOs are banned.

The European Commission does not have much reason to care about competition involving the development of new genetic traits, as this competition does not really impact most European farmers. For that same reason, the European Commission has little reason to care whether BASF succeeds or fails in this business after it acquires Bayer’s assets. And the signs are not promising. In recent years, BASF has cut back its own bioscience efforts because of what the company calls “extremely high technical challenges.”

The fundamental question is whether BASF will somehow be transformed into a more dynamic and innovative company after getting the Bayer divestitures and technology. That seems highly unlikely. The result almost certainly will be a loss of innovation.

Fewer Seed Varieties: Besides price, another important factor for many U.S. farmers in their seed purchasing decisions is variety. Variety is particularly important in the U.S., given the differences in climate and soil in various parts of the country. Farmers are already experiencing declines in seed variety, both with respect to conventional seeds and GMO seeds. Offloading Bayer’s seeds to a single buyer — a large German chemical company at that — seems like a recipe for this disastrous trend to continue. The European remedy is unlikely to protect U.S. farmers from a further loss of seed variety. The views of informed customers are important to merger investigations. Many U.S. farmers — the customers in this case — have significant concerns about Bayer’s proposed acquisition of Monsanto. Several of their top concerns highlight differences between the U.S. and Europe and weaknesses in the European remedy. The remedy is unlikely to protect U.S. farmers from the loss of competition between Bayer and Monsanto, even if it is tweaked. The Justice Department has made a mistake if has decided to sign on.

Allen P. Grunes and Maurice E. Stucke are antitrust attorneys with The Konkurrenz Group in Washington, D.C.

Disclosure: The authors have previously written two white papers on the competitive problems of the Bayer-Monsanto transaction. SumOfUs, an international consumer organization that opposes the merger, has provided financial support. The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

This article first appeared in Law360, available here: https://www.law360.com/articles/1034895/the-flawed-european-remedy-to-bayer-monsanto-deal

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