As a rush of consolidation de-clutters the global landscape in ag, farmers want to know what impact shrinking competition will have on prices.
It’s not difficult for farmers to understand the importance of economies of scale, buying in bulk, capturing efficiencies, reducing overhead. But when these drivers spark a rush in global consolidation of the companies they deal with every day, it’s unsettling to say the least.
A spate of mergers and acquisitions has reshaped the global ag landscape in the past six months. In late 2015, Dow Chemical and DuPont officially announced $130-billion merger to form ag-chem giant DowDuPont. A few months later ChemChina made a $43-billion move for Swiss ag chemicals and seed giant Syngenta AG.
Then, in September 2016 Germany’s Bayer swooped in for Monsanto in a $66-billion takeover, during the same week as Potash Corp. of Saskatchewan merged with Agrium to create the largest fertilizer giant in the world valued at $36 billion.
The glut in commodity prices dogging farmers in recent years has caused them to cut spending, which is hurting crop input revenues and, in turn, has been driving these large ag industry players to merge as a way of capturing efficiencies through economies of scale.
Mergers Driven By Economics
Bob Young, chief economist with the American Farm Bureau Federation, which has 5.6 million member families, says in a sense, corporate ag industry giants are responding to the same pressure grinding on farmers’ bottom lines.
Case in point: Young says U.S. net farm income was $120 billion in 2012, compared to under $60 billion in 2016. “Commodity prices are soft across the board — livestock, grains, oilseeds, cotton — it’s not just one or two,” Young says from his Washington, D.C. office. It’s also not just one or two mega-mergers. Several in such a short period has many growers concerned.
“They are watching this very carefully,” says Young. “It’s still early days so we’ll have to see how the firms behave moving forward.”
The first line of defense will be anti-competition laws enforced by governments and regulators, says Young. “We haven’t heard formal announcements yet but I would fully expect there to be an issue with cottonseed for Bayer/Monsanto.”
Regulation Key Driver
Young says one of the factors driving consolidation among farm input suppliers is heightened regulation. “They’re facing a more uncertain regulatory environment to be able to bring a product to market,” he notes. “Now you have to have deeper pockets and more patients — frankly, you have to be bigger to live through the time it takes, and there’s less time available for patent protection.”
Young says he wasn’t surprised to see crop input companies merging with seed trait companies. “There are efficiency gains there,” he says. “If Bayer wants to develop a new chemistry or have conversations with seed companies, they really have to wait until it gets approved because it’s all proprietary information. Now, if it’s all the same company they can sit around a table and discuss the problem and what they can develop to solve it.”
A prominent Canadian agriculture economist says farmers shouldn’t panic. Governments and regulators will protect the market from monopoly pricing, and in the end, all you need for healthy competition are two players.
“Are there concerns about pricing? Yes, but at the same time you don’t require that much competition to stay competitive. Three players instead of six is still competition,” says J.P. Gervais, chief agricultural economist with Farm Credit Canada. “These business going through mergers and acquisitions are seeing the same thing producers are seeing — a softening. It’s a normal part of the process in an industry that’s global and needs to discover more economies of scale. Especially when you consider that R&D costs are so high right now. For these farm input suppliers to be able to generate the same rate of return requires large scale, and that’s what we’re seeing.”
Andrew McKenzie, a professor of agricultural economics at the University of Arkansas, says there’s always the chance that prices could actually come down as a result of the mergers. “Larger companies can actually advance technology better than smaller players, so how that plays out in terms of prices is hard to say.”
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