WILL FEWER INPUT SUPPLIERS IMPACT FARMERS?
THERE HAS BEEN a great deal of discussion and speculation around recent mergers of chemical giants, like those between ChemChina and Syngenta and Dow and DuPont, and potential mergers, such as Monsanto’s repeated bids to purchase sectors of other companies. The industry has yet to feel the full effects of these, but there is interest in how these mega-mergers could affect Ontario’s farmers.
“Mergers are nothing new,” says Rob Hannam, president, Synthesis Agri-Food Network. “Farmers, input suppliers, grain elevators, equipment manufacturers, and seed companies all through the value chain are merging. Mergers can be viewed in two ways — negative because they result in fewer competitors, or positive because they can also increase competition among the remaining players.”
Hannam says bigger companies are more competitive because there’s more at stake.
“Larger companies tend to deal with fewer things and focus on what they do really well,” says Hannam. “When a merger occurs, research investment, for example, is directed to one really strong research and development program instead of two that might have been overlapping. Mergers often create business opportunities for other smaller companies to fill the gap or gives new companies the chance to find a niche and gain market share.”
IMPORTANCE OF INDEPENDENCE
Al Mussell, research lead, Agri-Food Economic Systems, Inc, says farmers expect a tremendous amount of independence determining the chemistry they use and want to retain that independence. Mussell says after an amalgamation, research and development changes over time and new research can evolve or even be wiped out.
According to Mussell, “the crop protection sector is very innovative, and companies are concerned about competitors not currently in the market entering with new products. However, bigger companies could entice new chemists to enter ag chemical companies to develop new products; new products could also help broaden the range of chemical families currently available.”
“Typically, farmers have operated in a market where there has been a continuum of restricted choice as chemical and fertilizer companies have merged,” says Philip Shaw, farmer and agricultural economist and author of the Grain Farmers of Ontario Market Trends Report. “Fewer crop protection companies could result in an oligopolistic market which could bring prices up. Many oligopolies exist in agriculture, with relatively few companies providing lots of products. However, when this happens there is a tendency to restrict supply and potentially stifle innovation, which could be a concern among farmers while increasing costs. However, this doesn’t mean the end is near — farmers don’t need to be overly concerned.”
“At this stage, I don’t think farmers will notice much difference from the consolidations,” says Alfons Weersink, professor, Department of Food, Agricultural and Resource Economics (FARE), at the University of Guelph. “The purchase of Syngenta by ChemChina is due to the fact that the former tends to focus on patent protected pesticides while AMAMA (ChemChina) is concentrated on generic pesticides for which the patents have expired. Similarly, the Dow and DuPont merger has resulted in three separate companies with one being agriculture. DuPont’s focus has been on seed while Dow has been primarily on crop protection so there will not be a reduction in the products available to farmers.”
“The consolidation is a continuation of a trend throughout the input supply sector (and further in the supply chain),” continues Weersink. “There are high fixed costs associated with research and development to new products and with the regulatory approval process once developed. Given the high fixed costs, the firms in the sector have the incentive to get the highest market share possible. More market share translates into lower average costs since they are spreading their high fixed costs over more output. Given the high fixed cost structure of the crop protection sector and the importance of gaining market share, firms will be unlikely to significantly raise prices in the short term for the fear of losing market share.”
Mussell believes mergers could help improve the rate at which new products reach the marketplace. “The huge front end costs of developing new genetic technology and patents on genetic traits could also be a motivation for acquisitions,” says Mussell. “Removing some of these roadblocks would expedite the development process and increase the number of new varieties.”
However, Shaw says fewer choices with more restrictions are being placed on farmers, as well as the price of seed.
“Seed corn costs increase yearly but so does productivity,” says Shaw. “Every time a new trait is brought into the market there is an increase in price. Due to technology use agreements, farmers aren’t able to save GM soybean seed and plant the next year like they are able to with some non GMO soybeans and wheat. The issue is somewhat restricted choice due to restricted selling, but this isn’t overly concerning. These aren’t new issues for farmers and can be managed.”
THE FUTURE OF SEED AND CROP PROTECTION
“Looking forward, we may see vertical consolidation rather than acquisitions. There may be more interest in acquiring better information streams of how products are used and how they can add value for agronomy,” says Mussell. “Companies could start to aim to be a closed-loop system, involving the entire grain value chain. They would also be looking into innovative ways to get around holdups in genetic developments or acquisitions.”
Hannam forecasts that the amalgamation trend will continue but not accelerate, with new companies also entering the market.
“Research is a numbers game, with a bigger program meaning better equipment, better researchers, and better tools. Mergers will impact research and the number of available products in a positive way.”
Weersink also believes mergers will continue to occur.
“It is difficult to predict whether the consolidation will lead to more or less innovation. There are increasing incentives for smaller companies to come up with ideas that can be commercialized by the existing big players. However, given the costs of research and development and regulatory approval, I think the consolidation will continue.”
“The merger transaction is expected to close in the second half of 2016, subject to customary closing conditions, including regulatory approvals, and approval by both Dow and DuPont shareholders. The subsequent separation of DowDuPont into three independent companies is expected to occur 18 – 24 months following the closing of the merger. DuPont and Dow will operate as independent entities until the merger closes,” says Dan Turner, DuPont Corporate Media Relations.
“At this time, we are operating as business as usual and we will continue to deliver the high quality solutions and services to our customers. We are working on the various antitrust regulatory filings here in the U.S. and around the world. The intent is to cooperate with the authorities to get them comfortable with the proposed merger transaction, which we believe is pro-competitive and good for consumers. Because of the size and complexity of the companies, we anticipate that this will be a thorough process.”
In the coming month s and years, the agriculture industry has yet to feel the effects o ce additional mergers and acquisitions. However, experts believe these recent mergers will improve the research and development pipeline and will help give farmers the resources they need for a successful planting and harvest. •