Megamergers Set to Shake up Agriculture Giants

July 10, 2017

Written By Adam Buckallew

The agricultural input supply landscape could see some big changes in 2017. The U.S. Department of Agriculture recently issued a report assessing the potential impacts of pending mergers and acquisitions involving the world’s “Big Six” agricultural chemical and seed companies. Though the deals are all still awaiting regulatory approval, the report states the proposed mergers “promise to change the industry.” Whether that will be a good thing for farmers remains to be seen.

The Big Six, which is composed of BASF, Bayer, DuPont, Dow Chemical Company, Monsanto and Syngenta, dominate the agricultural input market and account for 75 percent of all private sector research in seeds and pesticides. Five of those six companies are part of mergers awaiting antitrust regulatory approval before the deals officially can be completed. If the proposed mergers are allowed to move forward, the newly combined companies would create three global giants with control of 80 percent of the U.S. corn seed market and 70 percent of the worldwide pesticide market.

The largest of the merger deals is between Dow Chemical and DuPont, which plan to separate the combined company’s agriculture business, material science business and specialty products business into three independent companies following the consummation of their deal.

In addition to the Dow-DuPont merger, ChemChina is set to acquire Syngenta, and Bayer is acquiring Monsanto. All of the deals are expected to be completed by the end of 2017.

Merger Regulation

Before completion, these megamerger deals must pass antitrust review in their relevant jurisdictions. The Dow-DuPont merger has already been granted conditional regulatory approval by the United States, China, the European Union and Brazil.

Under the terms of a proposed settlement with the U.S. Department of Justice, DuPont must sell some of its crop protection portfolio and Dow must part with a line of products used in food packaging. A statement from the Department of Justice said the divestitures would “preserve vigorous competition in the sale of these products and benefit American farmers and consumers alike.”

DuPont estimates the merger will be complete in August if everything proceeds as planned. The Trump administration’s pro-business stance means it’s unlikely U.S. officials would reject any of the deals. So far, little protest has been offered up in the European Union as well.

If any of the mergers face regulatory resistance, it would most likely occur in Brazil, Russia, India or China. However, it would take opposition from at least three of the BRIC nations to block approval.

From Six to Four

Assuming all of the mergers make it through antitrust approval, it will mark the end of the Big Six and the dawn of the Big Four. The current Big Six came about when pharmaceutical, chemical and seed companies combined in the 1990s and early 2000s.

With an already limited number of big players in the agriculture scene, some farmers are concerned the mergers could result in higher prices for seed and ag chemicals due to a lack of competition for their business. More than 325 letters were sent to U.S. Attorney General Jeff Sessions from farm and environmental groups voicing concern over the proposed merger deals.

The National Farmers Union (NFU) expressed disappointment with the Justice Department’s provisional approval of the Dow-DuPont merger.

“The combination of Dow and DuPont, coupled with other pending mergers, leaves family farmers with less competition and choice in the seed and agrichemical sectors,” NFU president Roger Johnson said in a statement. “This drives up costs for farmers’ inputs, and it reduces the incentive for the remaining agricultural input giants to compete and innovate through research and development.”

R&D Questions

NFU is not alone in its concerns about how much the remaining ag giants will commit to spending on research and development after the wave of mergers is completed.

“Farmers and ranchers, in particular, are interested in how these deals will impact research and development budgets for companies like Bayer and Monsanto,” Bob Young, chief economist for the American Farm Bureau Federation (AFBF), said in a statement. “We depend on access to enhanced technology and would hate to see agricultural innovation suffer at the cost of business decisions.”

Farmers are worried a reduction in the number of competing firms servicing their needs could lead to less drive to fund research to stay ahead of the competition.

In a Senate hearing held in September 2016 on consolidation in the seed and farm chemical industries, Robert Fraley, executive vice president and chief technology officer for Monsanto, defended his company’s merger with Bayer, referring to the deal as a “healthy and sorely needed transformation.”

“I’ve talked to a lot of growers who recognize that in reality, farmers are really better served by companies who have more capabilities, more of a research and development engine who can generate more products and more innovation,” Fraley said when the Monsanto and Bayer merger was first announced.

Fraley estimates the combined Bayer/Monsanto entity would spend $2.8 billion on research and development annually, which is about twice what Monsanto has invested in recent years.

Young, the AFBF economist, also testified at the Senate hearing on agricultural consolidation and said farmers and ranchers cannot afford to lose access to technology and innovation if the pending mergers pass regulatory approval.

“AFBF has had several—and repeated—assurances from the companies involved as to their intent to maintain as strong an innovation arm as they can,” Young said. “We have no reason to doubt, but we also are reminded of the old line: trust, but verify…Everyone’s knee-jerk reaction is to think that increased concentration will lead to higher prices for these inputs. Knees tend to jerk reflexively, but sometimes they jerk with reason.”

The various regulators reviewing the mergers will ultimately have the final word on whether these mergers are approved. In the meantime, farmers will have little choice but to wait and see if these potential megamergers will help or hurt their bottom line.