Ag Merger Mania

Antitrust Critics Question Rapid Seed, Chemical Consolidation

Chris Clayton
By  Chris Clayton , DTN Ag Policy Editor
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Farm groups and antitrust experts are still analyzing potential impacts of the succession of mergers and potential acquisitions in the seed, trait and chemical industries. (DTN graphic by Nick Scalise)

OMAHA (DTN) -- Neil Harl has been waiting for an uprising in the countryside that doesn't seem to be coming.

A professor emeritus in ag economics at Iowa State University, Harl has been watching the consolidation of companies selling agricultural inputs his entire career. He recalls in the early 1980s there were more than 400 seed companies around the country.

Consolidation in the seed industry intensified in the past three decades. Since 2010, two companies -- DuPont Pioneer and Monsanto -- have controlled 70% of corn hybrid sales, according to industry numbers.

Harl is surprised by the lack of apprehension from farmers who have seen prices for inputs continue to go up.

"I would have expected uprisings over the last several months," Harl said. "Farmers haven't been able to organize against (seed) price increases so they have a take-it-or-leave-it kind of situation there.

Harl added, "It's probably going to have to get worse before there is enough of an awakening. There's so much at stake here that I wake up in the morning and wonder what else we can do to get people excited about this because I think it's worthy of that kind of attention."

Ray Gaesser, a corn and soybean farmer in southwest Iowa and a former president of the American Soybean Association, has talked with other farmers about the increasingly complex input market. There may be some uneasiness, but most farmers aren't sure how to respond.

"There's a concern about consolidation and having less and less competition in the products that we buy, whether it's seeds or chemicals, or traits even," Gaesser said. "There's concern there, but I haven't heard a lot of farmers jumping up and down at the same time. I don't know if they think it's inevitable or they are going to let someone else worry about it."

The latest round of consolidation in the seed and chemical industry kicked off late last year as Dow Chemical and DuPont announced plans to merge in a deal then valued at about $130 billion. Dow-DuPont will spin off into three separate divisions, including a stand-alone ag division. In response to questions about antitrust approval, a spokesman sent DTN a link about the merger. http://www.dowdupontunlockingvalue.com

Since Dow-DuPont, the state-owned China National Chemical Corp. (ChemChina) announced plans to buy Swiss-based Syngenta for $43 billion. That deal came after Monsanto Co. spent much of last year trying to woo Syngenta.

Now, Monsanto is on the other side of the sale block, with a $62 billion offer from Bayer AG rejected only because Monsanto wants a better deal for its shareholders.

Public relations offices from Monsanto and Bayer did not respond to emails from DTN seeking comment about antitrust risks. When Monsanto was pursuing Syngenta, its leadership made the case that further consolidation was not only good for U.S. agriculture, but necessary.

In a July 2015 interview with DTN/PF, Robb Fraley, Monsanto executive vice president and chief technology officer, acknowledged the criticism his company often gets for its size and market power and compared that to the market presence of leaders in other industries.

"We're one-eighth or one-tenth the size of Google," Fraley said, "yet we're trying to create state-of-the-art technologies for farmers." Technology in agriculture is too "fragmented," with too many research dollars spent in disjointed fashion by too many players, he said then. He contended that farmers would be better served by more consolidation, which would create the money pool needed for current and future research.

The announcements and proposals for mergers and acquisitions in the months following have left critics of ag consolidation and defenders of antitrust laws stunned at how quickly the landscape for seeds and chemicals can change.

"These are mergers of a scale and significance that really does push for some kind of response," said Peter Carstensen, a law professor at the University of Wisconsin.

Reflecting that these deals affect agriculture beyond the U.S., Carstensen was in Russia just last week at an economics conference dealing with global competition issues on food and agriculture. The conference largely focused on regulatory issues in Brazil, Russia, India, China and South Africa, known collectively as BRICS countries. The Bayer pitch to Monsanto was a hot topic at the conference, particularly on areas where the two companies compete, such as in cotton seed.

"There was deep concern on the structure of input markets, especially the seed markets," Carstensen said. "We were very focused on the issues that exist and the problems that exist in the seed world."

TOWN HALL ECHOES

The current proposed consolidations come just six years after President Barack Obama's administration vowed to take a tough stance on antitrust issues in agriculture. In 2010, the Department of Justice Antitrust Division and USDA launched a series of what they called "unprecedented" workshops on agricultural competition looking at different sectors of the industry. When they were announced, the Department of Justice stated the administration was checking to see if consolidation that had already occurred in the industry was leading to increases in monopoly and monopsony power. Monopsony is the flip side of monopoly, where instead of only one seller there is only one buyer in the market. The workshops generated 18,000 comments from a broad array of people and groups.

The Department of Justice and USDA put out a report in 2012 noting that "a healthy agricultural sector requires competition and, consequently, vigorous antitrust enforcement." The report noted, "Many producers lamented a lack of options of buying seeds," citing comments from the hearing in Iowa that three decades ago there were more than 50 seed companies, but as of 2010 there were only four. The report also noted that farmers thought the prices for genetically modified seeds were getting "out of hand" while their options for buying seeds were becoming limited.

Companies have stated they are confident about the status of their mergers. A spokesman for Syngenta said it and ChemChina remain on track to complete regulatory reviews and the transaction by year's end.

GROUPS REACTING

The American Antitrust Institute and at least two other groups are sending a letter next week to the Department of Justice highlighting competitive problems with the Dow-DuPont merger and what the groups see as a swath of issues regarding ag biotechnology consolidation.

"We're talking about a fundamental restructuring of the biotech space if these deals go through," said Diana Moss, president of the institute.

One of the issues the antitrust institute is raising about Dow-DuPont, and would raise on Bayer-Monsanto, is the vertical integration of traits, seeds and chemicals that would move away from competition at each level. This will squeeze out smaller rivals as companies strive to build a larger platform and stack traits in the process," Moss said.

"If you create these vertical platforms of traits, seeds and chemicals controlled by these very powerful companies, you really make it harder for smaller competitors to get into the system and get access and compete effectively," Moss said.

Most major farm groups have laid low on the mergers. The National Farmers Union has been practically a lone voice, calling on the Department of Justice to heavily scrutinize ag industry mergers. After Bayer AG's proposal was announced, NFU President Roger Johnson stated the deal would continue a "disturbing trend" in consolidation.

"Given the proposed merger between Dow and DuPont and the pending acquisition of Syngenta AG by China's National Chemical Corp., we ask that the Department of Justice thoughtfully consider and apply critical review to any pending and future deals, including a Bayer/Monsanto deal, that would break down marketplace competition in an already heavily concentrated agriculture sector," Johnson said.

Chris Novak, chief executive officer for the National Corn Growers Association, responded in an email to DTN that NCGA is still analyzing the impacts of the mergers and may comment later this summer after the group's board has a chance to discuss the topic.

Gaesser said he thought the Dow-DuPont merger could be a positive for farmers given that one of the spinoffs will be a stand-alone company dedicated to agriculture. "With that ag focus, that may not be a bad thing in that aspect of it," he said.

However, Gaesser also added he thinks one issue in the marriage of traits, seeds and chemicals is that companies could bundle seeds with stacked traits and chemicals, but also choose not to license products to other companies.

"It just seems in that industry they all think they need to combine and create a stronger business for themselves," Gaesser said. "I guess I don't understand that need so much, but evidently there is."

Harl said he thinks major ag groups are caught trying to remain in good graces with companies that provide event sponsorship and other benefits such as scholarships. On a national level, most major seed-and-chemical companies are often the biggest sponsors of agricultural conventions. For instance, DuPont and Syngenta were platinum sponsors of the 2016 Commodity Classic; Bayer, Dow AgroSciences and Monsanto were gold sponsors.

"That has dulled the edge you would normally expect of farm groups," Harl said. "The seed companies know this."

Harl added, "We don't like to mess with free enterprise, but we're at the point where we really need to take a long view of what is in the best interest of the country. I don't think it's in the best interest of the country to keep getting bigger, bigger and bigger without too much regard on the impact of the users of the products."

FEDERAL RESPONSE

Merger enforcement takes a significant amount of time to review and there are increasing lobbying efforts to convince the Department of Justice to sue against the Dow-DuPont merger, Carstensen said. "You can't consolidate this many firms in this market," Carstensen said. "There is some reason to be skeptical about the merits of some of these mergers."

Often, the Department of Justice demands certain divestitures of business lines or spinoffs, but Carstensen and Moss both question how such divestitures could occur when Bayer, Dow, DuPont, Monsanto and Syngenta are all part of the merger mix right now.

"All of these transactions mean there just aren't that many enterprises left to be the acquirer of any divested assets," Carstensen said. "There is more potential for there being either some pretty draconian settlements or just saying no because it's too complicated and doesn't make sense."

Carstensen said the Obama administration has stepped into other industries to declare companies were large enough. For instance, the Department of Justice blocked AT&T's attempt to buy T-Mobile.

"Then everybody knew nobody else could make a move to give them bigger market position so then you were actually driven back to having to compete," Carstensen said. "To some extent, there's at least that possibility here, it seems to me."

Chris Clayton can be reached at Chris.Clayton@dtn.com.

Follow him on Twitter @ChrisClaytonDTN

(SK,GH/CZ)

Chris Clayton