When any of us look to buy things, we would probably prefer more choices to less. Our sense of increased competition is hard to shake.
Recent merger and consolidation activity in the agricultural input space has raised some justifiable concern among industry watchers, as well as farmers and ranchers. But keep in mind there are innovation-based market forces at work behind this recent spate.
The farm economy itself is one reason companies are thinking about restructuring. After income peak in 2013, farm income is off 49 percent in 2017. Faced with customers having to deal with lower incomes, and thus anticipating a much tougher sales environment, many firms in the industry felt the need to look for some logical structural adjustments. Recall one of the earliest conversations in this area was a Monsanto run at Syngenta.
At the time, the idea of bringing a crop chemical protection company together with one that brought a strong capability in plant genetics to the table made a lot of sense from a business perspective to many in the industry. Both aspects of the industry faced significant challenges separately.
The timeline on bringing a new chemical to market is several years at a minimum and could easily move into the decades range. A new seed trait also takes years to develop, and in addition to rising regulatory hurdles such technologies frequently face costly litigation before even being able to earn a dollar return on investment.
This set of regulatory and legal hurdles facing a new agricultural technology means firms developing new suites of products must have great patience, as well as deep pockets. This also dictates firms of significant size to overcome all today’s criteria with respect to bringing new products to market.
Prior to the mergers of seed and chemical companies over the last few years, information and technologies tended to be housed in separate silos. One company developed a chemistry and then subsequently another developed the seed traits to match, or vice versa. Bringing this technology under one roof should allow noticeable synergies providing information flow from day one between the chemistry/trait wings of the firm rather than waiting for a product to be developed, allowing the patents to let, negotiating licensing arrangements and then letting the other side of the house go to work.
With the approval of the Dow/DuPont merger, we had one firm with these combined attributes. Which means there is probably some reason to have at least one more — thus the Bayer/Monsanto transaction.
Spin-offs from this activity may lead to other companies with current strengths in one of the two specialty areas looking for opportunities to create yet another firm in the space.
America’s farmers and ranchers are some of the most productive and efficient in the world, other nations and competitors such as China want to not only feed their own people, but also to sell into foreign markets often dominated by U.S. agriculture products. Accordingly, some have raised concerns about foreign acquisitions draining the U.S. of its technology leadership and IP assets as a means for China and others to better compete.
But in many ways, recent and current deal flows such as Dow/DuPont and Bayer/Monsanto are actually the best counterweight to any such concerns. These transactions will result in cementing chemical and life sciences hubs here in the U.S., ensuring their technologies, intellectual property, academic and university partnerships, and overall research and development capabilities, will remain and be amplified as U.S. based assets.
Furthermore, any effort to ever subsequently acquire either of these combined companies down the road would be subject to significant, if not insurmountable, review by U.S. regulators. And USDA, Justice and Treasury officials are quite adept at ensuring such provisions are locked in to prevent such remote occurrences as part of their required security reviews prior to any approvals.
No one likes industry concentration, just for the sake of concentration and potential market power, but when a strong business case can be made and understood, it is difficult to object to a merger just because of a four-firm ratio.
Robert Young is the former chief economist for the American Farm Bureau Federation. He has also served as chief economist of the U.S. Senate Committee on Agriculture. He holds a PhD. In agricultural economics from the University of Missouri.