Senator Chuck Grassley says consolidations of seed and chemical suppliers can be problematic at any point but the timing of the proposed acquisition of Monsanto Co. by Bayer AG is particularly bad for U.S. farmers.
Citing a revenue loss of about $600 per acre on his own farm in Iowa since 2012, the chairman of the Senate Judiciary Committee said he’s concerned the merger of the two seed and chemical companies could put farmers in an even bigger bind financially.
“It’s no secret that I’ve long been concerned about concentration and competition in the agriculture sector,” Sen. Grassley said in the opening statement his staff released prior to the hearing of the Senate Judiciary Committee he called on Tuesday (Sept. 20) to review the increasing trend of mergers and acquisitions.
“Farmers are unique; their profession involves accepting prices from input providers and commodity markets, while hoping for good weather in-between. Farmers don’t have the ability to simply raise the price of their crops when they sell them to pass on higher input costs.”
Witnesses who represented the companies involved along with commodity groups and antitrust specialists gave varying perspectives on the merger. Robb Fraley, executive vice president and chief technology officer for Monsanto, said farmers will benefit from the increased innovation resulting from the merger.
Role of innovation
“We are committed to serving farmers and investing in a broad range of solutions that can help their farming operations,” said Fraley. “The role of innovation has never been more important to agriculture. The fields of biology and data science are opening up a range of new solutions for farmers.
“I understand that change can be unsettling to farmers – I saw that firsthand when I helped invent the first crops developed through genetic modification (e.g. GMO crops). Importantly, just like then, I’ve found that change enables more innovation and delivers better products to the farm even faster.”
Jim Blome, president and CEO of Bayer CropScience North America, said he believes the combined companies will be better providers of new technology for farmers than if they continue to operate separately.
“Monsanto is a perfect match to Bayer’s agricultural business – combining complementary skills with limited geographic overlap,” said Blome, referring to Monsanto having a greater presence in North America while Bayer’s business is larger outside of North America.
Grassley, who farms near New Hartford, Iowa, with his son, Robin, said he’s concerned the mergers of Bayer and Monsanto – and three of the other major ag chem companies – will “have an enhanced adverse impact on competition in the industry and will raise barriers to entry for smaller companies by altering agricultural input markets for seeds and chemicals.
Barrier to new entries
“I’m also concerned that vertical integration of traits, seed and chemicals will make it more difficult for smaller biotech companies, independent producers and independent crop input companies to compete.”
Five of the six largest seed and agrichemical companies currently involved with the biotech seed industry are engaged in merger and acquisition discussions. Dow and DuPont are combing their operations; ChemChina is planning to purchase Syngenta and Bayer is planning to acquire Monsanto. The sixth company – BASF – has not announced any merger plans.
“There’s no doubt that right now, the agriculture industry is in a downturn,” says Sen. Grassley. “During the 2012 drought, the monthly average price of corn hit an all-time high over seven and a half dollars. Today, corn at my home elevator in New Hartford, Iowa, is trading at under $3 per bushel.
“Using yearly average prices, we’ve lost around $3.50 per bushel from 2012 to today. Multiplying that loss by 174 bushels – which is the 10 year county average yield in Butler County, Iowa – you get a revenue loss per acre of over $600.”
Similar trends can be seen with soybeans, wheat and other crops, he notes.
94 percent increase
“When I first started farming, a bag of seed corn cost less than $50. Today, seed corn lists for around $300 a bag, although it’s usually sold cheaper than that after discounts are applied. Data from Iowa State University shows that the collective costs of seed, chemicals, and fertilizer for an acre of soybeans has gone up 94 percent over the last 20 years.”
The ag biotech industry has produced cutting edge innovations, higher yields, and multiple efficiencies for the agriculture industry, he said. Because of biotechnology, crops are more resilient and better able to withstand threats ranging from insects to drought.
“The yields achieved today were unimaginable to farmers just a few decades ago,” Grassley noted. “The innovations of the companies in this room today have helped the world reach productivity levels which ease fears over meeting the long-term demands of our growing global population.
“However, when does the size of companies and concentration in the market reach the tipping point, so much that a market becomes anti-competitive? In addition to the transactions involving five of the ‘Big 6’ in the seed and agrochemical industry, two Canadian companies – Potash Corp. and Agrium – announced they were merging to create the largest fertilizer company in the world. To me, it looks like this consolidation wave has become a tsunami.”
Meanwhile, the senator said, the Department of Justice and the Federal Trade Commission, two of the agencies reviewing the merger plans for Dow-DuPont and ChemChina-Syngenta, have said they will collaborate on those and the Bayer-Monsanto merger.
Increased regulatory burden
Representatives of two of the largest farm organizations in the U.S. said they believe the move toward more mergers reflects a response to the increased regulatory burden many farmers and members of the ag chemistry and seed industries are experiencing.
“Domestic regulatory hurdles for crop protection chemicals and delays in international approvals for new seed traits represent significant barriers to market entry,” said Chris Novak, CEO of the National Corn Growers Association. “These barriers slow down innovation and drive up the cost of seed and chemicals.”
Novak, who spoke at the hearing on behalf of the NCGA and the American Soybean Association, said the process of developing and testing new products, and then securing regulatory approval to bring them to market, is requiring an increasing investment of time and money.
“As a result, fewer and fewer companies have the resources to be players in the market. This trend toward consolidation will continue unless and until Congress addresses these regulatory hurdles," Novak told the Senate Committee.
“We do want to preserve market competition, but that doesn't mean preserving the status quo. Just as farmers need to change and innovate, so do the companies that provide our inputs. True competition is not based solely on the number of players within a given market. Strong competition can result from having several evenly-matched companies fighting for market share within the seed, chemistry and trait development markets.”
Fewer farmers, fewer customers
In testimony released prior to the hearing, the two organizations noted agriculture has seen a significant decline in the number of small-to-medium sized family farms. “Fewer farmers means the agribusiness industry that supports the farm community has fewer customers-resulting in consolidation beyond the farm gate.
An American Farm Bureau Federation economist said farmers and ranchers know market forces have led to major-company mergers like Bayer-Monsanto, but they cannot afford to lose access to technology and innovation if they go through.
“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,” Bob Young, the AFBF’s chief economist said. “We have no reason to doubt, but we also are reminded of the old line: trust, but verify.”
Noting the market for seeds, chemicals and crop nutrients is poised to shrink from six major companies to just three, Dr. Young asked that regulators review these mergers not only in light of market concentration, but also the structure of the entire industry in a post-merger environment.
“Everyone’s knee-jerk reaction is to think that increased concentration will lead to higher prices for these inputs,” Young said. “Knees tend to jerk reflexively, but sometimes they jerk with reason.”
For more on the hearing, visit http://bit.ly/2cimt5n.