Grassley: Agriculture Consolidation Wave Has Become a Tsunami

Posted on 03/09/2017 10:26 AM

Seed, agrochemical company executives respond to questions at Judiciary hearing

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Determining whether recent proposed agribusiness mergers or acquisitions are “the precipice of a transformation” in structure was the key focus of a hearing today by the Senate Judiciary Committee, where its chairman, Sen. Chuck Grassley (R-Iowa), said the “consolidation wave may have become a tsunami.”

Grassley noted his concerns about the impact of seed and agrochemical developments. “When does the size of companies and concentration in the market reach the tipping point, so much that a market becomes anti-competitive?” Grassley asked.

Testimony from key industry officials. Executives from Bayer, Dow Chemical, DuPont, Monsanto and Syngenta were among witnesses at the hearing. Link to panel testimony.

Grassley said he was “very disappointed that ChemChina declined an invitation to testify,” adding that “ChemChina would have brought a unique perspective to the table because China’s government owns them. They’re called a state-owned enterprise.” The agrochemical industry provides basic inputs to farmers for growing crops and he says it appears the industry is on the precipice of a significant structural transformation.

Background. Bayer announced September 14 that Monsanto had agreed to a $66 billion acquisition bid, making it the biggest deal in the sector this year. Falling crop prices and the search for efficiency have helped drive other deals, like the planned $59 billion merger between DuPont Co. and Dow Chemical Co., as well as the proposed $43 billion acquisition of Syngenta AG by China National Chemical Corp., also known as ChemChina.

Grassley said he is concerned vertical integration in traits, seeds and chemicals will make it more difficult for smaller, independent companies to survive. Questions were also raised about market concentration and potential loss of research and development (R&D) incentives.

The Department of Justice and the Federal Trade Commission last week said they will collaborate on their analysis of the impact of the mergers.

The three companies created through these mergers would own 80 percent of the market share of the US corn seed sales and 70 percent of the global pesticide market. The proposed Bayer takeover of Monsanto would give the combined company 58 percent of US cottonseed sales, according to the most recent US government data, a matter they will have to address by offering to sell assets.

Sen. David Perdue (R-Ga.) said the possibility of reducing taxes by $2 billion under German tax law is fueling the proposed Bayer-Monsanto Co. merger. But company executives denied the implication of a tax inversion. They said US-German tax rates are roughly similar and the new company’s headquarters will be in Missouri. Robert Fraley, executive vice president and chief technology officer for Monsanto, reiterated assertions that Bayer would have its North American headquarters and research concentration in St. Louis. But senators were unable to pin either him or Bayer CropScience North America President and Chief Executive Jim Blome down on what that might mean long-term for jobs if and when the deal goes through.

Chris Novak, chief executive of the National Corn Growers Association (NCGA), said mergers among agribusinesses are partially driven by costly US regulatory pesticide and chemical reviews and a lengthy international approval processes for new biotech seeds. The pending mergers would give companies efficiencies and deeper pockets to cover costs, he said.

Further concentration in the industry will reduce choice and raise of the price of chemicals and seeds for farmers which ultimately will effect choice and cost to consumers,” Grassley told the committee in his opening statement.

Grassley’s concern was echoed by Roger Johnson, the president and CEO of the National Farmers Union (NFU). “You can have these companies in a position of making more profit by charging farmers higher prices and the competitive marker is not going to force those prices down,” Johnson testified.

But seed and agrochemical Industry officials insist the mergers will create more, not fewer, product choices for farmers and will not hurt consumers. “With the Dow-DuPont merger, we will bring our capabilities together,” Tim Hassinger, the president and CEO of Dow Agrosciences, told the committee, “and we will be able to more effectively compete and provide more product choices for farmers.”

James Collins, who heads DuPont's (DD) agriculture unit, said his company's upcoming $130 billion merger with Dow Chemical Co. will create a stronger player that will create more choices and drive innovation. "Dow and DuPont both have strong positions in different parts of the agriculture inputs market, but each needs additional capabilities to compete effectively," Collins said of the deal, which once completed will result in the combined company being split off into three separate, independent businesses.

Bloomberg recently talked to USDA Secretary Tom Vilsack about the recent action in the seed industry. Smaller seed companies will be the source of innovation for farmers, Vilsack said September 16 in an interview on Bloomberg TV with David Gura. “We’ll see smaller companies being successful and pushing the big guys to provide farmers choice; I’m more encouraged by a spurt of innovation,” Vilsack said. An increase in small to midsize operators in local food systems will create new opportunities for seed companies as farms become more diversified, he added. Open data and global sharing of information is one way the government can help innovation in agriculture, he noted.

The ultimate decision on the mergers rests with government regulators as US, European Union and other international regulators are reviewing Dow and DuPont’s plan to merge. Although the Senate does not have any authority to block the deals, executive and expert testimony at the hearing may be used as part of the regulatory review process.

The Bayer-Monsanto review will be lengthy. The companies said they will seek approval in 30 jurisdictions around the world, including the US, EU, Canada and Brazil, and do not expect to close until the end of 2017 – beyond the end of President Obama's administration. Democratic nominee Hillary Clinton has vowed to appoint antitrust regulators who will be tough on concentrated sectors. GOP presidential nominee Donald Trump’s position is murky relative to the outlook for US antitrust enforcement.

Bayer AG ’s big push into buying Monsanto could help it offset a growing problem on its home turf: increasingly stringent European regulation, the Wall Street Journal noted in a weekend article (link). Most genetically modified crops are banned throughout Europe, and EU officials are debating whether to do the same with next generation genetic technologies. “The single biggest challenge [in the EU] is regulation on the crop protection side,” said Liam Condon, the head of Bayer’s crop science division, in a recent interview with the newspaper. “It’s taking longer and longer to bring products to market.”

The Bayer-Monsanto deal would allow the two companies to pool resources to increase research and development and investment in technology, with the prospect of bringing new seed and crop products more quickly to market, said David Zaruk, a professor at Université Saint-Louis in Brussels. Zaruk said smaller seed and crop companies in Europe mostly have been priced out of the market and must team up with multinationals to get their products out because of the hundreds of millions of euros it can cost to comply with regulatory standards. Even Bayer and Monsanto separately “were ultimately too small” to innovate and succeed in the European market, he said.

Graeme Taylor, public affairs officer at industry-lobbying group European Crop Protection Association, said, “There’s a huge challenge for the industry in terms of innovation. It costs the best part of €200 million ($223.1 million) and 11 years to successfully bring a new product to market.” Taylor told the WSJ that the process for getting pesticides and herbicides approved for use in the EU had been “hijacked by politics,” in lieu of science. He cited the example of glyphosate, a weed killer that has faced protracted regulatory review.

Monsanto’s Fraley said costs for bringing new products to market have soared, and the mergers will help companies pay those expenses. “

While agribusiness executives insisted the industry's flood of merger activity will not raise prices or stifle innovation, members of the Judiciary Committee remained skeptical, insisting fewer market players means less choices for farmers and consumers. "Concerns have been raised about the loss of head-to-head competition of these transactions, and whether they will reduce incentives to invest in research and development," said Grassley. "Concerns have been raised whether these transactions will result in foreclosure of market access by competing seed companies to traits and germplasm, and whether they will enhance these companies to engage in exclusionary conduct."

Grassley said farmers are under tremendous pressure because the agriculture economy has slowed over the last couple of years. "Farmers don't have the ability to simply raise the price of their crops when they sell them to pass on higher input costs," he said. Grassley noted that the acquisitions come after corn prices fell from $7 a bushel in 2012 to under $3, and that overall farm income this year expected to be well below record highs of recent years. He said that “there is a lot of interest in how these transactions will recalibrate the seed and chemical world, and whether they’ll pass regulatory muster.”

Monsanto’s Fraley said that the consolidations are necessary to respond to that lower purchasing power by farmers, as companies that supply them seed, fertilizer and pesticides seek ways to reduce overlap and inefficiencies and pivot to more research and development. Fraley argued that licensing to smaller companies has enhanced market competition. “The bottom line is that our industry is undergoing a healthy and sorely needed transformation,” Fraley told the Senate panel. He called it a “healthy disruption.”

Bayer's Blome testified that the Monsanto merger is necessary to help farmers meet the food demand created by a rising population. "This type of change enables more innovation and delivers better products to the farm even faster," said Blome, adding that “Monsanto is a perfect match to Bayer’s agricultural business, combining complementary skills with limited geographic overlap.”

Diana Moss, president of the American Antitrust Institute, said the mergers will have "potentially adverse effects that could reduce innovation, increase seed costs and raise consumer food prices." She said the Dow-DuPont and Monsanto-Bayer mergers could be particularly devastating. "They will eliminate head-to-head competition in markets for certain crop seed and chemicals," said Moss. “Any arguments that integration is an efficiency should be viewed with skepticism,” Moss added.



NOTE: This column is copyrighted material; therefore reproduction or retransmission is prohibited under U.S. copyright laws.



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