A Response to Emerging Fourth Industrial Revolution
Congress has begun to focus on recent mergers and acquisitions in the seed and agrochemical industry. This industry provides inputs to farmers for growing crops.
There are six companies involved in the research and development, manufacturing, and distribution of agrochemicals and biotech seeds, namely Bayer, BASF, Dow, DuPont, Monsanto and Syngenta. All compete with one another for market share while simultaneously working with each other through cross licensing agreements. Cross licensing agreements between companies result in the companies trading technologies and products under certain conditions that typically render enhanced choices of products for farmers and facilitates innovation.
Currently five of the six companies have announced they are engaged in merger and acquisition discussions. Dow AgroSciences will merge with E. I. DuPont de Nemours and Company, ChemChina will acquire Syngenta International AG and more recently Bayer CropScience North America announced they will acquire Monsanto.
Combining the companies raised the concern of powerful members of the U.S. Senate including Charles Grassley (R-IA), Chairman of the U.S. Senate Judiciary Committee, and a farmer. In his opening statement Chairman Grassley explained, “I’m concerned that all these companies merging at the same time 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. I’m 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. I’m concerned that further concentration in the industry will reduce choice and raise the price of chemicals and seed for farmers, which ultimately will effect choice and costs for consumers. I’m concerned that further consolidation will diminish critical research and development initiatives which drive innovation and technological advances for the agricultural sector.”
DOJ & FTC
Two federal agencies are in charge of reviewing mergers and acquisitions: The Department of Justice (DOJ) and the Federal Trade Commission (FTC). U.S. antitrust merger law prohibits transactions where the probability of loss of competitiveness dwarfs the benefits of the proposed merger or acquisition. The DOJ and FTC will likely move quickly to review the proposed mergers and acquisitions as the beginning of the process is an important time. The agencies will need to forecast market trends and future effects of the mergers and acquisitions. Companies must provide the agencies with information that will assist the agencies with research and help them understand each company’s position in the market so that the agencies may hypothesize the impacts on competition.
The DOJ will review the Dow-DuPont merger. The FTC will review the ChemChina acquisition of Syngenta. The Bayer-Monsanto acquisition was just announced last week so it has yet to be determined which antitrust regulator will review that deal. Chairman Grassley urged the DOJ and FTC work together, with the assistance of the Department of Agriculture, “because these transactions involve the same underlying market (and) it’s crucial as they conduct their antitrust reviews.”
Trust, But Verify
Dr. Bob Young, Chief Economist and Deputy Director for Public Policy for the American Farm Bureau Federation (AFBF) testified on behalf of their farmer members. Farm Bureau is the largest general farm organization in the U.S. with 50 state organizations plus Puerto Rico. In his testimony Dr. Young stated, “AFBF understands the business forces driving these mergers…mergers & acquisitions acts as a way to continue to show overall sales growth and to increase market share. ”
These mergers and acquisitions come at a time where U.S. net farm income has dropped $52 billion since 2013, “the steepest decline in farm income on record,” according to Dr. Young. This fall in income resulted in farmers adjusting their spending on inputs of seeds, agrochemicals and fertilizer – the three business trade areas of the mergers.
Dr Young elaborated, “At the same time input suppliers are facing a flattening or declining revenue environment, they are also facing growing challenges in bringing new products to market. One positive approach a company can take to improve market share for example is to introduce new products, to provide a better service to their customers. Nearly all of the companies involved in the recent mergers and acquisitions activity have been, are, and are expected to continue to be heavily involved in the development of new products. The challenge is the time and money needed to bring a new product—chemical or genetic—to the market. Recent studies suggest it costs $136 million and takes 13 years of research and regulatory oversight before bringing that new seed to market. Further, firms frequently have to wade through litigation as well and that can drag the process out years longer. This softening of farm income and subsequent efforts on the part of farmers to bring costs under some kind of control is one of the main justifications on the companies’ part to look toward merger & acquisition activity.”
According to Dr. Young’s testimony AFBF is suggesting that the review of these mergers consider not only the market concentration/structure that will result from the individual company actions, but examine the structure of the entire industry in a post-merger environment. Young said, “There will be considerable market capacity in the Dow/DuPont/Pioneer and the Bayer/Monsanto companies. It is good that two will exist in order to drive a level of competition in the space, but will these two be so large that they preclude growth or delivery capacity by other firms?”
Young concluded, “Our members know the need to keep a new technology stream as active as possible. We have had several—and repeated—assurances from the companies involved as to their intent to maintain as strong an innovation arm as they can. We have no reason to doubt, but we also are reminded of the old line: trust, but verify.”
Emerging Fourth Industrial Revolution
Mergers and acquisitions highlight that the global economy is nearing a fourth industrial revolution that will transform the way we live and work.
Michael McDonough, Global Director of Economic Research and Chief Economist, Bloomberg Intelligence, describes the fourth industrial revolution as, “Technology that leads to massive gains in productivity. Massive gains in productivity means substantial improvement to everyone’s quality-of-life.”
According to Bloomberg reports, there is a group of technologies that is combining to create transformations across almost every industry. Those technologies include artificial intelligence, 3D printing, robotics and big data. On the life sciences front, in terms of genetics and medical imaging, these things are combining in a way that bring about a host of transformations across industries.
Dr. Robert T. Fraley, Executive Vice President and Chief Technology Officer, Monsanto, testified, “We are witnessing a new era in agriculture as a result of advances in biology and data science. Silicon Valley is digitizing farming around the world. And breakthroughs like gene editing are opening up a whole new world of possibilities in plant biology. These advances are urgently needed to address major challenges facing society, as we must:
- Feed 10 billion people by 2050
- Mitigate the impact of climate change
- Improve sustainability to produce more with less, and
- Help increase the efficiency and productivity of farmers”
The emerging fourth industrial revolution for agriculture means embracing new technologies that include but are not limited to precision agriculture, digital farming, soil microbiome and gene editing. Dr. Fraley concluded, “As someone who grew up on a small family farm in Illinois, I understand that change can be unsettling to farmers. But our industry is changing…and it needs to… because the solutions we need can only come if companies embrace new technology, increase their investments, and accelerate research and development (R&D). And that’s why you are seeing the latest round of mergers right now.”
Not a New Phenomenon
In 2002 the Harvard Business Review (HBR) published, The Consolidation Curve, a 13-year global analysis that found “most industries progress predictably through a clear consolidation life cycle – and that companies can plot with some precision where they fall in the cycle.”
HBR researchers found that once an industry forms or is deregulated it will move through four stages of consolidation. In 2002, they predicted that on average companies moved through the four consolidation stages in about 25 years and concluded that “in the future we expect it to be even quicker.” Moreover, the HBR research concluded, “…every company in every industry will go through these four stages—or disappear.”
Mergers and acquisitions are not a new phenomena and according to research conducted by the best minds in business they will continue at a faster pace in the emerging 4th industrial revolution we are entering. The agriculture industry will be best served by putting fear aside, verifying facts and embracing ever-changing technologies that spur innovation and better products that improves our quality of lives.