The small number of major companies in the agricultural biotechnology sector is about to get even smaller. Three big mergers have been put forward in the past year that, if completed, will have significant implications for the future of the industry, which lies at the center of efforts to more efficiently use limited resources to feed a growing global population. If the mergers overcome the hurdles ahead of them, they could shape the development of future technologies, affecting more than just the corporate bottom line in the long run.
Before the first of the current merger processes was initiated at the end of 2015, the top six companies in agrochemical industry sales — Syngenta, Bayer Crop Science, BASF, Dow AgroSciences, Monsanto and DuPont — controlled roughly two-thirds of the global seed market and three-quarters of the pesticide market, thanks to consolidation in the late 20th century. Now, some of those corporations are seeking to coalesce even further.
In December 2015, the Dow Chemical Co. and DuPont announced a proposed $130 billion merger that would include splitting the combined company into three parts. The entity would control almost 16 percent of the agrochemical market and 25 percent of the seed market, including a majority of the soybean and corn seed market within the United States. The scope of its control over the market has raised antitrust concerns among regulators in the United States and European Union who are scrutinizing the deal.
In February, Syngenta accepted a $43 billion acquisition offer from China National Chemical Corp. (ChemChina) after rejecting a similar offer from Monsanto the month before. The deal represents more than just the consolidation trend in the industry. ChemChina’s investment reflects China’s broader goal of bolstering its food security. Through a combination of strategies, including technology acquisition and development, consolidation in the agricultural sector, and land reform and acquisition, Beijing is seeking to combat the geographic reality of resource scarcity. The acquisition of Syngenta (and access to its corresponding intellectual property) by state-owned ChemChina comes at a time when Beijing is also looking to boost its domestic biotechnology sector. The proposed merger recently overcame a significant regulatory barrier with the approval of U.S. national security officials, though several blocs must still sign off on the deal.
With other majors pairing up, those that do not run the risk of falling behind. In July, Monsanto rejected a merger proposal from Bayer for a second time. But just this week a third, improved offer worth about $65 billion was put on the table. [Editor’s note: The companies announced on Wednesday that they had agreed to the deal worth $66 billion, according to a report by AFP.] The consolidation wave reaches beyond the big six as well. Recent reports indicate that preliminary merger talks have begun between fertilizer giant Potash Corp. and agricultural chemical producer Agrium Inc.
Mergers such as these, even large ones, are nothing new. The series of mergers and acquisitions in the industry in the 1990s concentrated more than half of the agricultural biotechnology patents issued by 2000 into the hands of 10 patent holders. Then, as now, concerns were raised about potential oligopolies and their pricing practices as well as the longer-term effect they would have on innovation.
Will innovation be hampered?
Academic studies indicate that the mergers in the agrochemical sector during the latter part of the 20th century increased the risk of diminishing innovation because they amassed research and development activities into the hands of fewer operators. That granted them disproportionate power to reduce the level of those activities, hampering innovation in kind. Given the financial incentives to continue research, companies would not necessarily do the same today, but the risk is still higher than it would be otherwise.
Entrepreneurial spirit, environments that nurture collaboration between academics and business, and heated competition are all known for their ability to spur innovation. Though control of an industry by a few giant corporations could limit innovation, it does not have to. Mergers such as the ones now occurring in the sector could instead increase efficiency by eliminating overlapping initiatives, potentially freeing up funds to pay for other avenues of research. Still, some experts expect to see fewer innovations coming out of the major companies during the newest cycle of consolidation, shifting the mantle of advancing technology to smaller innovators and academia.
That may end up being a positive turn of events for the agriculture industry, since unconventional thought could become a vital strategy for smaller companies looking to compete. This would be especially true as resource scarcity and labor shortages force many nations to think creatively about adapting food production to changing ge opolitical environments. Research areas are more likely to thrive outside the big companies, which could then lead to further acquisitions down the road. For instance, gene-editing techniques such as CRISPR, developed in academia for a variety of purposes, will have a substantial impact on the sector even though they were not developed by major conglomerates. In addition, changes in how crops are protected — by moving from traditional chemicals to biologics, for instance — could also shift power in the industry somewhat.
Innovation will still happen, it just may be more likely to occur outside the walls of the new megamajors. The bigger conglomerates, however, will still have a role in the development of initial discoveries. The high cost of bringing an idea to market may, in fact, necessitate cooperation between smaller innovators and larger players.
As the Pool of Agribusiness Giants Shrinks, Will Innovation Follow? is republished with permission of Stratfor.