Just three years ago — before the formation of Aventis —there were 10 major global chemical companies. According to Sano Shimoda, president of BioScience Securities, an investment banking firm in Orinda, CA, the “Global 10” consisted of BASF, American Cyanamid, Zeneca, Novartis, Rhone Poulenc, AgrEvo, Dupont, Monsanto, Dow AgroSciences and Bayer.
Since then, AgrEvo and Rhone Poulenc merged to form Aventis (which is selling off its crop sciences division), BASF took over American Cyanamid, and Zeneca and Novartis combined to form Syngenta.
The Global 10 is now the Global 7. And Shimoda believes that group will soon shrink to become the Global 5.
But the consolidation of agricultural industries extends far beyond that group. Each of the coming Global 5 also reached out to envelop most of the major seed companies and biotech firms. What's left is only a handful of companies that each control proprietary lines of chemical, seed and genetic technologies.
What's going on?Forces that drive consolidation
In many ways, the consolidation of agricultural companies simply mirrors American business; consolidation is happening across the board, in all industries. Still, there are forces at work unique to agriculture.
High cost of research and development. It can take $100 million to develop a new product and bring it to market. So in the name of efficiency, companies merge and combine their R&D departments. Another factor is the time and expense related to regulatory demands. Small companies cannot absorb the cost and time delays while waiting for regulatory approvals. The payoff is simply too far away.
A shift in technology. Biotechnology altered the playing field. If a company needs a unique package of technologies or raw materials — like those emerging from biotech labs — it's difficult to source them on the open market. So companies buy and merge to access that critical technology.
A need for vast distribution networks. This is related to the technology shift. Dupont acquired Pioneer for more than its genetic technology; Dupont also got a massive field distribution force. Now with a strong combination of chemicals, seed technologies and a distribution network, it can bundle its technology much like Microsoft bundles software.
Falling margins. Don't underestimate the effect Roundup Ready soybeans had on the herbicide market. When that technology hit, farmers shifted from traditional soybean herbicides to a combined technology of Roundup and transgenic seed. That technology immediately cut the per-acre cost of herbicides nearly in half. To survive, competing chemical companies had no choice but to meet that price. Then they focused on mergers and buyouts in a search for long-term efficiencies and economies of scale.Will competition be affected?
“That's tough to answer at this stage of the game,” says Mike Boehlje, professor at Purdue University's Center for Agricultural Business. “Classic economic theory says that for healthy competition you need a number of firms, open access to information and no barriers to entry. But increasingly that is difficult because of massive capital requirements. It's one thing to innovate, yet another to commercialize. The dilemma is that the only way to bring new technology to market is with massive expenditures that only a few companies can fund. That is a barrier.
“So the question becomes, how many firms do you need to mimic perfect competition? Twenty? Ten? Five? You certainly need more than one. And as you get closer to one, there is the possibility of market power.”
Sano Shimoda believes the technology shift, by itself, will force intense competition.
“I believe farm technologies are moving onto a technology treadmill, characterized by shortened product cycles similar to what exists in the computer market,” he says. “There, you buy a PC and it is quickly outdated by new technology. We may only have four or five major global chemical and seed companies, but they will really fight for the farmer's business by constantly introducing new and better products. Competition will be fierce.
“Even so, competition will be different, more complex than in the past. Farmers will pay more for new seed technologies, but they'll also get more value. That's the test. That's what will determine success or failure for the global companies.”
Tray Thomas, president of The Context Network, an international agribusiness consulting company in Des Moines, IA, also believes competition will ramp up, at least in the major markets.
“The corn and soybean markets are huge,” he says, “and these companies are really going to fight for market share. And as long as Roundup is out there, they have to compete with it. That will continue to pull the market down. Prices will fall as more companies compete for that market.
“I also think farmers should look at the future with enthusiasm because so many products are coming off patent.”Factors that boost buying power
According to Thomas, two major factors are boosting farmers' buying power.
First, about three years before a patent expires, the manufacturing company begins lowering prices. The idea is to sell more product to generate more income at a lower price: Roundup is a good example. Then about two years before patent expiration, the company begins making supply contracts with other distributors. Finally, when patents expire, the generics move in.
“It's like the food industry,” Thomas says. “The same manufacturing plant will produce a branded corn product and a generic one. Even so, the original brand — if it's a good one — will still hold market share. Take Treflan. People still call the product Treflan even though it has been off patent for many years. That's how branding works. You still pay a little more for the brand name, but not much. Some buyers want that brand name. Others don't care.”
A second factor that will continue to boost farmers' buying power is the Internet. And its biggest impact has come from eliminating differential pricing by region.
“That created headaches for manufacturers,” Thomas says, “and the best example out there is Bt cotton. It's the ‘Internet Effect’ in spades.
“Manufacturers could charge one price for insect control in the Delta, where costs to control insects are the highest. But they had to charge less in Georgia, and even less in the High Plains of Texas. The Internet eliminated that regional price differential. Geographic price discrimination is now practically impossible.”
According to Mike Boehlje, it's all about open access to information: “One thing the Internet has done is provide liquidity to these markets that wasn't there. Pricing information is now widely available. Maybe farmers didn't used to know about differential pricing, but they sure do now.
“In addition, farmers have more than the ability to find out about differential pricing; they can access those markets through Internet companies. They also can use that pricing information as a bargaining tool locally.”
Look for Part II of “Industry Giants” in the next issue of Farm Industry News.Supply chain production may change how you buy inputs
In any business it's essential to study trends even if they don't directly affect you today. And Mike Boehlje, professor at Purdue's Center for Agricultural Business, says one trend is worth watching. It may change how you buy inputs.
“Traditionally,” Boehlje says, “producers have been opportunistic buyers because there have been so many alternatives. They price check, make their best deals for annual input purchases, then next year they might make the purchases from someone else. There haven't been a lot of reasons to stay with a particular supplier or manufacturer.”
That, he says, could change. And it may occur in a form similar to what is happening with specialty crop producers today.
“It's advantageous for specialty crop producers to form some kind of contractual arrangement with a buyer,” he says. “In that instance, they are aligning with someone who takes their output. I think that same type of thinking will occur on the input side.”
In such a production system, Boehlje says a farmer who wants to be a part of a particular supply chain for an end user may be required to use specific products in order to join that system. So rather than shopping for individual products, he would first shop for a company or production system that is best for his situation. Then he would acquire inputs that match up with production requirements.
“That will create an opportunity for joint ventures in buying,” Boehlje says, “but they won't necessarily be geographically focused. Your neighbors, for example, may not be aligned with the same system. It's also possible that input purchasing would not even occur every year, but only every three years or even five years, depending on how the pipeline is set up.”Farm equipment: As competitive as ever
As editor emeritus of Farm Equipment magazine, Bill Fogarty has spent a lifetime studying the equipment industry. Looking back over the last 50 years, he sees one constant — healthy competition.
“The biggest thing that happened to the equipment industry was when farmers got rid of livestock,” he says. “That liberated them to shop all over the place — not just at their local dealer — and real competition for the farmer's dollar began.
“And really, nothing has changed. The fact is there are still too many dealers, and they often have to sell equipment at prices that don't generate much profit over the long haul.
“You'd think we'd reach a point where the need to get a return on capital would reach a balance. But the thing is, agriculture won't allow that. There's the occasional hot year, but on a worldwide basis there are more times when the squeeze is on farmers and that gets transferred to equipment companies. Take Deere. Its earnings for 2000 will double earnings in 1999. But that's still only half its earnings for 1998. That says it all.”
Even AGCO's buying spree — when it snapped up Deutz Allis, New Idea, Massey Ferguson, White and now AgChem — does not concern Fogarty. “AGCO has had excellent growth and it now owns a multiplicity of brands,” he says, “but I don't see that affecting competition.”
One reason Fogarty believes competition will remain strong has to do with the “one man's trash is another man's treasure” theory. He cites this example: “In the late '60s, whoever made the smallest farm tractor didn't have any competition at all. And they quit making it. So what happened? Kubota jumped right in and just ran with that market niche. The competition always rises to the challenge. Someone always sees opportunity.”