By M M Sharma

The Competition Commission of India (CCI) is currently examining the Indian leg of the mega merger between Bayer and Monsanto. The proposed acquisition of Monsanto’s entire shareholding by Bayer globally, which brings together two global giants in the seeds and agro-chemical markets, is drawing attention of economists, lawyers and agricultural scientists globally. Like in India, the antitrust authorities in US and EU are currently examining the merger and there is opposition amongst the antitrust experts and economists for justifiable reasons, which also need to be discussed publically in India.

If approved, the merger will lead to tight oligopoly of three multinational giants, (ChemChina-Syngenta, Du Pont-Dow and now Bayer-Monsanto) which will control almost 2/3 of the global production in seeds and agro-chemicals as well as the valuable Big Data and IT platforms. This will not only lead to price rise for seeds and pesticides but also will lead to control of global food value chain as well as direction of the innovative efforts in the next few decades besides increasing the dependence of world (including Indian) agriculture on the three global giants. This should be a wakeup call for any sensitive government.

Bayer/Monsanto merger forms part of the recent wave of consolidation in the agricultural industry that has transformed the control of global food value chain in recent decades and seems to be a part of a larger design which seems to have escaped the attention of policy makers so far. Monsanto is aware of opposition to its monopolistic policies of seeking high royalties for its GMO seeds, particularly in cotton, which is often linked to farmers’ suicides in cotton belts and has faced challenges from its Indian licensees of seed technology before the erstwhile MRTP Commission in the past and now before CCI. Can Bayer, the acquirer, prove to be in any way different than Monsanto for Indian agriculture, which still depends heavily upon nature and the high yielding genetically modified seeds? In order to appreciate the above, it is important to recall Monsanto’s track chart in India.

The Author, based in New Delhi, heads the competition law & policy practice at Vaish Associates, Advocates, a corporate, tax and Business advisory Law firm in India. The views expressed are personal. The Author may be reached at mmsharma@vaishlaw.com

Monsanto vs. Indian Farmers- Is Monsanto linked to farmers’ suicides?

Some environmental activists in India have highlighted how Monsanto’s seed monopolies led to the destruction of alternatives and collected super normal profits in the form of royalties and how the increasing vulnerability of monocultures created a context of debt, suicides and agrarian stress which is driving the farmers suicide epidemic in India . This systemic control by Monsanto got intensified with Bt cotton seed .That is why most suicides are in the cotton belt of Maharashtra, which has the highest acreage of Bt cotton. According to Government of India data nearly 75 % rural debt is due to high cost of purchase inputs, mostly seeds. According to some media reports , since Monsanto entered into India in 1998 the price of cotton seeds has increased by almost 80,000 % (from Rs. 5-9 per kg to Rs. 1,600 for 450 grams). Till March 2016 reportedly 3 Lakhs Indian farmers committed suicide trapped in debt and crop failure, 84% of these suicides are attributed directly to Monsanto Bt. Cotton.

There is a counter view to this alleged linking of Monsanto’s Bt cotton to farmers suicides in India as well. For instance, in a study published in 2014 , identified the role of Indian banking policies, rather than the alleged GMO crop failure, in contributing to the suicides. According to the study, the increase in suicides among Indian farmers is an unanticipated consequence of the bank reforms the country undertook since the early-1990s. In particular, the entry of foreign and new generation private banks has made banking in India competitive and led to fewer loans to agriculture and farmers. With increased competition, banks saw lending to the farm sector as unprofitable and unreliable. The study found that states with the highest incidence of farmer suicides were those that offered the least institutional credit to farmers. This forced small farmers into the hands of private lenders who charge exorbitant interest rates (as high as 45%). In those states where farmers had better access to institutional credit and farm insurance, there were markedly fewer suicides. Indian banks also offer credit to farmers with irrigated land, as this makes farming more viable. The study suggests that “In states where there is greater irrigation, they [banks] lend money to the farmer.” It further found “no evidence to suggest that the cultivation of a particular crop was related to suicides in India.” Some states with high agrarian suicide rates do not include cotton farmers.

How Monsanto’ abused its market power- According to media reports, Monsanto collected royalty for its Bt 1 cotton since 2002 without having a patent for it in India and instead created a new category called “Technology Trait” for which it charged a “Trait Fee”, which was royalty in a new name. Unlike in US, since Monsanto could not sign individual contracts with Indian farmers, due absence of a patent, Monsanto locked 28 Indian seed companies through one sided license agreements to collect hefty royalties on its behalf which was similar to the British revenue settlement system through Zamindaris to collect tax and revenue from farmers in colonial times. Indian seed companies are feeling the squeeze, finding themselves between the price control measures exercised by the government to protect farmers and Monsanto demanding nine times more in royalty and unilaterally terminating the license agreements. The price including the Trait Fee was reduced in 2006 because of the case filed by government of Andhra Pradesh before MRTP Commission and the subsequent negotiation between AP government and Monsanto.

The same issue of the likely abuse of dominance in charging high Trait Fee by Mahyco Monsanto, the Indian subsidiary of Monsanto, is again challenged before CCI, on complaints filed by various Indian Seeds Association and a reference by the Ministry of Agriculture. A penalty of Rs. 2 Crores was imposed on Monsanto by CCI for failing to comply with the notice by the Director General, its investigating arm, after Monsanto failed to obtain stay on the ongoing investigation from the Delhi High Court.

Global opposition to the merger

There is a growing opposition to this merger on both sides of the Atlantic! Antitrust experts both in US and EU have openly opposed the merger. The thrust of opposition is based on possibilities of ‘bundling” of “traited” seeds with innovative technology. In fact, some antitrust writers in US have already started comparing the “Baysanto” with the famous antitrust case of 1998 against Microsoft against its bundling of web browsers with its Window operating platform . In US, there is a growing opposition by Farmers groups as well. The proposed merger joins major rivals that compete to sell many kinds of vegetable varieties including tomatoes, peppers, cucumbers, lettuce, carrots, spinach and onions in the $860 million U.S. vegetable seed market.

The European Commission (EC) has also expressed concerns noticing that the proposed acquisition could reduce competition in a number of different markets resulting in higher prices, lower quality, less choice and less innovation. In particular, the initial market investigation identified preliminary concerns in the following three areas, namely, (i) Pesticides –due to limited competition between Monsanto’s portfolio of biological pesticide and Bayer’s portfolio of chemical pesticide products, and the parties’ overlapping activities in products that tackle varroa mites, a parasite affecting bee colonies in Europe; (ii) Seeds -due to parties high market share in the breeding and licensing of vegetable seeds for several field crops, such as, oilseed rape seeds and cotton seeds and in the research and innovation programs for wheat; and (iii) Traits- due to Monsanto dominant position in several traits markets worldwide and Bayer being one of the few competitors, which has notably developed alternative herbicide tolerance traits to Monsanto’s.

The EC will investigate in particular whether the transaction could lead to a reduction of competition in these markets, taking into account the existing links between the few worldwide competitors through cross-licensing and through research and development cooperation. The EC will further investigate whether competitors’ access to distributors and farmers could become more difficult if Bayer and Monsanto were to bundle or tie their sales of pesticide products and seeds, notably with the advent of “digital agriculture”. On 31 July 2017, Bayer and Monsanto submitted commitments to address some of the Commission’s preliminary concerns. However, the EC found these commitments insufficient and has now issued formal “Statement of Objections” to both parties to respond. Given the worldwide scope of Bayer and Monsanto’s activities, the Commission is cooperating closely with other competition authorities, notably with the Department of Justice in the US and the antitrust authorities of Australia, Brazil, Canada and South Africa.

Do efficiency gains outweigh the overall negative effects? It may be argued that to save humanity from the famines and malnutrition, considerable amounts of investments are needed in R&D in the agriculture sector. In view of fall of public investments and increasingly more role played by the private investments in the sector, a higher level of consolidation could lead to higher profitability and hence higher investments by the private sector.

But does such an approach factors for the effects which such large Corporations may have on the lives of around half a billion farmers in the World and their families, most of whom live in penury? Further, given the past experience of exploitative price increases for Bt Cotton by Monsanto, which could have been one of the reasons for increasing farmers suicides in India’s cotton belt, what is the guarantee that the Baysanto will be different?

Should CCI clear this merger? Is the projected merger necessary in order to promote innovation in this sector?

As per the “details of combination” notified by the parties on CCI website, post-merger, “Baysanto”, as the merged entity is proposed to be called, will have a dominant “platform” in seeds (in Cotton seeds in India), vegetable seeds (cabbage, cucumber, onion, hot pepper, tomato in India) as well as in insecticides for rice, cotton and corn (in India, Bayer already enjoys 60-65% market share and Monsanto enjoys 15-20% market share in Corn insecticides in both upstream market for seed treatments and downstream market for sale of seeds ) and face insignificant competition. Though the top lawyers representing the parties before CCI have tried to project a very benign post-merger scenario in the said details of combination , basing their arguments mainly on recent removal of horizontal overlaps through global divestiture of Bayer’s Liberty, a glyfosinate -ammonium based pesticide [that was, till now the main challenger to Monsanto’s Roundup, another glyphosate based herbicide (proposed in view of recent concerns raised by WHO’s International Agency for Research on Cancer(IARC) that re-classified glyphosate as “probably carcinogenic to humans” and the consequent difficulties faced by both in getting authorization for its usage extended in EU)] to BASF in October 2017, yet they do not seem to have adequately answered many antitrust issues , for instance, the strong possibility of “bundling” by leveraging its dominance in one product line to force purchases in another. Monsanto is already well known for such bundling in US! For Bayer-Monsanto, this platform will be a way to leverage the sale of one product into another, even if that product is lower quality or more expensive than a similar product produced by a rival.

The question that CCI and other antitrust authorities, particularly in US and EU, should consider is whether the remedies suggested viz. sale/divestiture of some of their assets by Bayer/Monsanto, such as, sale of Bayer’s worldwide glufosinate ammonium business, it’s Liberty link technology including the related IPR licensing and virtually all of its agriculture seeds and traits (excluding Indian cotton seeds business) and its primary R&D facility for GM seeds and traits in North Carolina, USA to BASF , are sufficient to allay the risk of competition law concerns discussed above by various experts globally? This remedy, for instance, does not specifically deal with the exclusionary portfolio effects and the possible adverse effects on innovation that may result from the combination of germplasm, traits, breeding technologies, crop protection, Big Data and digital farming as explained earlier.

In a well- researched policy article published in 2017 by the University of London, Centre for Law, Economics and Society, “Merger Activity in the Factors of Production Segments of the Food Value Chain:- A Critical Assessment of the Bayer/Monsanto merger” by Prof Ioannis Lianos & Dmitry Katalevsky, after examining the horizontal, vertical and conglomerate dimensions and effects on both actual and potential competition strongly believes that the merged entity will have the ability and incentive to foreclose competitors in upstream or downstream markets in seeds and crop protection value chains and will produce exclusionary “portfolio effects” arising out of the combination of the complimentary businesses of Monsanto and Bayer in Traits, seeds, pesticides, herbicides and digital farming to the detriment of the final consumers, i.e. the farmers. It will also lead to reduction or elimination of competition in the emerging innovative technologies like “digital farming” since post-merger, both will have the incentive to avoid disruptive innovation that could challenge their position in the seed and crop protection value chains. Moreover, the emergence of integrated technology/traits/seeds/chemicals platforms may place barriers to new entry.

It also needs to be noted that Monsanto, DuPont, Dow Chemicals have common shareholdings with the same institutional investors simultaneously holding large blocks of shares in each of them, which is already a strong factor facilitating collusion. The new more consolidated market structure will increase the risk for adoption of strategies of “parallel exclusion “or “cumulative foreclosure effect” as the remaining platforms which are already linked through a wide network of cross licensing and other horizontal cooperation agreements, in addition to common ownerships, as stated above, may attempt to raise the costs of potential rivals, including biotechnology startups etc.

Conclusion- if it is approved, not only will it create a mammoth 3 Firms’ trioply which shall control 2/3rd of the global production of seeds and agro-chemicals and acquire an important position in the agricultural equipment markets related to Big Data and “smart agriculture” but also it will stifle further innovation in future from prospective startups and perpetuate the collective dominance of the trioply all over the globe.

It is hoped that CCI will not rush through this merger and not only consider consulting experts and like the EC, consider cooperating closely with other competition authorities in the US and the EC, Australia, Brazil, Canada and South Africa but also will keep the peculiar vulnerability of poor and illiterate Indian farmers and their lack of bargaining power, unlike their American and European counterparts in mind.

The author is Head-Competition Law and Policy, Vaish Associates Advocates