One of the biggest stories in agriculture right now is the jaw-dropping consolidation among companies that sell the world’s seeds, pesticides, and fertilizers.

Currently, there are six companies that dominate the biotech seed and agrochemical industries: Bayer, Monsanto, Dow, DuPont, Syngenta, and BASF. But in recent months, DuPont has proposed merging with Dow, Bayer has struck a deal to buy up Monsanto, and Chinese giant ChemChina is buying Syngenta. If these mergers all go through, the three biggest agribusinesses would sell 62 percent of the world’s patented seeds and 62 percent of all pesticides.

As I detailed earlier, the biggest worry here is that a lack of competition could stifle the innovation needed to help farmers keep growing enough food to support a world population that will soon reach 9 billion. These giant oligopolies could also, potentially, raise prices on farmers who have already been battered by falling incomes in recent years.

Both US and EU regulators have begun scrutinizing these proposed mergers closely. And, on Tuesday, Congress jumped into the fray. The Senate Judiciary Committee held a hearing on "Consolidation and Competition in the U.S. Seed and Agrochemical Industry," and various politicians sounded alarmed about these growing agribiz Goliaths.

"To me, it looks like this consolidation wave has become a tsunami," said Sen. Charles Grassley (R-IA). "When does the size of companies and concentration in the market reach the tipping point, so much that a market becomes anti-competitive?"

That’s the multi-billion-dollar question, isn't it? The CEOs of the various agribusinesses involved had an opportunity to state their case in favor of the mergers, and critics laid out a detailed case against. So I thought I’d pull out the strongest arguments from the pro- and anti-merger sides.

How companies are defending these mergers: They’ll boost innovation!

At the Senate hearing, the companies themselves focused on the pro-innovation case for these mergers, and that’s worth hearing out.

The basic logic goes like this: It takes a lot of work and money to develop new crop varieties that have higher yields, or can withstand disease, or are more convenient for farmers. Take Monsanto’s Roundup Ready crops, which have been genetically modified to withstand the pesticide glyphosate (e.g., Roundup), which in turn makes it easier for farmers to spray their fields. Developing that herbicide-resistant trait for corn, soy, and cotton cost hundreds of millions of dollars in experimentation, testing, and jumping through regulatory hurdles. (Monsanto patented both seeds and pesticide, though those original patents have since expired.)

In the future, we’re likely to need innovations even more radical than that. The world’s population is likely to soar past 9 billion by 2050, and crop yields will have to rise some 60 percent if we want to grow sufficient food for all those people on existing farmland. That’s a staggering challenge, and it could take billions of dollars into everything from genetic engineering to improving traditional agricultural methods — all in order to boost yields, develop drought tolerance, improve soil fertility, and so on.

At the hearing, the CEOs argued that merging agribusinesses with different areas of expertise would help facilitate that sort of innovation. Here’s DuPont executive vice president James C. Collins Jr. defending the DuPont/Dow Chemical merger: "By combining our complementary strengths, such as DuPont’s seed expertise with Dow’s trait development, we will be able to respond faster and more effectively to the changing conditions that impact farmers."

Here is Syngenta CEO Erik Fyrwald on his company’s proposed merger with ChemChina: "ChemChina will provide Syngenta with greater capital to further its current industry-leading R&D programs. … Because ChemChina is not publicly traded, this transaction will allow Syngenta to focus more intensely on long-term R&D instead of having to focus on satisfying short-term investor expectations and demands. It will also give Syngenta better access to emerging markets."

And Monsanto’s chief technology officer, Robert Fraley, argued that agribusinesses needed to scale up to the size of Silicon Valley’s tech giants: "Fifteen years ago, we spent $300 million on R&D. Today we spend $1.5 billion. That sounds like a big number. But compare that against other data and life science companies like Microsoft, Apple, Pfizer and Merck who each invest over $10 billion per year in R&D. To realize a step-change, agricultural companies will need to invest more."

So that’s the basic case from the company side: The world has huge food challenges to overcome. Right now, private companies are where the vast majority of the R&D occurs. (To put things in perspective, the USDA’s agricultural research arm spends about $350 million per year. If the Monsanto and Bayer merge, their R&D budget will be $2.8 billion.) And big, diversified corporations can tackle these research problems more adroitly than smaller companies can.

The case against mergers: They may actually hurt innovation

Now, not everyone’s convinced by this pro-innovation case. At the hearing, Diana Moss, president of the American Antitrust Institute, laid out five big counterpoints to consider:

1) For starters, there’s not a lot of great historical evidence that consolidation has led to greater innovation in agriculture. In fact, the opposite might even be the case.

In the late 1990s and early 2000s, she noted, R&D spending among biotech firms as a percentage of sales boomed, as new traits such as insect resistance were being widely introduced. In response, the industry went through a wave of consolidation, with bigger firms like Monsanto buying up smaller companies and patents.

By the late 2000s, however, R&D spending as a percentage of sales had actually slumped back down to mid-1990s levels. "This conclusion," Moss noted, "calls into question long-standing arguments that concentration is needed to generate economies of scale in R&D."

2) Moss also pointed out that while crop yields have been going up over time — a point of pride among biotech companies — seed prices have increased even faster. This, she noted, was "the very problem that biotechnology is purportedly designed to solve." The worry here, in other words, is that while these massive agribusinesses have had R&D successes, the lack of competition has limited the actual benefit to farmers (and hence consumers).

3) Moss quibbled with the claim that companies could get more research and scientific breakthroughs by combining their research divisions. That might be true, but a big worry is that you’d have fewer labs working on a set number of problems in agriculture — which would actually reduce the odds of a breakthrough. Key quote:

The time and cost associated with performing R&D and field-testing and obtaining regulatory approvals create a long pipeline to commercialization. And once through the pipeline, biotechnology firms must market new technology to farmers where crop planning and switching costs increase the time associated with adoption of new technology on a larger scale. In innovation markets, therefore, the importance of maintaining multiple parallel in R&D paths is paramount. As one farmer put it: "The more people you have researching, the better off you are at finding something."

4) Moss also pointed out that a great deal of innovation in seed and crop varieties comes from different competitors working together to "stack" traits. So if Dow has developed a trait that allows cotton to be resistant to worms, and Monsanto has developed a trait that allows cotton to be Roundup Ready, they can join forces, through cross-licensing agreements, to produce cotton with both traits.

But this system works best when there are lots of companies competing against each other. "Farmers benefit most when there are competing stacks to choose from," Moss argued. "Competition maximizes the potential for numerous collaborations and minimizes incentives to refuse to license or to impose discriminatory restrictions in technology licensing agreements. Moreover, competition limits incentives for just a few large players in a tight oligopoly to tacitly or even explicitly ‘agree’ not to compete."

5) All these mergers could make it much harder for smaller companies to break into agriculture with new innovations. Big, vertically integrated firms that sell both seeds and pesticides can create integrated products that require farmers to buy the full package — and lock out small competitors.

The basic thread running through these five points is that competition is crucial for fostering innovation, as farmers have more choices and companies have more incentive to create the most appealing seeds and pesticides for them. Reducing this competitive dynamic is likely to swamp any benefits from increased synergies from mergers.

By the way, Roger Johnson, president of the National Farmers Union, raised a related concern. Right now, there are so many regulatory hurdles to bring new biotech products to market that it’s hard for any but the largest firms to compete. "The unpredictable and lengthy regulatory review process, particularly in the biotechnology space, encourages greater consolidation in the sector," he noted. So that’s another piece to consider here.

Other worries: Consolidation could mean higher prices for farmers

Also at the hearing was Bob Young, chief economist for the American Farm Bureau Federation, who explained the economic pressures that were leading to the mergers — and also pointed out reason for concern.

Thanks to a glut in global food production and drop in commodity prices, incomes for US farmers have been plummeting — from a total of $123.8 billion in 2013 down to just $71.5 billion in 2016. As such, farmers have been spending less on seeds, fertilizers, and pesticides. That’s hurting sales at these large companies, who are basically looking at mergers as a way to staunch the bleeding and boost market share and growth while they try to spend billions developing new products.

That said, Young was worried that these new behemoths would be in a position to raise prices in certain markets where they control the vast majority of seed or pesticide sales. "Everyone’s knee-jerk reaction is to think that increased concentration will lead to higher prices for these inputs," he said. "Knees tend to jerk reflexively, but sometimes they jerk with reason."

Roger Johnson of the National Farmers Union was even more blunt: "It is easier to fix prices when there are fewer market participants." He noted, among other things, that biotech seed companies have increasingly used their commanding market position to reduce choices among farmers and push them into preferred products: "Dominant firms are reducing the availability of non-transgenic varieties and increasing the price of the remaining non-transgenic varieties to discourage the use of those varieties. In Illinois, a survey found that 40 percent of farmers did not have access to any non-transgenic high yielding seed corn."

Johnson ended his presentation by noting that consolidation wasn’t just a concern in the seed, chemical, and fertilizer industry. It was also happening in areas like high-tech precision planting, in meat-processing, in meat-packing. "Farmers and ranchers bear the brunt of consolidation across the supply chain," he said.

The Senate has asked US regulators to give these mergers extra scrutiny

Given all these concerns — and the sheer complexity of the issues involved here — Grassley said in his opening statement that he wants these recent proposed deals to undergo special scrutiny: "In early August, I asked that the two antitrust agencies [the Justice Department and the Federal Trade Commission] collaborate, as appropriate, in their analysis of the agricultural biotechnology and seed industry, to ensure that the multiple transactions under consideration do not substantially lessen competition. I urged them not to review these transactions in a vacuum because of the already concentrated agriculture industry."

And it looks like Grassley has gotten a positive response so far: "I just heard back from these agencies last week that they’ll be heeding my advice and collaborating, as appropriate, on their analysis of the impact of the proposed mergers in the agricultural sector."

"I guess," he added, "that’s somewhat reassuring — if the regulators actually take a hard look at both the efficiencies and benefits the companies believe will result from these transactions, as well as the concerns raised by independent and smaller players in the market, farmers and consumers."

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