What is the name of the company on your bag of seed? Who makes the crop protectant chemicals you primarily use? What company’s name is on the side of your tractor and combine?
There is a more than 50 percent chance your answer will be one of the top four companies in that particular business. Concentration of agricultural input suppliers is increasing, but there is a very legitimate reason for that.
Some members of the media would point to a particularly large agricultural input supplier and be critical of how large and dictatorial it was about the use of its technology. While farmers have reasons for either using or not using a particular brand of product, the fact that large companies are very successful in what they do can be attributed to a specific reason.
That reason will become quite obvious when you think about the reason you purchase particular inputs. Why do you buy the seed or chemicals that you do? Other than the fact that your father bought a particular color of farm equipment, why do you go back to that dealership and spend money on their equipment? Why do you buy the types of herbicides that you us in your fields?
Quality demands a higher price
The reason you buy what you do is because the products are good, they offer value, they get the job done, and you are generally happy with the outcome.
The reason for the quality is the investment the company has made in research and development to bring the product to the market. The more that is spent on research the better the product performance and the more you are going to want to buy it.
Subsequently, the more money that is spent on research, according to USDA’s Economics Research Service (ERS), the more successful the company and the better the chance it will become one of a small handful of companies that dominate the market.
In fact, ERS says in the areas of crop seed/biotechnology, agricultural chemical, animal health, animal breeding, and farm machinery industries four firms shared over 50% of the total global market share.
In its report on the rising concentration in agricultural input industries, ERS says growth of those companies comes either from expanding sales faster or acquiring other companies that have the technology desired by the larger company.
Market Share Expanding
Different industries have different ways for their leading members to expand and grow, says ERS:
- In the crop seed and animal breeding sectors, the emergence of biotechnology was a major driver of consolidation. Companies acquired relevant technological capacities. The top four have 53.9% share of global sales, up from 21.1% in 1994.
- In the animal breeding sector, vertical integration in the poultry and livestock industries enabled some large firms to acquire capacity in animal breeding as part of their integrated structure. The top four firms have 55.9% share of global market sales, but no comparison with past data.
- In the farm machinery industry, many of the major mergers and acquisitions can be traced to large financial losses sustained by some leading firms during periods when the farm sector was in prolonged recession. Farmers delayed purchases and those companies in trouble were purchased. In 1994 the top four held 28.1% share of global sales, but that is now 50.1%
- The agricultural chemical sector has been heavily affected by changes in government regulations governing the health, safety, and environmental impacts of new and existing pesticide formulations: larger firms appear better able to address these stricter regulatory requirements. The four largest had 28.5% of global sales in 1994, but 53% today.
- Consolidation in the animal health sector appears to be largely a byproduct of mergers and acquisitions in the pharmaceutical industry, as most of the leading animal health companies are subsidiaries of large pharmaceutical companies. Those firms had 32.4% of the global market in 1994, but that has climbed to 50.6% today.
ERS says the crop biotech market has six companies that are dominators: Syngenta, Bayer, Dow, DuPont, and Monsanto--are also market leaders in agricultural chemicals. A sixth firm, BASF, is making significant investments in crop biotechnology research but so far reports few crop seed or trait sales. Their market dominance has resulted in a significant investment in purchasing smaller companies, which have applied technology that had been developed through university research. There were 27 of those smaller companies in 1985, and 20 of them were acquired by one of the top six firms.
But there is a problem
The downside to this evolution is the fact that fewer companies are supplying the majority of inputs to farmers, and fewer companies involved in research and development. Eight companies in the seed biotechnology business accounted for 76 percent of all research spending in 2010.
Five companies supplying crop protectants accounted for 74 percent of research dollars in 2010. That was the case with four farm equipment companies that spent 57 percent of research dollars. The resulting increase in market power means farmers may pay higher prices for purchased inputs, says ERS. And one of the tools used by the companies to do that is strong legal protection over intellectual property.
Those higher dollars charged for inputs are used for more research and development. Such privately-financed R & D has substantially replaced publicly-financed research that once occurred at many universities and was more available to the broader market. The shortfall of federal and state dollars to fund university research has withered many programs.
Popular agricultural inputs demand a high price, but farmers are willing to pay that price in return for a product with value and performance. However, those popular inputs are made by few companies who dominate their respective industries. Higher prices help pay for investments in research and development, which brings more products to the marketplace, filling a void left by reductions in publicly-funded research that was spread among many companies. However, with fewer companies able to afford expensive research programs, there will be less competition among input suppliers.
Source: FarmGate blog