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Updated: Ag America Merges: What’s in it for the Farmer?
UPDATE: (June 1, 21016)-- Groups call on Justice Dept. to block mergers. **Update** at the bottom of the story.
You most likely have heard about the latest agribusiness news: Bayer and BASF, two big players in the sector, are interested in buying Monsanto, the largest seed company in the world.
This news follows recent merger-and-acquisition announcements between Dow Chemical Co. and DuPont Co., and ChemChina buying Syngenta AG. On the machinery side, Kubota plans to take over Great Plains, and John Deere announced a recent acquisition of Hagie.
Is your head spinning yet? Are all of these merger-and-acquisition announcements sounding the same? For those that need it, will they get approval? Or, will their consolidating dreams continue to live in the rumor mill?
One thing is for sure, there will be more news like this. In fact, there will always be more, as long as shareholders of these companies want stock investments to grow, according to Ed McMillan, an agribusiness consultant and mergers-and-acquisitions specialist.
“Blame the shareholders. The people who invest in these companies expect a return on their long-term investment. Shareholders expect companies to make decisions to ensure that the stakeholders’ investments will continue to grow in value,” he says.
It's no different than when farmers spend $5,000, $10,000, or $15,000 per acre on land, putting smaller farmers out of business when they do that, but farmers ask input providers for the best inputs possible to try and make a return on that land, the consultant says.
McMillan has spent the last 20 years as a merger-and-acquisition consultant for food and agribusiness companies. When news of additional mergers and acquisitions is announced, he has to constantly remind himself of the changes in farming that have been happening the past 20 years.
While some believe the ag sector is experiencing more mergers and acquisitions because of large inventories and lower commodity prices that are lowering company earnings, McMillan disagrees. Outside of company shareholders demanding higher value for their investments, technology has been the impetus for change, he says.
For instance, technology changes in areas such as seed genetics, inputs, and data management have all allowed farmers to apply these to precision farming. Ultimately, this has allowed farmers to consolidate then expand, and take on bigger operations and risks.
“To serve that farmer who has specialized, the global agribusiness community has had to change its infrastructure, whether it’s the input providers or the downstream processors of commodities,” McMillan says. “All that intermediary system designed many years ago to support a relatively small agrarian operation is now geared to a very large, specialized, highly technical producer.”
Thus, ag companies are consolidating to improve efficiencies, cut overhead costs, and consolidate research and development with technology innovations so they can better serve that more sophisticated customer, he says.
Do Mergers and Acquisitions Benefit Farmers?
As crop protection companies marry seed companies, and animal protein companies eye genetic companies, farmers are benefitting by the integration ownership structure.
“Companies can better serve farmers by consolidating resources and research dollars for technology innovation,” McMillan says.
He adds, “I don’t think there is a cynical thing going on at all. If you are going to be a global leader, you have to collaborate, concentrate, reduce all extraneous investment, and focus. And I think that is what we are seeing companies do.”
The longtime merger-and-acquisition specialist agrees that there is always a threat that in consolidation, there are victims. “And one of the victims in consolidation is people,” McMillan says.
While mergers will never end, one significant factor happening in the ag sector includes global players being the acquirer. For instance, China buying Smithfield, or China buying Syngenta.
“It used to be that when German-based companies bought a U.S. company, people would get up in arms about the Germans owning a U.S. company. We don’t think like that anymore,” McMillan says. “Now we see China buying, and soon we will see India-based companies buying U.S. companies. What we are going to see is more global ownership vs. U.S. ownership.”
That could be seen as another threat for the U.S. farmer's ability to compete globally. “The reality is that if U.S. farmers are going to be able to compete globally, they have to produce commodities at a competitive level compared to Brazil, Russia, and beyond,” says McMillan.
The merger wave knows no strangers. Big companies have merged in the food industry with processors and branded suppliers, tech giant IBM exited the personal computer business, and beverage mogul Budweiser was sold to a foreign buyer. “This is not going to stop,” McMillan says. “Again, shareholders are saying to company leaders that if you can’t demonstrate to me organic growth that grows the value of my shares, then you have to deliver that through acquisitions.”
Groups Call For Merger Block
The Justice Department should block the Dow-DuPont merger, which would create the largest seed and ag chemical company in the world, because it would unduly reduce competition in the sector, say a trio of legal, farm and consumer groups, according to a FERN report Wednesday, June 1, 2016.
"The merger is part of a wave of consolidations that would turn the world’s six biggest seed and ag chemical companies — Monsanto, Syngenta, Bayer, DuPont, Dow and BASF — into “a Big 4, dominated by a Monsanto-Bayer and Dow-DuPont duopoly,” said the groups in a letter to regulators.
Because of the vast scale of the companies involved, “the likely harmful effects of the proposed merger cannot be effectively remedied in a way that fully restores competition and adequately protects consumer interest,” said the letter by the American Antitrust Institute, Food and Water Watch, and National Farmers Union, according to the FERN report.
“Indeed, crafting relief is inherently difficult in a merger of this size and impact and in a market with few, if any, viable buyers of assets. AAI, F&WW and NFU therefore urge the (Justice Department) to challenge the proposed merger of Dow-DuPont, a combination that would fundamentally restructure the nation’s markets for agricultural inputs, with likely adverse effects on competition, farmers and consumers.”