USDA ERS - Mergers in Seeds and Agricultural Chemicals: What Happened?

United States Department of Agriculture Economic Research Service

Mergers in Seeds and Agricultural Chemicals: What Happened?

Feature: Farm Economy February 15, 2019 Mergers in Seeds and Agricultural Chemicals: What Happened?

by James M. MacDonald

Highlights: review by authorities in the United States, Three mergers, combining the leading the European Union, and elsewhere. global providers of seeds and agricultural chemicals, were announced in 2015 and The mergers were completed in 2017 and 2016. 2018 only after the merging parties agreed to sell certain assets to other Because the mergers would combine frms in order to preserve competition in large frms that competed with one key markets of concern. another in already concentrated markets, they were subject to extensive antitrus

Six large frms dominated the sale of seeds and agricultural chemicals in 2015 in the United States

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and around the world: BASF, Bayer, Dow Chemical, DuPont, Monsanto, and Syngenta. Known as the “Big Six,” these frms produced and sold crop-protection products such as pesicides (primarily herbicides, insecticides, and fungicides) and seed treatments (seed coatings to protect agains insects or funguses). They also produced and sold crop seeds to retailers and directly to farmers, and they developed seed traits—such as genetically modifed traits for herbicide tolerance or insect resisance—to be bred into their own seeds or licensed to other seed frms. Each frm supported its products with major invesments in research and development (R&D) aimed at developing improved seeds and chemicals. Improvements in those products have been an important source of growth in agricultural productivity, both in the United States and around the world.

The Big Six operated in markets for many diferent products, some of which were highly concentrated, with jus two or three rival frms competing in them. In 2015 and 2016, three mergers were announced, encompassing fve of the six frms. The mergers led to extensive and careful antitrus reviews by enforcement agencies in the United States, the European Union, and other countries.

An April 2017 Amber Waves article, “Mergers and Competition in Seed and Agricultural Chemical Markets,” reported on the proposed mergers as the review process unfolded. This article provides an update to the outcome of those reviews.

The Three Proposed Mergers Would Upend Seed and Pesicide Markets In December 2015, Dow Chemical and DuPont proposed to merge, and then to split the merged entity into three independent and more specialized frms. One of the new frms would combine the seed and agricultural chemical businesses of Dow and DuPont. Another new frm would focus on materials science, while the third would emphasize specialty chemical products.

Two months later, in February 2016, the State-owned Chinese company China National Chemical Corporation (known as ChemChina) ofered $43 billion to purchase Syngenta. Finally, in September 2016, Bayer proposed to acquire Monsanto for $66 billion. Hence, fve of the six major global seed and chemical frms were parties to the proposed mergers, with only BASF excepted.

Each frm had a disinctive profle, with a srong tilt toward either seeds and traits or chemicals. For example, DuPont derived nearly 70 percent of its agricultural product sales from seeds and traits, while Dow derived nearly 80 percent of its agricultural sales from chemicals. Bayer’s chemical sales placed it second among the Big Six, and accounted for over 80 percent of the frm’s agricultural sales. In contras, Monsanto derived nearly 70 percent of its agricultural sales from seeds and traits, but its chemical sales placed it ffth among the Big Six.

Table 1: Six frms dominated the global seed and pesicide indusry in 2015

2015 sales ($ millions) Company Country Seeds and Agricultural Merger partner traits chemicals

BASF Germany Small 6,455 None Bayer Germany 1,416 9,173 Monsanto Dow Chemical U.S. 1,409 4,977 DuPont DuPont U.S. 6,785 3,013 Dow Monsanto U.S. 10,243 4,758 Bayer Syngenta Switzerland 2,838 10,005 ChemChina Note: BASF did not separately report seed sales, placing them under an “other” category.

Source: USDA, Economic Research Service using data from company annual reports.

Syngenta, meanwhile, was the larges producer of agricultural chemicals among the Bix Six and was the third-larges seed business. BASF was not initially involved in the mergers, although it came to play a role later. The frm had the third-larges agricultural chemical business among the Big Six but did not have a signifcant seed business.

ChemChina was the larges producer of chemicals in China, and through its ownership of the Israeli frm Adama produced generic pesicide products for sale in the United States and the European Union. However, in contras to the Bix Six, the frm did not inves heavily in research and development for new products and did not participate in the seed business.

The Mergers Generated Concerns Regarding Competition in Pricing and in Innovation Each of the merging frms had a global presence, with a wide variety of products sold in diferent product markets in multiple countries. Many of the specifc seed and chemical markets already were highly concentrated, and the mergers would reduce the number of competitors in some. The proposed mergers were subject to review by antitrus enforcement agencies in the United States and the European Union—the two larges markets for their products—as well as by agencies in Ausralia, Brazil, Canada, China, India, and South Africa. Those reviews focused on the likely efects of the mergers in those concentrated markets.

Proponents of the mergers argued that frms needed greater scale to inves in and support research, and that the mergers—by creating more balanced portfolios of seed and chemical businesses— would spur greater combined seed/chemical innovations. Opponents argued that, with less competition, it would be in the interess of the combined frms to raise product prices and that frms might be less likely to inves in research and innovation once the spur of rivalry was removed.

Antitrus agencies evaluated these claims and assessed the likely competitive impacts of the mergers. In the United States, antitrus agencies may sue in Federal court to prevent mergers assessed as likely to reduce competition. They may also seek other remedies, short of a lawsuit, to maintain competition in a given market. If their concerns relate to some of the businesses operated https://www.ers.usda.gov/amber-waves/2019/february/mergers-in-seeds-and-agricultural-chemicals-what-happened/[4/3/2020 11:45:05 AM] USDA ERS - Mergers in Seeds and Agricultural Chemicals: What Happened?

by the merging frms, agencies might seek a sale of those businesses to another frm in order to preserve competition, in a sep known as a “sructural remedy.” Agencies might also seek a “behavioral remedy,” requiring the merged frm to commit to a specifed set of actions aimed at preserving competition.

In the case of these mergers, authorities in the United States, the European Union, and Brazil pursued sructural remedies—approving the mergers only after sales of assets to other seed and chemical providers. The U.S. reviews, carried out by the Federal Trade Commission for the ChemChina acquisition of Syngenta and by the Antitrus Division of the Jusice Department for the Dow-DuPont and Bayer-Monsanto mergers, quickly focused on several product markets in the United States. Those products and a few others also became the focus of invesigations in other countries.

Table 2: U.S. antitrus agencies focused on competition in markets for these products

ChemChina acquisition of Syngenta

Paraquat, an herbicide used primarily to clear felds prior to planting Abamectin, an insecticide used primarily in citrus and tree nut crops Chlorothalonil, a fungicide used primarily in peanut and potato crops

Dow Chemical-DuPont merger

Broadleaf herbicides for winter wheat Insecticides for chewing pess

Bayer-Monsanto merger

Canola: GM (genetically modifed) seeds; traits for herbicide-tolerance Corn: GM seeds Cotton: GM seeds; traits for herbicide tolerance and insect resisance Soybeans: GM seeds; traits for herbicide-tolerance Vegetables: carrot, cucumber, onion, tomato, and watermelon seeds Foundational herbicides Nematicidal seed treatments in corn, cotton, and soybeans Digital platforms

Source: USDA, Economic Research Service using Complaints fled in United States vs. Bayer AG and Monsanto Company; United States, State of Iowa, State of Mississippi, State of Montana vs. Dow Chemical Company and E.I. DuPont De Nemours and Company; and United States before the Federal Trade Commission in the Matter of China National Chemical Corporation.

The ChemChina Acquisition of Syngenta The Federal Trade Commission (FTC) and the Jusice Department (DOJ) share responsibility for merger enforcement in the United States, and they sort cases according to each agency’s experience and expertise in the key products at issue. Since ChemChina did not produce crop seeds, the https://www.ers.usda.gov/amber-waves/2019/february/mergers-in-seeds-and-agricultural-chemicals-what-happened/[4/3/2020 11:45:05 AM] USDA ERS - Mergers in Seeds and Agricultural Chemicals: What Happened?

acquisition had no efect on competition in the markets in which Syngenta sold seeds (and where the DOJ maintains expertise). The review was therefore carried out by the FTC and focused on three pesicide markets:

Paraquat, a nonselective herbicide used to clear felds prior to the growing season Abamectin, an insecticide used to kill mites, psyllids, and leafminers, primarily in citrus and tree nut crops And chlorothalonil, a broad-spectrum fungicide used primarily in peanut and potato crops. Syngenta was the market leader in each product, while ChemChina’s Adana subsidiary was the larges or second-larges producer of generic versions of the products. The FTC argued that the combined frm would account for 60 percent of paraquat sales, 80 percent of abamectin sales, and 40 percent of chlorothalonil sales—and that the increase in market concentration would reduce competition sufciently to allow the remaining frms to raise prices.

The FTC approved the merger, subject to the divesiture of the ChemChina products in the three markets of concern. The three pesicide businesses were then sold to American Vanguard, a California-based producer of crop protection products. European authorities also approved the acquisition, subject to the divesiture of certain other pesicide lines sold in Europe.

The Dow-DuPont Merger The U.S. Jusice Department (DOJ) reviewed the Dow-DuPont merger. The Department’s Antitrus Division expressed concerns with the likely competitive impact of the merger in two herbicide markets, and joined with four States to fle a complaint. One market concerned herbicides used in winter wheat: DuPont produced the larges selling herbicide used in the control of broadleaf weeds in winter wheat, while Dow had recently introduced a competing product. The second market concerned insecticides used to control chewing pess, such as moth larvae and beetles, which are of particular concern in specialty crops. Dow and DuPont were the two larges sellers of insecticides for chewing pess.

The DOJ complaint argued that the combined frm would control 40 percent of market sales in broadleaf herbicides for winter wheat, and 75 percent of the market for insecticides targeted at chewing pess, enough to allow the frm to raise prices. In addition, the DOJ argued that competitive rivalry between Dow and DuPont had led to the development and introduction of new and improved products in each market, and that a merger would eliminate that rivalry along with the competitive pressures to introduce new products. The European Commission (which enforces European Union competition rules) expressed similar competitive concerns, as well as concerns regarding herbicides for cereals, certain oilseeds, and rice.

As a condition of obtaining approval from enforcement agencies in the United States and the European Union, DuPont divesed parts of the frm’s pesicide business. The DuPont assets, including R&D assets, were sold to FMC Corporation, a diversifed U.S.-based manufacturer of pesicides and lithium products. Separately, Dow agreed to dives certain nonagricultural chemical businesses to meet competitive concerns in those markets.

Brazilian authorities also expressed competitive concerns regarding the corn seed market in Brazil, where the two companies competed, and approved the merger only after the divesiture of Dow’s corn seed business in Brazil, which was sold to CITIC Agri Fund, a division of the Chinese State- backed frm CITIC, Ltd. After meeting objections from the various enforcement agencies, Dow and DuPont then completed their merger, and the combined remaining agricultural businesses of the two frms were then spun of into a specialized frm called Corteva.

Bayer’s Acquisition of Monsanto In the United States, the Jusice Department identifed several areas of concern in the Bayer- Monsanto merger. For example, the two frms were the two leading suppliers of genetically modifed (GM) cotton seeds; each frm also produced GM traits for herbicide tolerance and insect resisance used in their own seeds and licensed to other seed frms. The two frms accounted for almos all of the herbicide-tolerant and insect-resisant traits in GM cotton seeds. Similarly, the two frms were the two major suppliers of GM canola seeds and also of the herbicide-tolerant traits found in their own and other frms’ GM canola seeds.

Soybeans were another concern. Monsanto had been the market leader in GM soybeans since the mid-1990s. The frm was the larges seller of seeds and the only provider of herbicide-tolerant traits (other frms licensed the trait from Monsanto). The traits conferred tolerance to glyphosate, a broad- spectrum herbicide marketed by Monsanto under the trade name Roundup. However, in the las decade, Bayer had developed a soybean seed business based on traits conferring tolerance to another broad-spectrum herbicide (glufosinate) marketed by Bayer under the tradename Liberty, and had begun to expand its soybean seed and trait businesses at Monsanto’s expense.

The DOJ also expressed concern about the efects of the merger in U.S. markets for seed treatments —coatings applied to seeds to protect agains insects or funguses. Bayer and Monsanto competed head-to-head in markets for nemacidal seed treatments in corn, cotton, and soybeans, so the merger would remove a competitor in a highly concentrated market.

Bayer sold another critical seed treatment product, called Poncho, to Monsanto and other corn seed producers. Poncho is the only efective treatment for protection agains corn rootworms, and a seed treated with Poncho is more valuable where there are rootworm infesations. While Bayer did not sell corn seeds, the Jusice Department argued that the merger would nonetheless afect competition in corn seed markets; a combined Monsanto-Bayer would have the incentive to charge higher prices for Poncho to other corn seed producers, or to deny them access to the treatment entirely, thereby foreclosing competition for Monsanto’s corn seed business.

Finally, the Department cited concerns with U.S. markets for fve vegetable seeds—carrots, cucumbers, onions, tomatoes, and watermelons. Each market was highly concentrated, with only a few sellers; each had seen signifcant improvements in seed varieties through conventional breeding programs; and Bayer and Monsanto were leading suppliers in each market.

In each of these cases, the DOJ argued that, with the elimination of a competitor, the remaining frms

in the market would be able to raise prices while losing few buyers to rival sellers or products. Moreover, as in the Dow-DuPont case, the DOJ further argued that rivalry among the frms had provided competitive pressures to research, develop, and market new seed and crop protection products. With a rival removed through the merger, the DOJ argued that frms would have less competitive pressure to develop new products, and that innovation and productivity growth would sufer as a result.

The merger between Bayer and Monsanto was completed in June of 2018. To gain approval from enforcement agencies, Bayer had to dives subsantial assets through sales of businesses to BASF. Specifcally, BASF acquired all of Bayer’s soybean, canola, and vegetable seed businesses and mos of its cotton seed business, as well as Bayer’s research and development (R&D) capabilities for the divesed crops and for hybrid wheat, and for its LibertyLink trait technology for seeds resisant to certain herbicides. BASF also acquired several Bayer herbicide businesses and selected seed treatment products, and the digital farming business of Bayer, which aims to develop comprehensive feld-level information on soil attributes, weather, and seed and chemical performance to support precision agriculture technologies and farmer decision-making.

Issued Raised in the Cases The competitive concerns identifed for these mergers focused on two broad issues. The frs was reduced competition in certain highly concentrated seed, seed trait, pesicide, and seed treatment markets, leading to higher prices charged to farmers. The second concern focused on competition in research and innovation in those markets, and whether mergers would lead to reduced R&D expenditures and less innovation in the future.

In the United States, the European Union, and Brazil, antitrus enforcement agencies approved the mergers while obtaining sructural remedies (divesitures of assets to other frms) for the competitive problems that they identifed in the mergers. In principle, a divesiture allows the merging frms to realize the potential efciencies and synergies from a merger while limiting the merger’s risks to competition. A successful divesiture remedy depends on fnding an acquiring frm with the capacity to take on and manage the divesed business.

As a result of specifc actions in these cases, BASF will now be an important competitor in crop seeds (competing agains Bayer, ChemChina/Syngenta, and Corteva). FMC will be the ffth-larges producer of pesicides in the United States, and each frm will also have a signifcant research organization to support its products. The impact of the DOJ and European Commission decisions in these cases, and the value of sructural remedies more generally, will come down to how well these new entrants compete in these product markets.

The invesigations of the Dow/DuPont and Bayer/Monsanto transactions focused heavily on the likely impact of the mergers on innovation, and in particular on the argument that removal of a rival in a highly concentrated market would lead to reduced research and innovation. Antitrus agencies have focused more heavily on innovation concerns in the las two decades. These concerns have become an important feature in a growing number of cases across the economy and in agribusiness.

However, there is not yet much empirical evidence on the efect of competition on research invesments and innovation—and, specifcally, on how many rivals are necessary to spur innovation. This issue will remain an important quesion for antitrus policy and for economic research.

This article is drawn from... Mergers and Competition in Seed and Agricultural Chemical Markets , by James M. MacDonald, USDA, Economic Research Service, April 2017

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