The Impact of Mergers in the Agrochemical Industry
The agrochemical industry market is estimated to be worth USD250.5 billion by 2020. The growth can be attributed to a number of factors such as increased participation from private players, innovative farming practices, increased R&D investment, support for Intellectual Property Rights, emergence of a variety of agrochemicals and IT-enabled safety procedures. However, the intense competition between the players has been a game-changing trend in the industry in the past few years. In fact, 2016 was a year of mega mergers in the agrochemical industry.
As of today, these ‘Big Six’ players dominate more than 80% of the market share!
• DuPont-Dow Chemical
In December 2015, the US chemical giants DuPont and Dow Chemical announced a merger to form a new entity DowDuPont with a combined market capitalization of about USD130 billion. Post merger, the entity would be split into three independent public listed companies, namely specializing in agriculture, material science and specialty products. The merger will help Dow combine its chemical and trait expertise with DuPont’s forte in germplasm and seeds, along with R&D. Both companies are looking at strengthening their global markets, achieve R&D synergies and enable faster allocation of resources after the merger.
In August 2016, the Chinese state-owned chemical company ChemChina acquired the Swiss seed giant Syngenta AG for USD 43 billion. This deal marks the biggest acquisition of a foreign firm in the Chinese corporate history. Syngenta, which currently enjoys the position of market leader in pesticides in North America, is hoping to push its sales in China, the fastest growing agricultural sector in the world as well as the markets in Brazil and UK. In return, ChemChina will become the world’s biggest supplier of pesticides and agrochemicals. It will be also able to reduce its dependency on petrochemical and petroleum products, which accounts for almost half of its revenue. ChemChina is also hoping to take advantage of Syngenta’s biotech capabilities and spread its geographical presence in emerging nations, especially Africa where the demand of seeds and crop chemical is high.
In December 2016, the US agribusiness giant Monsanto approved merger worth USD66 billion with the German company Bayer to form the world’s largest seed and pesticide producer. The merged entity will sell 29% of the world’s seeds and 24% of the world’s pesticides. The deal brings together two vastly different, yet highly complementary businesses under one umbrella. Monsanto’s expertise lies seeds, trait products & big data enabled farming consultancy, whereas Bayer is known for its chemistry expertise and crop science technology. The merged company will be able to cross-sell several products, including pesticides, seeds and chemicals, as well as provide solutions in crop protection and digital farming.
Reasons for Merger
There are several reasons which have pushed these players to shake hands.
1. The recent fluctuations in currencies, crop prices and crude oil prices have adversely affected the sales and profit margins of agrochemical companies.
2. The cost of raw materials has gone higher. So, the farmers have reduced spending on crop inputs which translates into lower production and reduced sales for the agrochemical companies.
3. The shareholders and investors in these companies are demanding justification for their investment in R&D. Like in the case DuPont, it has invested an average of $2.1 billion in its R&D over the past few years. However, the cash flow is still expected to drop about $500 million from the last year.
4. These companies are facing regulatory pressures to attest the impact assessment of their products on environment and people’s health. The environmentalists are of the opinion that the agrochemical giants do not reveal their research findings in the name of confidentiality which could be detrimental to the environment.
Hence, in order to boost their margins, lower the cost & development time, streamline their workflows and increase the efficiency of the R&D process, the agrochemical companies are vying each other’s strengths to capitalize on.
Impact of Mergers
Now, while the mergers have enabled these six companies to re-organize their operations and expand their businesses, it is believed that it will also reshape the industry and have a prolonged impact in various ways:
1. Lower Competition & Innovation
If only top 4-6 firms will control the market, it will have an adverse bearing on the competition. It will act as an entry barrier for the new or smaller companies which want to introduce new technologies, data science and products in agriculture. Consequently, it will also stifle innovation and advanced developments which will again lead to sluggish improvement in the crop yield and quality. It may be also possible that they concentrate only on making products for the most blockbuster crops, thereby ignoring smaller markets and less profitable crops.
2. Higher Cost of Input for Farmers
As the number of players reduces in the industry, they will be able to monopolize the prices and variety. The funnel of the products will be quite narrow. The farmers will be left with limited choices of seeds, fertilizers, chemicals and other agri products. They will have to spend more on supplies and pass the cost to their customers. Due to higher commodity prices, customers may not buy more, eventually resulting in lesser income for the farmers. Moreover, farmers will have to overtly depend on a single crop production, which could be sensitive to ecological changes and may not yield high produce during certain months or a year.
3. Wield More Political Power
The behemoths will influence the government and lobby for changing the farming and food production policies to favor their personal interests. They may bring the corporate style of working in the business. They will bring more money and capture power to win over public interest groups and lawmakers. The farmer unions as well as the smaller and independent farmers will have a lesser say in these policies. There are more than 570 million farms in the world. More than 90% of farms are run by an individual or a family and rely primarily on family labor. Their livelihoods may be threatened. The global food supply chain may become unbalanced.
4. Layoffs in the Pipeline
The mergers will bring synergies in several areas, but not in employment. The companies believe that there could be duplication of skills. This is of course, a bad piece of news for the employees working there. For instance, DuPont is planning to cut down its global workforce size by 10% after the merger. It is estimated that more than 6000 U.S. workers could be jobless after Bayer-Monsanto merger. The most severe impact could be on R&D professionals. They may start looking for greener pastures to save themselves from the cloud of uncertainty looming over their jobs. If the exodus happens, the R&D efforts of agrochemical companies will take a bad hit.
5. More Mergers on the Horizon
Since these giant companies will make the survival difficult for the smaller players, the industry will witness more mergers and consolidation. The bigger entities will eat the smaller ones, while the large business groups will merge to tap into technical advantage and resources.
Impact of Mergers on the Indian Agrochemical Industry
The nation which has to feed more than 1.2 billion people and is the fourth largest producer of world agrochemical products, is keeping a watchful eye on these mergers. The Indian agrochemical industry is estimated to grow at a CAGR of 12% annually to become $7.5 billion industry by FY19. But, these mergers could put the growth in a downward spiral.
In fact, after the proposed merger of DuPont-Dow Chemical, The Competition Commission of India (CCI) reflected that it was likely to have an adverse impact on the competition in seeds, agrochemicals and material science in India. It was also of the opinion that a corporate driven agro-industrial model could put small, marginal and rural farmers in trouble. Indian may have to adhere to the Intellectual Property (IP) protection and enforcement requirements as per the wish list of these global MNC agrochemical companies. As a result, they may get exclusive rights, which would further enhance their monopoly power in India.
Organic farming is another reason why the Indian agrochemical industry would be averse to these mergers. On the lines of ‘Make in India’ and ‘Skill India’, the ruling government is actively encouraging the Indian farmers to cultivate organic produces. An increasing number of the Indian customers are ready to pay higher prices for organic food, which could enhance the income of farmers. However, the agrochemical corporates could stifle this initiative to promote their products.
On the positive side, the Indian agriculture is opening up to technology. The merged entities could take innovative farming and crop protection techniques to a new level.
The full impact of these mega mergers is yet to be known and realized. But, so far, there has been angst and lots of hullabaloo among the farmers and other stakeholders. Let’s wait and watch how the agrochemical industry shapes up in the wake of consolidation.