Yes, Ag Industry Mergers Could Increase Commodity Seed Prices01/27/2017
A study indicates that mergers, which are still pending, between large agribusiness companies could slightly increase the average seed prices of corn and soybeans, but drastically escalate cotton seed costs.
Joe Outlaw, professor and Extension economist, Agricultural and Food Policy Center, Texas A&M University, speaking to farmers from across the southeast attending the 2017 Southern Southeastern Annual meeting in Charlotte, NC, presented highlights from a study commissioned by the Corn Producers Association of Texas and the Southwest Council of Agribusiness.
“These two ag associations, and others across the country, are nervous about ramifications from the impending mergers of DuPont/Pioneer with Dow, and Monsanto with Bayer. After a flurry of consolidations over the last decade, the ag industry is basically dominated by six large multinational firms, and findings from our study shed direct light on what could happen to soybean, corn and cotton seed prices should these mergers occur,” explained Outlaw.
The study was commissioned just two weeks before Senate Judiciary Hearings, and while Dr. Outlaw, or any of the other economists who worked on the study were not asked to testify, Texas Senator Ted Cruz did enter the study findings into the official Hearings record.
The study was titled “Effects of Proposed Mergers and Acquisitions among Biotechnology Firms on Seed Prices”. As part of the study, the Herfindal-Hirschman index, orHHI, was employed as an analysis tool. The HHI is widely used to measure market concentration, with zero indicating nearly perfect market competition, to 10,000, which indicates a monopoly.
“We used this index just as The Federal Trade Commission and Department of Justice use it to provide a numeric gauge or value of a company’s expected market share after a consolidation. A market with an HHI of less than 1,500 is considered to be a competitive marketplace, while 1,500 to 2,500 would be considered a highly concentrated marketplace,” added Outlaw.
As a general rule, mergers that cause the HHI to increase by more than 200 points in a “highly concentrated” market raise antitrust concerns. Dr. Outlaw was adamant during his presentation, often reminding those listening that this study is not stating that either of these companies is influencing or is going to influence a market negatively, just that the potential to do so will exist if the mergers reach fruition.
“Our producers will be the ones suffering the consequences of higher seed prices due to less competition if company mergers continue to limit market options,” said David Ruppenicker, CEO, Southern Southeastern, Inc.
Corn seed prices jumped from 2600 to 3100 when merger conversations became public.
“If the DuPont/Pioneer and Dow merger happens, our findings show the H&H scale for soybean seeds (Dow) would increase by 345 points, taking it from a point of ‘caution’ to a point of being in the ‘red’,” added Outlaw.
“Considering the guidelines being used by the FTC and the DOJ, these mergers would most likely increase market power and lower market contestability, which would severely limit the ability of new similar businesses to enter the market,” said Outlaw.
Another point Outlaw made dealt with the term “tacit collusion”, which infers that two firms agree to play or implement a certain market strategy. In this case, all entities involved in a specific market would know what the others are doing without explicitly stating details beforehand because the market is so tightly integrated or connected – which could be a concern.
Findings from the study expect the average seed price on corn would increase by 2.3 percent, soybeans would go up 1.9 percent and cotton seed prices would escalate 18.2 percent.
“I would not be surprised if the DOJ, after reviewing all relevant information about these mergers, would like to see a divestiture of certain business lines within the acquiring companies,” concluded Outlaw.
Wheat or other specific commodities were not included in the study because there was no relevant data available in the short time frame in which the study had to be conducted.
A PDF of the completed study (Effects of Proposed Mergers and Acquisitions Among Biotechnology Firms on Seed Prices) may be found at https://www.afpc.tamu.edu/ on the right side of the home page under “Recent Publications”.
Source: Brad Robb, Southeast Farm Press