Rising Concentration in Agricultural Input Industries Influences New Farm Technologies
Keith Fuglie,
Paul Heisey,
John King, and
David Schimmelpfennig
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Concentration in several global
agricultural input industries has risen significantly; by 2009, the
largest four firms in the crop seed, agricultural chemical, animal
health, animal genetics/breeding, and farm machinery sectors
accounted for more than 50 percent of global market sales in each
sector.
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Factors influencing changes in
market structure and concentration vary by industry and include
market forces, the emergence of new technologies, and government
policies.
- The largest agricultural input firms are responsible for a
large and growing share of global agricultural research and
development (R&D), and higher input prices paid by farmers
partially reflect the higher quality of inputs created through
private-sector R&D.
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This article is drawn
from . . .
Research Investments and Market Structure in the
Food Processing, Agricultural Input and Biofuel Industries
Worldwide, by Keith O. Fuglie, Paul Heisey, John L.
King, Carl E. Pray, Kelly Day-Rubenstein, David Schimmelpfennig,
Sun Ling Wang, and Rupa Karmarkar-Deshmukh, ERR-130, USDA, Economic
Research Service, December 2011.
You may also
be interested in . . .
"Have Seed Industry Changes
Affected Research Effort?" by Jorge Fernandez-Cornejo and David
Schimmelpfennig, in Amber Waves, Vol. 2, Issue 1, February
2004, available at:
http://webarchives.cdlib.org/sw15d8pg7m/http://ers.usda.gov/amberwaves/february04/features/haveseed.htm
Concentration and
Technology in Agricultural Input Industries, by John L.
King, AIB-763, USDA, Economic Research Service, March
2001.
"Competition Issues in the
Seed Industry and the Role of Intellectual Property," by GianCarlo
Moschini, in Choices, Vol. 25, No. 2.
2010.
"The Impact of Seed Industry
Concentration on Innovation: A Study of U.S. Biotech Market
Leaders," by David E. Schimmelpfennig, Carl E. Pray, and Margaret
F. Brennan, in Agricultural Economics,
Vol. 30, No. 2, March 2004, pp. 157-67, http://ssrn.com/abstract=365600
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The increase in R&D
performed by global agricultural input industries (see "Private
Industry Investing Heavily, and Globally, in Research To Improve
Agricultural Productivity" in the June 2012 issue of
Amber Waves) has coincided with
significant changes to the structure of these industries. The
largest firms have increased their market shares and account for
most of the investment in (and ownership of) new innovations in
these industries. Implications of market concentration in the U.S.
seed industry were addressed earlier in Amber Waves
and in other ERS research (see suggested readings). New ERS
data allow a closer look into global market concentration across a
number of agricultural input industries.
Market Concentration
is Increasing in Research-Intensive Agricultural Input
Industries
Since the 1990s, global
market concentration (the share of global industry sales earned by
the largest firms) has increased in the crop seed/biotechnology,
agricultural chemical, animal health, animal breeding, and farm
machinery industries - all of which invest heavily in agricultural
research. By 2009, the largest four firms in each of these
industries accounted for at least 50 percent of global market
sales. Market concentration was particularly high in animal
genetics and breeding, where the four-firm concentration ratio
reached 56 percent in 2006/07 (the latest year for which data are
available). Growth in global market concentration over 1994-2009
was most rapid in the crop seed industry, where the market share of
the four largest firms more than doubled from 21 to 54 percent. The
top eight firms in all five input sectors had between a 61- and
75-percent share of global market sales by 2009.
Factors Driving
Market Concentration Vary by Industry
Firms increase their
market share either by expanding their sales faster than the
industry average or by acquiring or merging with other firms in the
industry. Firms can expand their sales faster than others in the
industry by offering better products or services (often an
outgrowth of larger R&D investments), improving their marketing
ability, or offering lower prices (often through economies of
scale). The leading input firms in 2010 had faster sales growth
than the industry average, but a significant amount of that growth
came from acquisitions of other firms.
Reasons for mergers and
acquisitions vary by industry and firm circumstances but include
market forces and the emergence of new technologies. Government
policies can also affect the ability of firms to compete in markets
and their incentives to merge with or acquire other firms.
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In the crop seed and animal
breeding sectors, the emergence of biotechnology was a major driver
of consolidation. Companies sought to acquire relevant
technological capacities and serve larger markets to share the
large fixed costs associated with meeting regulatory approval for
new biotechnology innovations.
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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.
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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, which
substantially reduced demand for farm machinery as farmers delayed
major capital purchases. Firms experiencing large financial losses
are often vulnerable to acquisition.
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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.
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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.
The Crop Seed-Biotechnology
Industry Has Undergone Significant Structural
Transformation
In 2009, seven large seed
companies each had annual seed sales of over $600 million. Five of
these top seed companies--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, although it is a market leader in agricultural chemicals.
These companies currently constitute the "Big 6" involved in crop
seed, biotechnology, and chemical research.
The seed-biotechnology
industry has been reliant on small and medium-sized enterprises
(SMEs) as sources of new innovation. New SME startups (often
spinoffs from university research) tend to specialize in commercial
development of a new research tool, genetic trait, or both.
Significant entry by SMEs into the seed-biotechnology sector began
in the late 1970s and early 1980s, with a second wave of new
entrants in the late 1990s and early 2000s. In recent years, exits
have outnumbered entrants, and by 2008 just over 30 SMEs
specializing in crop biotechnology were still active. The majority
of the exits from the industry were the result of acquisition by
larger firms. Of 27 crop biotechnology SMEs that were acquired
between 1985 and 2009, 20 were acquired either directly by one of
the Big 6 or by a company that itself was eventually acquired by a
Big 6 company.
Concentration in a
research-intensive industry can be measured not only in terms of
share of product sales but in share of new innovations. Firms that
are most successful in creating new innovations are often better
positioned to dominate the market (although not all new product
introductions will be commercially successful). In research for
genetically engineered crop varieties, for example, companies
typically obtain a patent first, then initiate field trials, and
finally obtain regulatory approval to sell crop seeds. Although
there is considerable overlap in terms of companies participating,
the markets for crop seeds can be distinguished from markets for
genetically modified traits. The shares of these research outputs
held by the Big 6 companies in each case are between 55 and 95
percent.
Consequences of
Concentration For Agricultural Innovation
The rising concentration
in global agricultural input markets means fewer firms are
supplying those inputs to farmers. It also means that fewer firms
are responsible for many of the new innovations that drive growth
in agricultural productivity. The share of private R&D
performed by the largest firms is even larger than their share of
sales. In crop seed and biotechnology, eight seed-biotechnology
companies accounted for 76 percent of all R&D spending by this
industry in 2010. In agricultural chemicals, five companies (each
with over $2 billion sales in 2010) were responsible for over 74
percent of the R&D in this sector. In farm machinery, four
companies (each with over $5 billion in farm machinery sales)
accounted for over 57 percent of farm machinery R&D, and in
animal health, just eight companies accounted for over 66 percent
of R&D. Moreover, all of these leading firms are multinational
companies with R&D facilities positioned around the world.
These global research networks allow large firms to develop and
adapt new technologies to local conditions, meet national
regulatory requirements for new product introductions, and achieve
cost economies in some of their R&D activities.
Greater market power
resulting from the structural changes in agricultural input
industries means that farmers may pay higher prices for purchased
inputs. With stronger legal protection over their intellectual
property and fewer firms offering competition, firms can charge
higher prices for their new innovations. Such price premiums are
necessary to provide firms the means (and incentive) to invest in
R&D in the first place, and farmers are willing to pay higher
prices so long as the gains from higher productivity outweigh their
higher costs. In fact, for the past two decades, the prices of farm
inputs have been rising faster than the prices U.S. farmers receive
for their crops and livestock.
The largest increase over
1990-2010 was in crop seed prices, which more than doubled relative
to the price received for agricultural commodities. This increase
was due, at least in part, to the value of the new seed traits
resulting from research investments made by seed/biotechnology
companies. However, higher input prices may also stem from
increases in the prices of labor, capital, energy, and other
materials used in their manufacture. The sharp rise in the price of
fertilizer in 2008-09 was driven by a significant increase in the
cost of energy and materials used to make fertilizers, higher
transportation costs, and the falling value of the U.S. dollar.
Multiple factors contribute to changing prices for farm inputs, and
it is difficult to isolate the effects of market power, product
quality, and other factors affecting these prices.
The growing concentration
in agricultural input industries raises a number of issues. One is
the inherent tension between public policies regulating
intellectual property rights (IPR) and market competition. While
antitrust laws restrict firms from exercising monopoly power, some
exceptions are made for intellectual property rights over new
innovations. However, antitrust rules may still apply to how firms
license their intellectual property to other firms. Another issue
is whether under the current market and policy environment there
are significant economies of scale in crop and animal
biotechnology, implying that only very large firms can hope to
compete effectively in these sectors. This might mean there is a
significant barrier to entry for new firms and a potential loss of
new innovations, particularly from SMEs. On the other hand, the
global reach of the large, multinational agricultural input firms
could speed up the rate of international technology transfer and
help to close the productivity gaps between regions and countries.
The rate of transfer will be influenced by international trade
agreements and how countries regulate and protect IPR in new
agricultural innovations, especially those involving genetically
modified organisms. Finally, public investments in research can be
an important enabler of market competition. Examples include public
provision of elite parent material for crop/livestock breeding
companies and the basic scientific tools necessary for commercial
development using genomics and molecular biology.
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