USDA issues report on ‘Big Six’

2017-04-21T14:00:00Z USDA issues report on ‘Big Six’ Illinois Farmer Today
April 21, 2017 2:00 pm

Editor’s note: The following was written by James M. MacDonald, a branch chief at the USDA Economic Research Service, for the ERS Amber Waves magazine.


Agriculture in the United States uses less land and far less labor today than it did in the 1940s. Yet agricultural production grew by 169 percent between 1948 and 2013, with nearly all of it due to improvements in productivity.

Biological, mechanical, chemical and organizational innovations from public and private sector investments in research and development (R&D) have largely driven this productivity growth.

A handful of global firms (known as the “Big Six”) dominate private-sector research on both seeds and crop-protection chemicals: BASF and Bayer, from Germany; the U.S. firms Dow Chemical, DuPont and Monsanto; and the Swiss firm Syngenta. 

Each firm combines pest control and seed businesses. Their pest control products consist primarily of chemical pesticides, but also include biological products and seed treatments. The seed businesses include sales of crop seeds, as well as genetically modified seed traits placed in their own seeds or licensed to other seed firms, and tools for genetic modification, which can also yield fees when licensed to other firms.

Recently proposed mergers promise to change the industry. In December 2015, Dow Chemical and DuPont proposed to merge with the intention of later separating their combined agriculture, materials science and specialty products businesses into three independent and specialized corporations.

In February 2016, the state-owned Chinese company ChemChina offered $43 billion to acquire Syngenta. Several months later, in September 2016, Bayer proposed to purchase Monsanto for $66 billion.

These mergers would transform the “Big Six” into the “Big Four.” 

Each merger is subject to review by antitrust authorities in the United States and the European Union. The antitrust investigations focus on two major concerns about the potential impact of the mergers on competition in chemical and seed markets.

First, would the mergers reduce competition in sales of seed and chemical products so that surviving firms could raise prices for these products? Second, would the mergers reduce competition in research, leading surviving firms to reduce investments in R&D and therefore generate fewer innovations in the future?

These issues are of interest not only to antitrust agencies, but to farmers, rival producers and investors.

Measuring concentration

Many specific chemical and seed markets are already highly concentrated and grew more concentrated during the formation of the Big Six. For example, the largest four sellers of corn seed accounted for 85 percent of U.S. corn seed sales in 2015, up from 60 percent in 2000, while soybean sales from the largest four sellers rose from 51 to 76 percent, according to data from Farm Journal. 

Monsanto and Bayer are the two largest sellers of cottonseed, so the merger would make that industry noticeably more concentrated.

The effects of the merger on corn and soybean markets would be much smaller, since Bayer does not have a major presence in them. The Dow-Dupont combination would likely raise concentration in some specific chemical markets.

The mergers raise questions about competition in pricing and in research. This is different than in many other agricultural markets, such as meatpacking, milk processing or grain transportation, where merger-related competition concerns focused heavily on pricing. For example, the largest four buyers of fed cattle handled 80 percent of all U.S. purchases in 2008, when the nation’s third largest meatpacker, JBS Swift, proposed to acquire National, the fourth largest. 

In recent meatpacking and transportation mergers, the issues concerned markets with only a few firms (two, three or four), in which a merger would remove a competitor likely allow remaining firms to raise prices for their services or to reduce prices for products that they purchased.

Pricing issues also arise in the recent chemical/seed mergers.

The firms compete in many different national and regional markets for specific chemicals and seed varieties.

At low levels of concentration, when they face many competitors, firms have little control over prices. If a single firm attempts to raise the price for its seeds or chemicals, farmers would be able to quickly switch to rival sellers, and the firm would lose so much business the price increase would result in reduced revenues and profits.

However, at higher levels of concentration, with only a few rivals in a market, farmers have fewer alternatives if a seller raised seed or chemical prices. Moreover, those few rivals might likely draw the conclusion that each could benefit if they all raised prices.

Policy power

In the 1960s and 1970s, antitrust agencies focused heavily on concentration as a sufficient indicator of market power. That is, increases in concentration beyond some relatively low threshold could be expected, with a high degree of confidence, to lead to price changes irrespective of other market factors. 

Policy has since changed sharply, based in part on economic analyses of competition in markets. While concentration still matters, it alone is no longer considered to be a sufficient indicator of market power. Other factors, such as the ease of rival entry and the ease with which buyers can switch their purchases among sellers, now matter as well.

Moreover, the concentration levels that attract scrutiny are considerably higher than they were in the past.

Mergers today are likely to attract antitrust concern if they lead to a reduction of four sellers to three, three to two, or two to one. They may attract antitrust action in some less concentrated markets (six sellers to five, or five to four), if other factors, such as high barriers to entry or high costs to buyers switching among sellers, support market power among the sellers.

Copyright 2017 Illinois Farmer Today. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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