The Justice department uses a formula called the “Herfindahl-Hirschman Index” (HH) to gauge concentration in an industry. 10,000 on the index is a total monopoly, less than 1,000 is a competitive market. A number above 1,800 begins to show serious concentration.
The Justice department will have its work cut out for it analyzing the concentration of the biotech seed and pesticide industry given the proposed mergers under consideration. We have six major companies that together, along with one other major company, essentially make up the industry players.
There are three mergers being proposed: DOW/DuPont, Syngenta/ChemChina and Bayer/Monsanto.One merger likely doesn’t kick the HH index up enough to cause alarm, two mergers is significant concentration and three mergers essentially creates an oligopoly.
Individually, each merger likely stays under levels that ring alarm bells, but if all three are consummated then the industry is concentrated with pricing leverage over customers.
The concentration in this industry needs to be evaluated collectively.
These companies have already used their market concentration to limit exposure to market forces and they have also played global farmers against one another, picking winners and losers.
For example: Pioneer and Monsanto reduced their seed corn prices in Brazil by 35 percent two seasons ago, while leaving seed prices here virtually unchanged.
We knew that because of our seed purchases for farms in Bahia and Iowa.
They were concerned that farmers in the Mato Grosso would cut back on acres so they lowered seed prices which helped keep them in production.
It worked. Instead of reducing corn acreage they maintained production which damaged U.S. corn export market share. We paid higher seed prices up here so they could lower seed prices down there so they could keep up production in Brazil, which is not in U.S. farmer’s interests.
Fewer industry players increase their market clout and they will use it. Syngenta screws U.S. corn farmers with MIR 162 and refused to own up to the liability.
They do business here because the home market in Europe is closed to biotech seed.
They make their profits here and then use Europe as a tax haven before selling out to China where the trouble with MIR 162 started.
They have been using us badly.
Bayer is reportedly prepared to increase its bid for Monsanto from $128 to $135 per share. They would appear to be third in line for these mergers which would mean that it would get the highest HH index.
I do not see these mergers as benefiting U.S. farmers in any way. If there is cost savings from a merger, U.S. farmers will never see the benefit of it.
Bayer has reportedly identified $60 billion in financing sources compared to its initial bid for $43 billion. Monsanto is going to want it all.
Monsanto’s CEO alluded to the regulatory risks. They likely have to pay someone off in order to get a HH index number it needs.
Typically, companies looking to do deals with one another sign non-disclosure agreements and the seller provides basic financial information to the buyer.
The two companies negotiate a deal settling on a price and then a due diligence process is started by the buyer that, depending on the information uncovered, could require adjustments in the deal.
There are typically contingent liabilities and often part of the payment is held in escrow until they are settled.
If there is specific information that a buyer requires in order to firm up his bid, it is up to the seller to provide it.
There may be proprietary information that the seller will not want to disclose until the due diligence process.
Bayer wanted more information, calling it due diligence, than what Monsanto was willing to provide until they had the structure and framework of a deal done to the point that there was confidence in the prospects of the deal.
The fact that Monsanto was unwilling to provide it suggested that the structure was not far enough advanced or a price committed to that Monsanto was confident enough with to move forward.
Monsanto reportedly knows what it is like to have proprietary files stolen by a computer programmer who thought that he would become valuable to a Chinese seed company with the information.
The individual allegedly accessed the files nine days after resigning. Not too smart. His personal computer had spy software on it so he had plans.
When China can’t steal proprietary information they can buy it.
I believe that it gained the information as to how to construct an entire pork supply chain from its purchase of Smithfield Foods. The Syngenta/ChemChina deal changed.
A Chinese government entity was reportedly putting $5 billion into the deal funding the ChemChina purchase of Syngenta.
I would bet they would have rather kept that ownership information to themselves as it will significantly increase the regulatory review process.
Now it is Beijing buying Syngenta.
The Chinese government bans corn with MIR 162 to be imported, damaging commercials and U.S. farmers, and then turns around and buys the company that put the unapproved trait into the market.
Does that feel right to you?
David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.
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