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DAVID KRUSE

By Staff | Sep 30, 2016

The announcement that Bayer was buying Monsanto has created a storm of comment and concern over the concentration of the biotech seed industry that this merger and others that are pending could keep seed prices high.

Farmers are frustrated as corn prices have fallen below the cost of production and that unlike fertilizer prices, seed corn prices have not fallen accordingly. One obvious point is that farmers don’t have to put on as much fertilizer and can cut back for a while if soil fertility levels were high. They can’t, however, go without seed.

It would be hard to cut back on seed. The only way that competition would be created between seed companies is if acres are reduced and we should see fewer corn aces next year, easily 5 percent if not more.

A couple years ago the price of corn was so poor in Brazil, that Mato Grosso farmers were intending not to plant. In that instance, seed companies cut prices by a third and it helped sustain corn acreage there.

The way you get ag input companies to lower their price is to use less of their product. We have seen fertilizer prices fall by a third as farmers stopped applying so much fertilizer.

So how much that seed corn prices decline will be determined by the degree that corn acres are reduced here this next year.

I think that there is already price fixing in the seed corn industry by my definition. There are the major biotech companies with the traits – Monsanto, Pioneer, Syngenta and such.

Then there are another tier of independent seed companies who have their own genetics but need to buy traits from the majors. That means that the majors technically sell their traits to competitors which frankly is about all the competition that they have got.

So the price of commodity corn falls by a third, farmers are looking at below-the-cost-of-production money losing cash flow for 2017 and seed corn prices should come down right? One of the independent seed corn companies told me that they took that argument to negotiate their trait prices with one of the majors and was told that they were doing so well selling more seed that the major was going to increase the cost of their tech fees $4 bag.

Independent seed companies are dependent on the majors for new traits that they have to have in the market. Therefore they are not really that independent.

If an independent does well competing against the major then the major just jerks his chain bringing him to heal by increasing his trait costs. There are no reasons for trait values to go up given current circumstances, but they raised them anyway because they can.

They effectively cut off any real competition in doing so. If an independent started to gain traction on market share, the majors supplying them traits could raise the price of traits on to prove who is in control. Independent seed companies do business pricing their seed at the permission of the majors.

They can be better at producing seed at a lower cost than a major seed company but if they try to pass that lower cost onto seed customers the major can employ punitive pricing power making the cost of traits prohibitive.

I think that these independent companies all negotiate their own deals so they get played hard by the majors.

So independent seed companies understand the angst in the farm economy and want to lower prices, but can’t because they only indirectly set seed prices. The real pricing power comes from the majors that are all trying to merge so that they concentrate that pricing power even further.

Wake up! Competition in this industry is already impaired! I see price fixing already occurring when large companies have control of the pricing power of smaller companies. We are told that we are supposed to accept that and think that is okay because these merged entities will bring us new traits faster.

Whom are they thinking of first?

The current pending mergers of Dow/DuPont, ChemChina/Syngenta, and Bayer/Monsanto will have their market concentration power measured by the U.S. Justice Department. If there were just one merger, the impact would be far different than three collective mergers all occurring at the same time.

If all three of these can happen at the same time, then I think that they had just as well do away with anti-trust reviews as there is little weight given to them. One gets the impression that no one really cares about free and fair market competition anymore.

These companies, when modeled in mergers, produce proformas that the valuations are based upon. They have to meet or beat those valuations to keep Wall Street happy.

What do you think the Biotech oligopoly cares about most, fair pricing of seed to farmers, or meeting the optimistic metrics in their merger deals?

This is a world of Harvard MBAs who never make the mistake of putting things they don’t want others to see in e-mails as Hillary and Powell did. I think that they teach that in Harvard Business Class 101.

These guys are far removed from anything on the farm, but they understand numbers and the fact that farm revenues have declined to threaten their seed sales if acres are reduced is the only thing that will get their attention.

Otherwise they are already in control and they know it.

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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