[Congressional Record Volume 163, Number 43 (Monday, March 13, 2017)]
[Senate]
[Pages S1775-S1777]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
AGRICULTURE INDUSTRY MERGERS
Mr. GRASSLEY. Mr. President, I ask unanimous consent to be printed in
the Record the concerns of the Summit Agricultural Group regarding
three mergers in the agriculture industry. Specifically, this group is
concerned with the mergers between Bayer AG and Monsanto, DuPont and
Dow Chemical, and China National Chemical Corporation--ChemChina--and
Syngenta AG. The paper states that ``the mergers of these international
agrochemical and seed giants will significantly reduce competition and
innovation in the agricultural sector, and will cause irreparable harm
to the American farmer via increased input costs.''
As my colleagues are aware, I have long been concerned about
concentration and competition in the agriculture sector. Increased
concentration in the industry could significantly reduce choice and
raise the price of chemicals and seed for farmers, which ultimately can
affect choice and costs for consumers. Moreover, further consolidation
could diminish crucial research
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and development initiatives which drive have innovation and
technological advances for the agricultural sector. I have also raised
concerns about the competitive advantages that are likely to result
from the ChemChina-Syngenta transaction.
I have written several letters to both the Justice Department and the
Federal Trade Commission expressing my concerns and asking that they
carefully review these mergers and collaborate, as appropriate, on
their analysis of the impact on the agricultural industry. These
regulators need to take a hard look at both the efficiencies and the
benefits that the merging companies believe will result from these
transactions, as well as the concerns raised by independent and small
players in the market, farmers, and consumers.
There being no objection, the material was ordered to be printed in
the Record, as follows:
Executive Summary: Agriculture Mergers
Background: Bayer AG and Monsanto, DuPont and Dow Chemical,
and China National Chemical Corporation (ChemChina) and
Syngenta AG have all announced their intentions to merge. The
mergers of these international agrochemical and seed giants
will significantly reduce competition and innovation in the
agricultural sector, and will cause irreparable harm to the
American farmer via increased input costs.
Market Structure: Many view market share in terms of retail
sales; however, the underlying structure should be examined
to determine competitive dynamics. Almost all commercial seed
sold for planting a crop is composed of germplasm
``genetics'' and transgenic traits, which are genes inserted
to alter the seed, for example Monsanto's Roundup
gene made plants tolerant to Roundup herbicide.
When an independent seed company, say Becks Hybrids, wants to
sell seed they need to acquire a license to both the
germplasm and transgenic trait, and pay the licensor both
germplasm and trait fees on each bag of seed they sell.
Without access to high yielding and performing germplasm, the
addition of the transgenic traits is almost irrelevant.
Plainly stated: If you have a gene that makes a horse that
runs faster, but no horses, it's a problem.
Competitive Issues: Given this, concentration of germplasm
into few companies would give them the ability to bundle
their germplasm, transgenic traits, and chemicals together,
creating significant pricing power. Further, because
germplasm is the building block of the seed it would
significantly reduce incentives for independent innovation--
if a new trait is discovered, what options would a third
party have to combine with competitive germplasm and get to
market? Lastly, independent seed companies would be
irreparably harmed given the need to acquire germplasm from
potentially two companies that control 90% + of all genetics
in the market.
Practical Historical Examples: When the Roundup
chemical came off-patent, Monsanto was able to increase the
Roundup Ready seed trait licensing fee by multiples
to offset the revenue decline. More recently, when Monsanto's
Roundup Ready seed trait was about to come off-
patent they gave it to the market. However, other germplasm
breeding companies had already committed breeding programs to
the new patented Roundup Ready 2 Yield technology.
Given the 5-6 years required to breed a new trait into
germplasm, when farmers had the ability to buy the now
generic Roundup Ready trait, there was and is no
competitive germplasm to put it in. Plainly put, more
consolidation will only serve to increase the prevalence of
anti-competitive actions caused by consolidated ownership of
germplasm, transgenic traits, and chemicals.
Detailed Discussion: Agriculture Mergers
Background: Bayer AG and Monsanto, DuPont and Dow Chemical,
and China National Chemical Corporation (ChemChina) and
Syngenta AG have all announced their intentions to merge in
2017. The mergers of these international agrochemical and
seed giants will significantly reduce competition and
innovation in the agricultural sector, and will do
irreparable harm to the American farmer.
Market Share Dominance: Corn is the single most important
grain crop in the U.S., grown on 94 million acres with a
finished crop worth $50 billion. The U.S. grows 40% of the
world's corn supply, exported 13% of the crop in 2016, and
corn is an important component of the positive U.S. trade
balance of $35 billion stemming from agriculture. As the
graph at right shows, if these mergers are allowed to
proceed, two companies: Dow-DuPont and Bayer-Monsanto would
effectively control the U.S. corn market at the most basic
level--the germplasm. Breeding with germplasm for higher
yields and agronomic performance is still the number one
factor for success on the farm.
While industry data shows Monsanto has 36% of the seed corn
market, it uses a licensing model whereby the independent
seed companies (the other 17% in the table below) effectively
distribute Monsanto hybrid seed corn and traits through their
own brands, paying Monsanto two different royalties: one for
germplasm (genetics) and one for the transgenic traits.
Further, Monsanto licenses out different, and many would
argue inferior, germplasm to the independent seed companies
than the germplasm it uses in its own brands. The smaller
independent seed companies receive inferior germplasm to the
larger independent seed companies, and may pay a higher
royalty per unit to do so. DuPont primarily sells its hybrid
seed corn through its own sales channels.
Soybeans are the most important oilseed crop in the U.S.,
planted on 84 million acres, and representing a finished crop
of $35 billion at the farm level in 2016. As with corn,
Monsanto uses a licensing model to distribute soybean
genetics and traits through independent companies. Monsanto
has 90% market share in soybean transgenic traits through
their own brands, independent licensees, and through
licensing to DuPont and Syngenta.
Syngenta and DuPont have paid-up licenses for the Monsanto
soybean transgenic traits, which means the Syngenta and
DuPont germplasm and breeding programs are all on the
Monsanto transgenic trait platform. With the paid-up license
to the Monsanto soybean transgenic traits, Syngenta and
DuPont have a margin opportunity on the transgenic trait
royalty to take market share from the independent seed
companies.
To illustrate the power of the germplasm performance,
Monsanto agreed to give its first-generation transgenic trait
Roundup Ready to the market, as it was coming off
patent. The problem is the other companies with germplasm
breeding programs had already committed their breeding
efforts to the new patented Roundup Ready 2 Yield
technology. Since it takes 5-6 years to breed a new trait
into high performing germplasm, by the time farmers had the
ability to buy the now generic Roundup Ready
transgenic trait, there was and is no competitive germplasm
available to put it in.
Barriers to Entry: Given the costs and timelines for the
development of transgenic traits and plant breeding, new
competition and innovation will be limited. Transgenic traits
have to be integrated into the germplasm without impacting
the crop in other negative ways. As noted in corn, the
germplasm is controlled primarily by two companies: Bayer-
Monsanto and DuPont-Dow, with ChemChina-Syngenta having a
small share. In soybeans, Bayer-Monsanto would control over
90% of the soybean transgenic traits that are contained in
the Monsanto, DuPont, and Syngenta soybean germplasm.
As agriculture is a global market, new transgenic traits
have to be approved in all export countries in order for a
U.S. farmer to be comfortable knowing there will be a market
for his crop. The current international transgenic regulatory
approval process can take over 8 years and can cost in excess
of $150 million per trait. This international regulatory
burden means that only the largest companies have the means
and capabilities to get a new transgenic trait approved for
use by U.S. farmers. This limits the ability for any company
with new transgenic traits ever getting them to the market.
Aside from the enormous expense, the control of the high
performing germplasm and required transgenic trait platforms,
almost certainly eliminates the entry of new innovation and
trait technologies by any company other than those
contemplating the mergers. In the past ten years China has
used its regulatory approval process as a trade tool, which
makes the acquisition of Syngenta by ChemChina (a state-owned
enterprise) even that much more unsettling.
Ability to Bundle: Aside from fertilizer, a farmer has to
buy seeds (inclusive of transgenic traits), seed treatments,
and crop protection chemicals (herbicides, fungicides, and
insecticides) each year. Given the vertical integration and
dominant market position of these companies, major bundling
opportunities exist. These companies will have the
opportunity to require farmers to buy seed, seed treatments,
and crop protection chemicals even though superior chemistry
or generic alternatives may exist. Often these bundles of
seeds, traits, seed treatments, and crop protection chemicals
are part of the patent protection these companies have in
place, or in connection with sales promotions and programs.
It is impossible for an independent seed company to compete
with this type of vertical bundling opportunities. Monsanto
has already been accused of bundling its Roundup
herbicide with the access to its seed and traits, even though
a generic version of glyphosate herbicide is readily
available to farmers at a fraction of the price.
International Implications: As the graph on the right
indicates, these companies have significant market share in
crop protection chemicals on a global basis. The same holds
true for their seeds and transgenic traits in the countries
which have approved their cultivation including Argentina,
Brazil, and Canada. The impacts on the farmers in these
countries will no doubt be the same as in the U.S.
Near-Term and Long-Term Negative Impact: If these mergers
are allowed to proceed there will be negative impacts
through-out agribusiness. Research for new transgenic traits
and other biotech innovations will be stifled as the ability
to take such traits to the market in competitive genetics
will be controlled by two companies. The ability to stack any
new traits and/or technology will be controlled by the patent
protections the merging companies hold on their germplasm and
related trait technologies.
In the near-term, the existing independent seed companies
who rely on licensing from
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Monsanto for their corn and soybean germplasm and traits to
be sold in their brands will be squeezed given that the new
merged companies will need to increase market share and
profits for their shareholders to justify the mergers.
Independent seed companies cannot compete with the bundling
opportunities and margins that the merged companies will
enjoy with their combined product offerings.
In the longer term, the American farmer will lose as the
remaining oligopoly uses their market power, bundling of
products, and limited competition to increase the costs for
every acre planted. This in turn will increase the costs for
consumers in all markets touched by production agriculture.
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