What is in this article?:
- The plant input supply industry is composed of many diverse segments and companies that supply farmers with seed, nutrients, pesticides, machinery, capital, labor, and many other inputs — all driving change in agriculture.
Price and cost efficiency
Firms throughout the entire supply chain compete on the basis of price and cost efficiency. A good example is the proliferation of unit train movements of fertilizer to ‘big barn’ retail warehouses primarily in the Midwest. Today, nearly all of the phosphate shipped by Mosaic—the world's leading producer and marketer of concentrated phosphate and potash—via rail from central Florida to domestic customers moves in 65 to 80 car unit trains with ‘turns’ as low as 12 days. That was not the case 10 years ago. More and more retailers are investing in large warehouses (15,000+ tons) capable of unloading unit trains in order to capture significant freight savings and compete with the dealer down the road or, more likely, in the next county.
The farm machinery and equipment manufacturing industry (North American Industry Classification System (NAICS) code 333111) is obviously a key input industry in the plant and plant product chain and faces many of the same forces described in this article for other input industries. While there have been mergers and acquisitions within this industry, they have not been as substantive or pervasive as in the plant nutrient and the seed/biotech/crop protection segments. Concentration is moderate and has decreased very slightly as seen in the HHI for the 50 largest companies which totaled 1,707 in the 1997 Economic Census of the United States and 1,657 in the 2002 census. This slight decrease in HHI is contradicted by an increase in the market share of the four largest companies, as measured by the value of shipments, which increased from 53 percent in 1997 to 58 percent in 2002; market share for the eight largest increased from 60 percent to 65 percent.
Acquisition by and purchase of competitors is a highly cyclical activity that is exacerbated by fluctuating currency exchange rates and international financing factors. With the U.S. dollar near all-time lows for its broad-weighted exchange rate, the value of U.S. agribusiness assets—including all companies in the input supply industry—has been very attractive to foreign firms that have access to capital in non-dollar markets. Consequently, the acquisition of U.S. agribusinesses by foreign companies has increased dramatically recently. This increasing globalization of input segments increases the volatility of rivalry by introducing competing firms from other geographic areas.
Another important point is that there is a big difference between industry consolidation and the loss of a segment’s competitive advantage. The U.S. nitrogen and phosphate industries are good examples. The U.S. nitrogen industry is about 60 percent of the size it was 15 years ago. The U.S. industry simply could not compete with foreign producers when domestic natural gas prices began to increase relative to values in other regions early last decade. Strong global demand growth coupled with lower relative natural gas prices resulting from the development of large shale gas reserves domestically has stabilized and may even breathe new life into the U.S. nitrogen industry. Nevertheless, the United States now imports roughly one-half of its nitrogen needs.
In the case of phosphate, some firms depleted their rock reserves and went out of business and others did not invest in new mine development because returns were so low during the first half of the last decade. The largest U.S. phosphate producer, IMC Global, merged with the Crop Nutrition business of Cargill to form Mosaic in 2004. U.S. phosphate rock production today is about one-half of its peak a dozen years ago. The competitive advantage of U.S. phosphate producers has eroded over time due to the higher costs of developing, extracting and processing lower quality secondary and tertiary reserves, as well as complying with more restrictive environmental regulations. Needless to say, the United States plays a much smaller role in the global phosphate market today than it did a decade ago.