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.
Threat of New Entrants
Potential entrants into the plant input sector are both domestic and international, with the latter being a larger threat. The entry of a new local competitor is a small risk in most plant input sectors. In the rapidly changing dynamics of plant inputs, foreign competitors can be enabled by governmental financing without regard to short-term or even intermediate profitability of the entrant. The entrance of Chinese glyphosate producers is a very clear example. All of the new producers emerged as a result of capacity added to existing Chinese petrochemical facilities. Each of these new producers saw a chance to increase local employment and export opportunities. It seems unlikely that they engaged in a market analysis that took into consideration a long-term profit potential. Increasingly, growing economies such as China and India see agricultural production as a strategic need that should be supported by direct government investment and assistance as needed, versus indirect support by the United States and the European Union. The ability for this new capacity to disrupt international trade and prices will be very difficult to assess for strategic planning purposes in more mature markets.
Expiration of patents, such as Monsanto’s Roundup, create the potential for new producers in the plant input sector. The sector has followed the lead of the pharmaceutical industry by looking for patentable improvements to its existing technologies. This, plus the higher cost of certification of generics under the current administration, has helped to provide some additional intellectual property barriers. Given the increasing technological content and environmental scrutiny, this will be an increasingly important tactic to extend existing barriers.
The importance of barriers to entry varies with segments of the input industry. In the case of plant nutrients, there are increasing barriers to entry. Nitrogen requires cheap hydrocarbon feedstock and an investment of a billion dollars; phosphate relies on high quality phosphate rock, access to low cost sulphur and ammonia, and an investment of $1.5 to 2.0 billion; and potash needs mineral deposits found in a few locations, an investment of $2.0 to 3.0 billion, plus five to seven years to develop. The recent hostile takeover attempt of Potash Corp., the world’s largest potash producer based in Saskatoon, Saskatchewan, by BHP Billiton, the world’s largest iron ore mining company based in Melbourne, Australia, highlighted the attractiveness of the potash industry but also illustrated the difficulty of entry. The $40 billion bid by BHP was deemed grossly inadequate by Potash Corp. but no white knight emerged to up the ante, indicating either the offer was adequate or there are not many knights whose kings can come up with $40 billion to invest in a potash company. In the end, the Canadian government, based on the criteria from the Investment Canada Act, concluded the proposed deal would provide no net benefit to Canada, and BHP withdrew their bid.