What is in this article?:
- Concentration in several global agricultural input industries has risen significantly: crop seed, agricultural chemical, animal health, animal genetics/breeding, and farm machinery.
- The largest agricultural input firms are responsible for a large and growing share of global agricultural R&D, and higher input prices paid by farmers partially reflect the higher quality of inputs created through private-sector R&D.
Drivers of change
Reasons for mergers and acquisitions vary by industry and firm circumstances but include market forces and the emergence of new technologies. Government policies can also affect the ability of firms to compete in markets and their incentives to merge with or acquire other firms.
• In the crop seed and animal breeding sectors, the emergence of biotechnology was a major driver of consolidation. Companies sought to acquire relevant technological capacities and serve larger markets to share the large fixed costs associated with meeting regulatory approval for new biotechnology innovations.
• In the animal breeding sector, vertical integration in the poultry and livestock industries enabled some large firms to acquire capacity in animal breeding as part of their integrated structure.
• In the farm machinery industry, many of the major mergers and acquisitions can be traced to large financial losses sustained by some leading firms during periods when the farm sector was in prolonged recession, which substantially reduced demand for farm machinery as farmers delayed major capital purchases. Firms experiencing large financial losses are often vulnerable to acquisition.
• The agricultural chemical sector has been heavily affected by changes in government regulations governing the health, safety, and environmental impacts of new and existing pesticide formulations: larger firms appear better able to address these stricter regulatory requirements.
• Consolidation in the animal health sector appears to be largely a byproduct of mergers and acquisitions in the pharmaceutical industry, as most of the leading animal health companies are subsidiaries of large pharmaceutical companies.
Crop seed-biotech industry transformation
In 2009, seven large seed companies each had annual seed sales of over $600 million. Five of these top seed companies--Syngenta, Bayer, Dow, Dupont, and Monsanto--are also market leaders in agricultural chemicals. A sixth firm, BASF, is making significant investments in crop biotechnology research but so far reports few crop seed or trait sales, although it is a market leader in agricultural chemicals. These companies currently constitute the "Big 6" involved in crop seed, biotechnology, and chemical research.
The seed-biotechnology industry has been reliant on small and medium-sized enterprises (SMEs) as sources of new innovation. New SME startups (often spinoffs from university research) tend to specialize in commercial development of a new research tool, genetic trait, or both. Significant entry by SMEs into the seed-biotechnology sector began in the late 1970s and early 1980s, with a second wave of new entrants in the late 1990s and early 2000s. In recent years, exits have outnumbered entrants, and by 2008 just over 30 SMEs specializing in crop biotechnology were still active. The majority of the exits from the industry were the result of acquisition by larger firms. Of 27 crop biotechnology SMEs that were acquired between 1985 and 2009, 20 were acquired either directly by one of the Big 6 or by a company that itself was eventually acquired by a Big 6 company.
Concentration in a research-intensive industry can be measured not only in terms of share of product sales but in share of new innovations. Firms that are most successful in creating new innovations are often better positioned to dominate the market (although not all new product introductions will be commercially successful). In research for genetically engineered crop varieties, for example, companies typically obtain a patent first, then initiate field trials, and finally obtain regulatory approval to sell crop seeds. Although there is considerable overlap in terms of companies participating, the markets for crop seeds can be distinguished from markets for genetically modified traits. The shares of these research outputs held by the Big 6 companies in each case are between 55 and 95 percent.