Consequences of concentration for ag innovation

The rising concentration in global agricultural input markets means fewer firms are supplying those inputs to farmers. It also means that fewer firms are responsible for many of the new innovations that drive growth in agricultural productivity. The share of private R&D performed by the largest firms is even larger than their share of sales. In crop seed and biotechnology, eight seed-biotechnology companies accounted for 76 percent of all R&D spending by this industry in 2010. In agricultural chemicals, five companies (each with over $2 billion sales in 2010) were responsible for over 74 percent of the R&D in this sector. In farm machinery, four companies (each with over $5 billion in farm machinery sales) accounted for over 57 percent of farm machinery R&D, and in animal health, just eight companies accounted for over 66 percent of R&D. Moreover, all of these leading firms are multinational companies with R&D facilities positioned around the world. These global research networks allow large firms to develop and adapt new technologies to local conditions, meet national regulatory requirements for new product introductions, and achieve cost economies in some of their R&D activities.

Greater market power resulting from the structural changes in agricultural input industries means that farmers may pay higher prices for purchased inputs. With stronger legal protection over their intellectual property and fewer firms offering competition, firms can charge higher prices for their new innovations. Such price premiums are necessary to provide firms the means (and incentive) to invest in R&D in the first place, and farmers are willing to pay higher prices so long as the gains from higher productivity outweigh their higher costs. In fact, for the past two decades, the prices of farm inputs have been rising faster than the prices U.S. farmers receive for their crops and livestock.

The largest increase over 1990-2010 was in crop seed prices, which more than doubled relative to the price received for agricultural commodities. This increase was due, at least in part, to the value of the new seed traits resulting from research investments made by seed/biotechnology companies. However, higher input prices may also stem from increases in the prices of labor, capital, energy, and other materials used in their manufacture. The sharp rise in the price of fertilizer in 2008-09 was driven by a significant increase in the cost of energy and materials used to make fertilizers, higher transportation costs, and the falling value of the U.S. dollar. Multiple factors contribute to changing prices for farm inputs, and it is difficult to isolate the effects of market power, product quality, and other factors affecting these prices.