20 February 2017

Africa: Agribusiness Giants On Merger Path

"If the Bayer-Monsanto merger is approved, the new merged company will control almost 30% of the global commercial seed market and 25% of the agrochemical market - making it the world's largest supplier of seeds and chemicals. In South Africa, it would control about 30% of both markets. Already today, Monsanto is one of two companies in South Africa that employs 80% of the private sector breeders in maize and 100% of the breeders in soybean and sunflower breeders. " - African Centre for Biodiversity

The dominance of giant agribusiness multinational companies in the supply of seeds and chemicals is not new, whether at the national level in both developing and developing countries or on a global scale. The vast influence of these companies is felt in policies imposed on national governments damaging to small farmers as well as to the environment and human health, as well as in control of pricing for agricultural inputs.

Recent years, however, have seen a further escalation of mergers which is accelerating concentration in the industry, of which the merger of Bayer and Monsanto is currently under review by national regulatory agencies in South Africa and other countries. This new report highlights the negative consequences of this trend, particularly for smallholder farmers.

For previous AfricaFocus Bulletins on biodiversity and related issues, documenting this and other related critical analyses on policies in African agriculture, visit http://www.africafocus.org/intro-ag.php - Editor's Note

The Bayer-Monsanto merger: Implications for South Africa's agricultural future and its smallholder farmers

February 2017

The African Centre for Biodiversity (http://www.acbio.org.za) Rosa Luxemburg Stiftung (http://www.rosalux.co.za)

[Excerpts only: Full paper available at http://tinyurl.com/z4pkxb9]

About This Paper

This paper explores the likely implications of an approved BayerMonsanto merger for the South African agricultural system. It outlines the trend of consolidation occurring within the seed and agrochemical industries, provides a background to the merger, criticises the rationale given for the merger by Bayer and Monsanto and outlines concerns should the merger be approved in South Africa. These concerns focus on the implications for South African farmers, smallholder farmers in particular. The paper argues that further consolidation of an already corporate- controlled seed sector is not needed and that it undermines the emergence of an alternative system that would support smallholder farmers in contributing to food security in an egalitarian agricultural economy.

Key Findings

Context

The proposed Bayer-Monsanto merger takes place in a context of megamergers: China National Chemical Corporation (ChemChina)- Syngenta; DuPont-Dow. If approved, just three corporations would control about 60% of the global patented seed market and 64% of the agrochemical market.

If the Bayer-Monsanto merger is approved, the new merged company will control almost 30% of the global commercial seed market and 25% of the agrochemical market - making it the world's largest supplier of seeds and chemicals. In South Africa, it would control about 30% of both markets. Already today, Monsanto is one of two companies in South Africa that employs 80% of the private sector breeders in maize and 100% of the breeders in soybean and sunflower breeders.

The merger will need to be approved by regulatory authorities in more than 30 countries. Authorities are viewing the merger activities in totality to assess possible implications for the market, farmers and consumers. They will look at whether reduced competition will lead to reduced innovation, lowered spending on research and development and implications for increased input costs and reduced choice for farmers and other consumers (although the market is already significantly consolidated).

Merger activity is being driven by the global economic downturn and reduced demand for products by farmers because of low commodity prices. It is also driven by the desire to reduce operational costs, particularly for research and development processes, and to access proprietary knowledge enclosed in intellectual property rights, such as patents. The merger and acquisition trend is supported by the historically low interest rates (close to zero) being offered in the United States, the Euro zone, Japan and the United Kingdom.

Both Bayer and Monsanto are already engaged in big data projects in the agricultural sector. Bayer notes that one of its prime reasons for acquiring Monsanto is because it owns The Climate Corporation, which has the most powerful data science engine and the most extensive field research network. In addition, Monsanto has its foot in several important Genome Editing initiatives: it owns one of the two existing CRISPR licenses and has started two joint ventures on precision agriculture with the agrotech giants CNH and AGCO.

Both companies would benefit from sharing patents on genetically modified crops and existing network and distribution models as they both plan to expand into the African market, with a particular focus on smallholder farmers. Bayer has been in the plant genetic engineering arena since the early 2000s and holds more patents on transgenic plant traits (206) than Monsanto (119) in the European Union). Having access to each other's proprietary knowledge would provide them with significant cost savings, particularly as the biotech industry shifts towards using CRISPR genome editing technology, which revolutionises transgenic interventions through the rewriting of whole DNA-sequences, but is not yet subject to a comparable degree of regulatory oversight as the first generation of genetic engineering. Both traits and germplasm is needed to remain competitive in this market.

South Africa is the most important African market for both companies in terms of sales and for providing a base for African expansion. The recent request by GrainSA, Agbiz Grain, the South African National Seed Organization (SANSOR) and the Agricultural Research Council for a breeding and technology levy to be imposed on winter cereals in South Africa - with the possibility of expanding this to other crops - would effectively mean that public resources would be used to collect royalty payments for these companies.

Both Bayer and Monsanto sit on industry representative bodies, giving them a significant degree of influence on the industry - a combined company would enjoy benefits of greater influence.

Implications

The merger between Bayer Crop Science and Monsanto would have possible implications for the agricultural sector and the food system in South Africa:

It would further reduce the competition within the South African seed sector. Evidence from the US seed market shows that mergers of this size will change key parameters of the seed market. BayerMonsanto' s dominant market position will be further enhanced, as will both companies' control over traits-germplasm-crop protection products in the country.

Quite contrary to the claims of Bayer and Monsanto managers, the merger is likely to decrease the amount of investment and the range of innovations. This paper argues that the potential merger must be analysed in the larger context of a rapid privatisation of research and development. A particularly important tool of the potential Bayer-Monsanto seed giant would be the instrument of licensing rights, and increased pressure on farmers through the collection of levies is expected.

Serious impacts are anticipated for farmers and food consumers alike. For farmers, evidence from the last few years at both the South African seed market and the US seed market shows that a further increase in seed prices is very likely. The choice of available inputs will further decrease. Given the high amount of sunk costs that particularly Monsanto invested in the development of partly unsuccessful genetically modified organisms, there is a threat that the South African market will be used as a strategic point from where to 'dump' old genetically modified (GM) technologies onto the African market. On the other hand, available micro data from households in South Africa show how any price increase in staple food prices might affect the income poor. An indirect effect on food prices from the merger cannot be excluded.

A closer look at the drivers of the Bayer- Monsanto merger reveals that the 'efficiency argument' put forward by the corporations might lead to a benefit to their shareholders, but cannot be expected to spill over to external groups, such as farmers and food consumers.

...

Seed and Agrochemical Markets

Global agricultural input markets (seed, fertiliser, crop protection products, farm machinery and agri-tech markets) are already significantly consolidated, having experienced a series of horizontal and vertical mergers and acquisitions over the past two decades (Figure 1).

The global and regional seed market

In 1994, the four biggest seed companies controlled 21% of the global market (AgriPortal, 2016); today just ten companies own about 65% of the world's proprietary seed (seed registered for legal protection) for major crops (Wattnem, 2016). It must be noted that in Africa 65-100% of seed used by smallholder farmers is farmer-saved and exchanged (varies by crop and geography) (Wattnem, 2016). The global commercial seed market has an estimated value of about US$53 billion and is expected to grow to US$113 billion by 2020 (Marketsandmarkets, 2016) with the African market contributing less than 2% to the current value (CTA, 2015). This presents a potentially lucrative market, but many obstacles have to be overcome to carry out a sustainably profitable business. Some of the bigger ones include lack of infrastructure, specialised knowledge, institutional arrangements and political bureaucracy.

The genetically modified seed market was worth US$15.6 billion in 2011 and is expected to grow to US$30.2 billion in 2018 (AGPRO, 2013). However, a recent market report notes that conventional seeds are expected to be the fastest growing segment of total seed sales (Marketsandmarkets, 2016). ... Africa presents an untapped market but with very slow processes of regulatory and institutional development to allow GM crops to be grown. In the meantime, market expansion will be based on conventional certified seed and agrochemicals.

Maize and horticulture are the two biggest seed markets on the African continent, with the maize market valued at about US$500 million and horticulture at US$250 million; most seed company activity takes place in this space (ACB, 2015). There is more recent interest in commercialisation of legume seed on the continent.

The South African seed market

South Africa has a dominant commercial seed industry, which is primarily geared to serving the needs of large-scale commercial farmers, with a dominant focus on hybrid, improved and genetically modified seed (DAFF, 2015). South Africa's marginal smallholder farmers also rely on commercial seed as a significant source of planting material, especially for maize and horticulture, although indigenous crops and farmer seed varieties are also used. Multinational corporations dominate the seed industry: Pioneer HiBred /Pannar, Sakata, Monsanto and Syngenta (GrainSA, 2015). ...

The value of the South African seed market was estimated at R5.62 billion in 2012/13 (TASAI, 2015). The focus of both Bayer and Monsanto is on commodity crops: maize, sunflower, soybean, cotton and wheat. The value of the seed market in grain and oilseed was about R3.9 billion (about US$285 million) for the 2014/15 production season (GrainSA, 2015). ...

Maize dominates the national variety list - there are 546 maize varieties on the official list; 308 are protected by plant breeders' rights and 162 are genetically modified (TASAI, 2015). There are 41 genetically modified soybean varieties on the list and 35 non- genetically modified ones, including 19 with plant breeders' rights protection (TASAI, 2015). Monsanto and DuPont/Pioneer Hi-Bred/Pannar own at least 85% of the seed business for the big commodity crops - maize, soybean (the second largest agronomic crop in the country) and sunflower. There is intense competition between them (TASAI, 2015). DuPont is planning to merge with Dow, which puts pressure on Monsanto to increase its scale to continue competing in seed and agrochemical markets. Bayer's strength is in agrochemicals, although it has a small seed footprint in South Africa. Bayer introduced its cotton seed to South Africa in 2014 and a new canola seed variety in 2015 (Breytenbach, 2015). It reportedly introduced these new varieties into South Africa in response to a direct call from farmers asking for alternative products (Breytenbach, 2015).

Syngenta, Monsanto, Pannar-Du Pont Pioneer and Dow form SANSOR's committee on genetically modified organisms (SANSOR, 2016). Any activity that is likely to increase Monsanto's influence in this market in South Africa is significant given the extent of genetically modified maize planted, the country's staple food crop.

The global and regional agrochemical market

The global agrochemical market is estimated to be worth about US$33.4 billion (Macaskill, 2016) with the African market valued at around US$1.1 billion (R15-20 billion) in 2014 (Odendaal, 2014). The agrochemical market is dominated by Monsanto (US$15 billion), Syngenta (US$13.4 billion), Bayer (US$10.4 billion), DuPont (US$9.8 billion), Dow (with sales of US$6.38 billion in 2015) and BASF (US$5.8 billion); Chinese-owned ChemChina doesn't make divisional sales figures available, but total sale figures for all divisions (of which agrochemicals is just one) were US$45 billion in 2015 (Alessi, 2016).

The South African agrochemical market

South Africa uses more agrochemicals than any other African country, mostly for grain crop production (PR Newswire, 2015), yet it comprises less than 2% of the global market (Macaskill, 2016). South African farmers spent R2.3 billion on agrochemicals in the 2014/15 season (GrainSA, 2015). The South African agrochemicals market is estimated to grow at a compound annual growth rate of 4.5% by 2020 (PR Newswire, 2015). Major agrochemical companies operating in the country range from Bayer Cropscience and Syngenta to Adama, Dow Agrosciences, Philagro South Africa, BASF South Africa, Sipcam, Monsanto and Chemtura Corporation (GrainSA, 2015). Companies such as Bayer, Syngenta SA, Dow, DuPont and Monsanto South Africa sit on the executive council of CropLife SA, an industry representative body (CropLife SA, 2016).

Bayer and Monsanto in South Africa

Both Bayer and Monsanto are major manufacturers of agrochemicals, seeds and genetically modified seed (Court, 2016). Company confidentiality makes it difficult to ascertain market-specific market shares for any company.

Bayer Crop Science in South Africa

Most of Bayer's African sales are generated in South Africa, and a key part of Bayer's strategic focus for its business in southern Africa is 'expanding our seed footprint - especially for soyabeans and wheat - through further acquisitions, in-licensing agreements and partnerships' (Bayer, 2016). It owns a manufacturing plant in South Africa, has established a maize competency centre in KwaZuluNatal (Bayer Crop Science, 2016e) and has opened its first African SeedGrowth Centre near Johannesburg (one of 16 in the world) (Bayer, 2016c). The Centre will train seed company production staff, support seed companies in upscaling processes, act as a base for research in optimising seed treatment technologies and demonstrate how Bayer's equipment works (Bayer, 2016c).

It is focusing on both the large-scale commercial and small-scale farming sectors. In March 2016 Bayer launched its 'Committed to the Future Pledge' at the South African Grain Congress, in which it promised to continue to invest more than 10% of turnover into developing new compounds (it should be noted that this is their core business and so does not qualify as an added benefit for South Africa). It also promised to invest in further initiatives, like its Bayer Forward Farms project, a knowledge platform that facilitates the sharing of knowledge between selected farms and the combined expertise of the broader industry (Bayer, 2016d).

It is also actively pursuing the small-scale farming market. Bayer uses demonstration farms and training centres set up by organisations, such as the United States farm machinery giant AGCO to showcase its inputs (Maritz, 2016). It is involved in other projects like this in South Africa, Ghana, Ethiopia and Morocco (Maritz, 2016). ...

Monsanto in South Africa

Monsanto is a pioneer of genetic modification of agricultural crops (ACB, 2005) and the largest maize seed company in the country by sales (DAFF, 2015); it also supplies 90% of soybean planted commercially in South Africa (ACB, 2016). It has been operating in South Africa since 1968 and has licensed its genetic modification technology to other seed companies operating in the domestic market. In the late 1990s it purchased domestic seed companies Sensako and Carnia, thereby taking up a major stake in local seed and grain markets (ACB, 2005). Monsanto sells seed for alfalfa, canola, corn, cotton, sorghum, soybean, sugarbeets and wheat (Stucke and Grunes, 2016). Monsanto's purchase of global seed company Seminis gave it ownership of plant breeders' rights to a range of South African vegetable seed varieties (ACB, 2005) and access to germplasm. The Sensako purchase gave Monsanto about 45% of the South African agrochemical market for field crops (ACB, 2015b).

In November 2016 Monsanto opened its renovated breeding centre in Petit near Benoni, South Africa (Van Wyngaardt, 2016). The 300 hectare plant breeding farm uses imported and local germplasm to establish new breeding crosses (Van Wyngaardt, 2016). Monsanto also pursues the small-scale farming sector through projects, such as Water Efficient Maize for Africa (WEMA) (Monsanto, n.d.[2]). ...

ACB has extensively critiqued this programme for its use of Monsanto's genetically modified drought tolerant maize because the product has not been successful in the United States, and it is inappropriate for smallholder farmers, due to its reliance on the use of synthetic fertilisers and agrochemicals (ACB, 2015a). The project, which is supposedly meant to benefit small-scale farmers, leads them onto a technological treadmill with known environmental consequences and one that is difficult to escape. Farmers have drought tolerant varieties of their own, which are freely saved and thus always available and adapted to localised conditions. Genetically modified crops were also trialled in eight African countries in 2015 (SeedWorld, 2016a) with Monsanto's drought tolerant maize from the WEMA project expected to be released in field trials in Tanzania and Mozambique in 2017.

...

2016 - The year of the mega-mergers

July 2014: Monsanto tried to buy Syngenta for US$46 billion, but the deal was rejected by shareholders.

November 2015: Chinese state-owned ChemChina made a US$43 billion bid for Syngenta, which was accepted by shareholders in February 2016. This was the largest purchase of a foreign firm in Chinese history.

ChemChina owns Adama (formerly Maktheshim Agan Industries), the world's seventh largest agrochemical company.

The Committee on Foreign Investment in the United States approved the deal in August 2016 (Bloomberg 2016b), South Africa in September 2016 and Australia in December 2016 (Food Ingredients First, 2016). South Africa attached the condition that Syngenta's formulation plant could not be relocated outside of the country for an undefined period to avoid job losses (CCSA, 2016a). The deal was also approved by the Common Market for East and Southern Africa (COMESA) Competition Commission in September 2016 (Comesa Competition Commission, 2016).

The European Commission has requested additional information from both companies and will announce its decision on the ChemChinaSyngenta merger on 12 April 2017 (Produce Business UK, 2017).

A possible obstacle to approval is ChemChina's plans to acquire another Chinese state- owned fertiliser company, Sinochem, which was not mentioned in the applications for approval of its acquisition of Syngenta (Noel and Baghdjian, 2016).

December 2015: DuPont and Dow announced a merger that will give the combined company an estimated value of US$130 billion.

The deal was approved by the COMESA Competition Commission in September 2016 (Comesa Competition Commission, 2016a), but still awaits approval in Australia, the United States, Brazil and South Africa.

The deal is being held up by the European Commission, which has launched a full investigation on the basis that insufficient information has been provided (Reuters, 2016a). The Commission will announce its decision on 6 February 2017 (Investopedia, 2016).

May 2016: Bayer started the bidding process for Monsanto. The $66 billion bid was accepted in December 2016. If approved, the merged company will be the world's largest seed and agriculture chemicals company. If the merger is not approved by competition regulators, Bayer will pay a US$2 billion termination fee to Monsanto (Begemann, 2016).

The European Commission will decide on this merger by 15 March 2017 (European Commission, 2016).

It has not yet been submitted to South Africa's regulators.

August 2016: Canadian Potash Corp. started negotiations to buy fertiliser producer Agrium for US$30 billion. The deal is expected to close in mid-2017 and will create the largest fertiliser company in the world; it also plans to expand into seeds and crop chemicals (Skerritt and Casey, 2016).

BASF has been left out of the scramble to consolidate and may well have to buy up smaller companies, or sell, because it will not have the strength to take on the concentrated power of its competitors (ETC Group, 2016). Or it could benefit from forced divestitures of the mergers. If all the proposed megamergers are approved, these three companies (ChemChina-Syngenta, DuPont-Dow, Bayer-Monsanto) will own and sell about 60% of the world's patented seeds and pesticides/herbicides (AgriPortal, 2016).

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