In the 1970s and 1980s, U.S. cotton farmers were able to procure seed from a variety of sources. And until the early 1990s, university breeding programs were responsible for a sizable percentage of the cottonseed planted. Now, all of that is finished and the pool of seed companies is shrinking.
Whether that bothers cotton farmers or not, they should know a merger proposal is currently sitting on a desk in the U.S. Department of Justice. While the DOJ studies the proposal, antitrust considerations surely top its list of concerns since the merger is between industry giants Monsanto and Delta and Pine Land (D&PL).
Last Aug. 15, Monsanto announced it would acquire D&PL for $1.5 billion in cash. “Both companies see today's announcement as a great opportunity to pair Monsanto's trait technology with the strong genetics and brand offerings of D&PL,” said Ernesto Fajardo, Monsanto's vice president of U.S. crop production.
D&PL was already well-known among cotton farmers when transgenic cotton varieties were introduced in the mid-1990s. Since then, the Scott, Miss.-based company has continued as a major cottonseed player. This is especially true in the Southeast — as an example, 75 percent of Georgia's cotton acres are planted in DP 555.
Monsanto is a massive influence on U.S. agriculture. In 2005, 83 percent of U.S. cotton was transgenic and 81 percent involved Monsanto traits. Those percentages have only grown and Monsanto's GM traits are being utilized in, among other “traited” crops, Bollgard cotton, Roundup Ready cotton, and the new Roundup Ready Flex cotton — all things farmers often laud.
This isn't the first time the companies have tried to merge. In 1998, such a move failed. Why is this attempt different?
“The market has changed dramatically in the last seven or eight years,” says Tom Jagodinski, president and CEO of D&PL. “Back then, our germplasm was on 75 percent to 80 percent of the acres. Now, we're on about 50 percent.
“There have been new market entrants into the cottonseed business, mainly FiberMax and Phytogen. FiberMax has gone from zero to 30 percent share in seven years.”
And on the trait side, “Bayer, Phytogen and others have launched new traits. So there have been new entrants in both the seed and trait business.”
While there has been strong pushback against the proposed merger, some say positives could result.
“When you have a giant in the technology arena merging with, at least in our area, the number one cottonseed company, there are advantages as far as research, technology and seed breeding,” says Eddie McGriff, Extension agent in Coffey County, Ga. “When those resources are brought together, it could mean the development of better seeds and technology.”
Agreed, says Ron Smith, Auburn University entomologist. “New technology could be delivered faster after a merger. And coming off last year, we're excited about things like drought-tolerant varieties. There's a real need for them. Further down the road, we'd like to see some genes that would deal with the plant bug/stink bug complex.”
Recent developments in the cotton industry along with the backdrop and uncertainty of the farm bill mean “the U.S. farmer will need every advantage he can get to be technologically ahead of the competition overseas,” says Jagodinski. “We've looked at what other companies — Bayer, BASF, Dow, Syngenta, Dupont, you name them — are working on for cotton. And the simple fact is Monsanto has the best technology in the market today and they're working on new technologies for tomorrow that we believe will give the U.S. farmers a further advantage.
“Our thought is we should put the best cottonseed company with the best cotton trait provider. That would allow certain efficiencies to be gained by being in the same house, so to speak.”
One reason speed-to-market is so important is “the need we have to compete in a global environment,” says John Raines, Monsanto director of public affairs.
“The second thing that's extremely important is (Monsanto's) commitment to cotton. Look at companies that support and are in the cotton business. We're solely focused on agriculture as a company. Many of the other companies that support and service cotton producers today don't have an ag-only focus.”
Despite such assurances, support for the merger often comes with caveats.
“Those opposed say a merger would create a really dominant force in the marketplace,” says Smith. “And I don't think there's any question about that. My argument isn't on the business side — I understand the opponents have legitimate concerns.”
Smith says there are certainly higher costs associated with the GM varieties. But he “was around when they weren't available and we spent more on in-season insect control than we're now spending on the technology. During much of my career, $80 to $100 per acre wasn't uncommon for insect control. We've forgotten those times.”
Steve Brown, Georgia Extension cotton specialist, says a possible outcome of a merger will be superior technology getting to the market quicker. However, “the bad side is at what price? Do you trust them on price? They'll say, ‘We must keep farmers in business.’ But our farmers are barely holding their noses above water as it is. We've not had a great run of years.”
What's really needed, insists Brown, is “viable competition” on both the genetic and seed sides. “That's what would really change the game. This merger would lead to a less competitive environment. Already Monsanto is the dominant (biotech) player and D&PL is the dominant seed company in Georgia.”
But proponents again dangle elusive, coveted traits. Want fiber-quality improvement genes quicker? How about new nitrogen-utilization technology that promises to lower farmers' costs? Sucking insect control?
Those are areas “that are very important to the American cotton farmer, particularly when there's 52 cent cotton and $4 corn,” says Jagodinski. And Monsanto is developing them.
Passionate detractors of the merger are easy to find.
“Don't forget: beating in the breast of every good capitalist is the heart of a monopolist,” says Neil Harl, Iowa State University Charles S. Curtis Distinguished Professor in Agriculture. “In order to have a competitive environment, an alert, insightful, aggressive, well-staffed regulatory agency, or agencies, is required. You must always have oversight in every viable economic and governmental model. Without it, excesses are inevitable.”
Harl, a well-known agricultural economist and analyst, has long felt competition was vital. But over the last 25 years, “I've been absolutely convinced that competition is the heart of our economic system.
“It's very clear that a country like Russia has people that work as hard as we do and are as educated as we are. In some ways, they even have more resources than we do and yet they have a pittance to show for it.”
The key difference between the two economies “is that at the heart of our free market system is competition. We must be vigilant and watch every merger/alliance or other type of amalgamation of firms. Most of those are designed, in one way or another, to reduce competition. Or, if it isn't their purpose, it's still the result.”
Also a staunch believer in vigorous competition is Diana Moss, vice president of the American Antitrust Institute (AAI). “Look, firms are profit maximizers. That's what everyone does and that's fine. The question is whether, by maximizing your profits, you're excluding competitors. Anti-trust laws are designed to promote and protect competition.”
A merger would be bad for farmers, says Bill Freese, an analyst with the Center for Food Safety, an advocacy group generally opposed to GM crops (see http://www.centerforfoodsafety.org/pubs/CFS-CTA%20Monsanto-DPL%20Merger%20Report%20-%20Final.pdf). The merger “will mean fewer choices, less innovation and, ultimately, will lead to increased prices. Without effective competition, a company can charge what it wants.
“You can see where this is going. A company can load a seed with technology that farmers don't necessarily want. But they pay those extra tech fees to get the improved yield capacity.”
What's “extremely critical” is for producers to realize their vulnerability, says Harl. “When concentration increases in the seed supply, for example, you know the farmers will end up paying more and more and more for seed. That's happened with cottonseed and will happen anywhere. It's a normal thing when concentration occurs.”
D&PL currently controls 51 percent of the U.S. cottonseed market. Stoneville, which Monsanto owns, is responsible for 12 percent. To facilitate the merger, Monsanto will divest itself of Stoneville. Even then, however, the company will have four times as much cottonseed under its control.
“We'll be selling a better asset than we bought two years ago,” insists Raines. “We've made a lot of investments in Stoneville and seed production, and have put a lot of focus in R and D in terms of better germplasm. And we'll sell a more robust company two years post-purchase.”
Monsanto is the “800-pound gorilla” in the biotech industry, says Moss. That means “no matter how you cut it, you have to deal with them. And with Monsanto sitting on 95 percent of the market, it's hard for rivals to compete.”
Don't blame Monsanto, says Raines. Long ago the company took a massive risk and is now reaping the rewards — rewards that ultimately benefit farmers.
“Monsanto began investing in biotechnology some 25 years ago. Since then, we've invested over $5 billion.
“The fact is that was a bet, a very risky bet (in the early 1980s). That's what's led to where we are today — we made a bet that panned out.”
Further, Raines says Monsanto spends approximately $2 million per day on research and development. That equates to “about $700 million per year. We're very focused (on providing) the farmer the right product based on their needs.
“If we then price those products, or don't have the appropriate value-share where the farmer feels comfortable buying those products from us, then we've got a broken business model. At the end of the day, if the farmer doesn't buy our stuff, we don't stay in business.”
Moss isn't convinced. Evaluating mergers, which is common for the non-profit AAI, “means you're looking forward and predicting the likely outcomes based on fact patterns in the market and what incentives the companies have to behave certain ways. Taking everything into account, this is what we see as most likely.”
Monsanto “obviously wants to move into seed … so they'll be vertically integrated. They'll have the whole supply chain covered all the way from the biotechnology down through the actual production of GM seed.”
Moss, an author of a white paper on the merger (see http://www.antitrustinstitute.org/archives/files/552.pdf), concedes that such vertical integration is sometimes good for consumers. But not in this case, she insists.
“If you're a rival biotech company, you're going to have a really hard time getting access to D&PL to sell your biotech traits. That's because D&PL will be integrated with Monsanto and that's where they'll get their technology. Half the market for biotech developers will just disappear.”
Now consider a scenario where you're a downstream market competitor of D&PL.
“You'll have a harder time getting access to Monsanto biotech. That's because Monsanto will have an incentive to keep you out of the market. They won't want competing seed companies with D&PL.
“From a competition policy perspective, the merger would result in what's termed ‘vertical foreclosure.’”
Jagodinski says such anti-trust concerns are confusing. “If they're talking about impairing competition, they're not looking at the facts. Look at what the market has done over the last seven years with new trait entrants — Dow and Bayer are launching their own traits. They also launched their traits stacked with Monsanto's.”
At the same time, Monsanto has adopted “a position of broadly licensing its traits to everyone. They've done that around the world, and I don't think they'll stop now.
“And there's new seed competition coming into the market. If there's a negative comment about this, they're obviously not addressing or considering the competitive situation in the market.” What does Moss see as the merger's likely effect on consumers?
“First, Monsanto will have more market power and be able to exercise it potentially by raising prices to farmers. Seed prices could easily rise for GM seed.
“Second, Monsanto will have absolutely no incentive to promote or produce conventional cottonseed. Monsanto is a biotech company. Conventional seed can take a hike. Farmers will have fewer choices in the types of seed they can plant.”
Not true, insists Jagodinski. D&PL does “all breeding work in conventional. Once we find a good variety, we put traits in it. We're still selling conventional seed. But, quite honestly, we can't run fast enough to give it away.
“I hear this complaint, but I was looking at data the other day that shows our conventional seed sales, over the last four years, have dropped to less than 10,000 units from 40,000 units. It's very expensive for us to offer it, but we still do because farmers want choice. But the fact is it just doesn't sell. And the conventional material we offer is the best we have.”
As for cottonseed prices rising post-merger, “I don't see that happening,” says Jagodinski. “There are a lot of efficiencies in this merger. Normally, when you have a merger, you'll see prices lower.
“I'm not saying (Monsanto) will do that. But I don't think (it's) betting on doing this merger and then raising prices.”
Cottonseed prices have gone up “because the cost of production has gone up. At the same time, when people look at the price of a bag of seed, they should look at it on a per-acre basis. That's because (A) we've gotten better over the last decade on what we put in the bag and (B) that's allowed farmers to reduce their seeding rates. They used to plant 3 acres per bag. Now, they plant as many as 8 acres per bag.”
Farmers' cost is just under $20 per acre for cottonseed, says Jagodinski. “They spend about $500 per acre to raise an acre of cotton. So, we're still a small portion of their total input costs.”
There is a reason few are willing to publicly back the merger, retorts Moss. After even casual study “people understand this is a big, potentially problematic merger. … (Proponents) can argue the merger will reduce costs and result in better coordination or produce better seed and get it to market quicker. They can say all sorts of things.”
But, to allow the merger, “they must argue there are no incentives to behave anti-competitively.”
No one, says Moss, can make the case that such incentives are absent. “That's why there hasn't been as much support for this deal as there's been concern.”
Awaiting a verdict
Back in Georgia, Steve Brown says the proposed merger has reached farmers' radar. “There are farmers unhappy with the merger, but there's been no collective effort to rise up to block it. Some have been vocal, and there was even some discussion about going up to D.C. to meet with the Georgia delegation. But there's no great groundswell. I think farmers believe this is beyond their control to do anything about. They've had little impact on this type of thing in the past.”
Moss says the merger concerns should be couched in the larger worries over the nation's food security. “It's one thing to have a merger in the aerospace industry. But the issue takes on a new importance and dimension when it's dealing with the food supply.”
Harl says the Department of Justice merger verdict is expected soon and offers a simple prediction and warning.
“Time will prevail and demonstrate to the American people that we were asleep when we allowed this concentration to proceed. That was bad policy and a bad idea. We've already made mistakes — let's not compound them.”
Asked if Democrats taking power in Congress is a new factor in how the DOJ is approaching the merger, Raines says, “I don't think it's had any effect. The DOJ has a rigorous set of guidelines they use to evaluate all mergers and acquisitions regardless of whether it's agriculture- or consumer-related.
“The only dynamic that's changed is in bringing people up to speed. You do have a different Congress and when people change, there are a lot of questions to address.”