This chapter introduces the main themes of the study. A competitive and innovative seed industry plays an important role in increasing agricultural productivity. In recent years, mergers and acquisitions have led to a further consolidation in an already highly concentrated industry, which raises questions about potential harmful effects on prices, choices, and innovation. At the same time, a wide array of public policies affect seed markets. Yet, not much information has been available so far as to the extent of market concentration and its potential harmful effects. This report provides new data and analysis on concentration in the industry, reviews the theoretical and empirical literature on effects of mergers, and presents several policy options.
Concentration in Seed Markets
1. Introduction
Abstract
Plant breeding has historically played an important role in increasing agricultural productivity. Continued investments in plant breeding will be essential to ensure a productive, sustainable and resilient agricultural system for the future. In recent years, important mergers and acquisitions have reshaped the global seed industry, further consolidating an already highly concentrated industry. This in turn raises questions about potential harmful effects on prices, choices, and innovation. Yet, so far not much information has been available as to the extent of market concentration and its potential harmful effects.
1.1. The importance of plant breeding
Global agriculture faces the triple challenge of raising productivity while ensuring sustainability and improving resilience. To achieve these goals, innovation in the form of high-performing varieties is essential.1 Historically, improvements in varieties have underpinned large gains in agricultural productivity across the world.2 For instance, the introduction of hybrid maize in the 1930s in the United States broke a decades-long pattern of stagnating yields, and enabled a seven-fold increase in the US maize yield over subsequent decades (Figure 1.1). Studies typically place the contribution of better varieties at 50% or more of this total increase in yield (Fernandez-Cornejo, 2004[1]).3
Figure 1.1. Maize yields in the United States, 1866-2016
Note: Yields for maize (harvested for grain).
Source: USDA (2017[2])
A study by the National Institute of Agricultural Botany (NIAB) in the United Kingdom showed that increases in UK cereal yields since 1982 were mostly due to better varieties, putting the relative contribution of genetic improvement at 88% for cereal crops and rapeseed (Mackay et al., 2011[3]).
In developing countries, the strong growth in agricultural output during the Green Revolution similarly depended in large part on the introduction of improved varieties. These were developed through the Consultative Group on International Agricultural Research (CGIAR) and national agricultural research services (Evenson and Gollin, 2003[4]). In the second phase of the Green Revolution, from 1981 to 2000, better varieties accounted for 40% of total production growth in all developing countries. Simulations suggest that without these improved varieties, per capita caloric intake in the developing world would have been 13%-14% lower (Evenson and Gollin, 2003[4]).
Even stagnating yields may hide an important contribution by plant breeding in preventing a further decline. Olmstead and Rhode (2002[5]) show that stagnating wheat yields in the United States between 1840 and 1940 required considerable efforts by plant breeders to introduce varieties resistant against a wide array of pests and diseases, and to breed varieties which could thrive in regions where wheat breeding previously did not take place. Olmstead and Rhode (2002[5]) estimate that wheat yields in 1909 would have been 46% lower if no new varieties had been introduced since 1840. Continued investments in improved varieties are thus not only important for productivity growth, but necessary to maintain productivity at current levels.
1.2. Consolidation in the global seed industry
Since 2015, three large mergers and acquisitions have transformed the global seed industry. In December 2015, Dow Chemical and DuPont announced their intention to merge, with the merger officially completed in September 2017. Only a few months earlier, the Chinese state-owned enterprise ChemChina acquired Syngenta, after Syngenta had rejected an earlier bid from Monsanto. In September 2016, Bayer announced a bid to acquire Monsanto. After receiving regulatory approvals, the merger was officially completed in June 2018, creating the world’s largest agro-chemical, seed and biotechnology firm.
These mergers consolidate an already highly concentrated industry. In the past few decades, a process of acquisitions and mergers led to the emergence of the Big Six (Monsanto, Syngenta, Bayer, DuPont, BASF, and Dow Chemical), multinationals with a strong position in agricultural chemicals and (with the exception of BASF) seed and biotechnology. The current consolidation wave couples firms with a strong position in the agro-chemical market (Bayer, Dow, ChemChina) to firms with a strong position in the seed and biotechnology industry (Monsanto, DuPont, and Syngenta, respectively). The combination of seed, biotechnology and agro-chemical activities in one firm has been a recurring theme in the past decades. However, the current consolidation brings this to an unprecedented level.4
At the same time, the precise level of market concentration is unclear, because detailed data on market shares in different countries and market segments are typically not available in the public domain (Fernandez-Cornejo and Just, 2007[6]). Some highly aggregate estimates have tried to combine sales data from the Big Six with estimates of the size of the global seed market to calculate measures of global market concentration (e.g. Heisey and Fuglie (2011[7]), ETC Group (2013[8])). However, global figures may under- or overstate the degree of market concentration in specific markets. An informed policy debate requires more detailed information.
1.3. Issues raised by increasing market concentration
Increasing concentration in seed markets leads to three potential concerns: Will increased concentration lead to higher seed prices for farmers? Will consolidation reduce innovation and R&D in the seed industry? Will consolidation reduce the number of choices farmers have when choosing varieties?
The answers are not clear a priori. In markets where firms are competing head-to-head, a merger could lead to an increase in prices, less innovation and a reduction in the number of varieties. However, mergers may create efficiency gains, especially where firms with complementary products or technologies are combined.5 If competitive pressures remain sufficient, these efficiency gains could in theory lead to lower prices and more innovation.
From the point of view of sustainability and global food security, the possible effects on innovation are particularly important. A reduction in innovation would mean a slower rate of improvement in varieties. Over time, the welfare losses of slower productivity growth in agriculture could easily dwarf any short-run welfare losses caused by higher prices. Hence, understanding the potential effect of mergers and market concentration on innovation is particularly important.
Innovation is a strategic tool in the competitive process as seed firms compete to introduce better-performing varieties. Indeed, the seed industry is exceptionally R&D intensive when compared to other agricultural input industries. As shown in Figure 1.2, the global seed and biotechnology industry invests around 10% of its revenues in R&D. The R&D intensity is typically higher than for smaller firms (Fuglie et al., 2011[9]).
Many fear that a reduction in the number of competitors could undermine the incentive for these large R&D investments. Several critics of the mergers have also argued that the current mergers are likely to hurt innovation by eliminating “parallel pathways” of R&D and reducing the opportunities and incentives to engage in pro-competitive R&D collaborations (e.g. through cross-licensing of genetic traits). It is also argued that the mergers may create integrated platforms of complementary varieties, traits and chemicals possibly leading to exclusive packages that do not interoperate with products from competitors. In turn, these platforms would raise barriers to entry for smaller firms as they would require new entrants to simultaneously invest in varieties, traits and chemicals. These barriers in turn could result in higher prices, less choice, and less innovation in the long run.6
Figure 1.2. R&D intensity of agricultural input industries
Note: Global R&D expenditures as a percentage of global sales, 2009.
Source: Fuglie et al. (2011[9])
This view is not shared by all observers, however. Proponents of the mergers maintain that the mergers will not necessarily reduce R&D and innovation, and may even encourage it. For instance, removing parallel paths in R&D is not necessarily problematic as it might remove redundancy in research efforts, thus making R&D potentially more efficient. Proponents have also argued that the feared reduction in R&D collaboration through refusals to cross-license is not likely as firms do not have an incentive to refuse cross-licensing. Moreover, to the extent that mergers lead to complementary platforms of varieties, GM traits, and chemicals, they might improve innovation by allowing better coordination between these different elements (Manne, 2017[10]).
Much of the discussion focuses on innovation through genetic modification (GM). Only a limited number of OECD countries have adopted GM technology at a large scale. However, similar issues exist for conventional plant breeding, as well as for the new plant breeding techniques (NPBT) which are currently emerging (see Schaart et al. (2015[11]) for an introduction). Bonny (2017[12]) provides a useful overview of the link between controversies over market concentration and the broader debate around sustainability and biotechnology.
1.4. Public policies affecting seed markets
Mergers and acquisitions are scrutinised by competition authorities. When a competition authority concludes that a proposed merger may threaten competition in a certain segment, it can block the merger or demand “remedies” such as the divestiture of parts of the merging companies. For instance, in evaluating the merger of Dow Chemical and DuPont, the European Commission (2017[13]) voiced concerns about competition in several markets for existing pesticides and certain petrochemical products. One concern was that the merger would reduce incentives to engage in innovation. The European Commission ultimately approved the merger, but made it conditional on DuPont divesting a significant part of its existing pesticide business, including its global crop protection R&D organisation.
Most of the public debate has focused on whether competition authorities should allow the mergers in the seed industry. But beyond competition policy, several other public policies affect seed markets. One example is public R&D on varietal improvement by national agricultural research services. Public R&D has historically played an important role in plant breeding, and in several countries continues to do so. Public R&D can also affect private-sector plant breeding through fundamental research, for instance on new plant breeding techniques.
Intellectual property rights for plant varieties and related inventions affect private-sector R&D in plant breeding. Historically, plant varieties did not qualify for intellectual property rights. Over time, a specialised system of intellectual property rights for plant varieties (known as plant breeders’ rights) has emerged. In some jurisdictions, new varieties can nowadays also be protected through the patent system.
Regulations also affect plant breeding. In addition to regulations regarding genetically modified organisms, the marketing of conventional seed varieties may also be subject to regulations; in the European Union, for example, new varieties may only be marketed after passing a test for their value for cultivation and use (VCU). Other examples of public policies affecting seed markets include the maintenance of public seed banks and rules that govern access to international genetic resources.
Given this broad range of policies affecting plant breeding, an important question is whether policy makers can take complementary policy actions to ensure a competitive and innovative seed industry, in addition to the decisions made by competition authorities.
1.5. Aims of this report
The first aim of this report is to present background information regarding the seed industry, including new estimates of concentration levels in different countries and crops, and the structural drivers of observed trends in concentration. A second aim is to shed light on the possible effects of mergers through a review of the theoretical and empirical literature as well as an empirical analysis using the new evidence on market concentration presented here. A third aim is to propose possible policy responses.
Chapter 2 presents an overview of global seed markets, including data on market size, growth, and composition in terms of regions and crops. Trends in technology (in particular genetically modified organisms), prices, and R&D are reviewed.
Chapter 3 examines structural changes in the seed industry. In addition to profiles of the main companies and a review of the recent mergers and divestitures, this chapter examines the causes of increasing industry consolidation. A case study of the US cotton seed market illustrates the structural changes highlighted in this chapter.
Chapter 4 reviews the literature regarding the impact of mergers on prices, innovation, and choices, reviewing both theoretical arguments and empirical evidence from the general economic literature. It also provides specific evidence where available.
Chapter 5 presents new evidence on seed market concentration across countries and crops. This chapter also contains evidence on market concentration in GM traits.
Chapter 6 builds on the new estimates of seed market concentration to explore the effects of higher market concentration on seed prices and innovation.
Chapter 7 turns to policy questions and proposes complementary policy responses for policy makers in light of the information contained in this report.
Seed markets are closely linked to a number of other topics. Some examples include the link between the seed industry and the agrochemical industry; the question of providing access to improved seeds in a developing country context; and broader questions around how plant breeding relates to questions of sustainability and different farming systems. Within the scope of this study, it was not possible to explore all of these questions. Instead, the main focus here is on an economic assessment of market concentration and related policy options. Several other topics are thus left for further research.
Notes
← 1. A note on terminology: A seed is the physical “carrier” of genetic information of a variety. Farmers choose between different varieties when buying seed, and plant breeders aim to develop improved varieties. A variety developed or selected through human intervention is also referred to as a cultivar (“cultivated variety”). Strictly speaking, the term “seed market” or “seed industry” encompasses both the development of varieties (plant breeding) and the physical production, distribution and sale of seeds. The focus of this study is primarily on plant breeding.
← 2. For historical introductions to plant breeding and seed markets, see Kingsbury (2009[30]) and Kloppenburg (1988[14]). For a discussion of the importance of biological innovations, including varietal improvement, in the early development of US agriculture, see Olmstead and Rhode (2008[246]).
← 3. A recent analysis by crop scientists from DuPont Pioneer estimates the contribution of “genetic gain” (i.e. varietal improvement) in maize yield increases at between 59% and 79% between 1930 and 2011, depending on the production environment (Smith et al., 2014[231]).
← 4. Market concentration has been a topic of debate in other agricultural input industries as well. See Fuglie et al. (2011[9]) for a global overview and Wesseler et al. (2015[26]) for the European Union. For industry-specific studies, see Bonanno et al. (2017[249]) on herbicides in the European Union and Hernandez and Torero (2013[250]) on the global fertiliser industry.
← 5. In addition, mergers may resolve problems of mutually blocking patent claims (“patent thickets”).
← 6. See, for example, Moss (2013[64]), Moss (2016[210]), Lianos & Katalevsky (2017[219]), and IPES-Food (2017[220]).