FarmPolicy

September 23, 2017

Bayer to Acquire Monsanto, Creating “Farm Giant”

On Wednesday, Bayer and Monsanto announced that they signed a definitive agreement under which Bayer will acquire Monsanto.

Thursday’s Wall Street Journal had two above the fold articles covering this development.

In the lede article in Thursday’s paper, Jacob Bunge and Christopher Alessi reported that, “Monsanto Co. agreed to sell itself to Bayer AG after months of haggling, in a $57 billion deal that would create an agricultural powerhouse and end the independence of one of the most successful and controversial companies in the U.S.

“If regulators approve the deal, which was unveiled Wednesday, the German pharmaceutical and chemical conglomerate would inherit Monsanto’s market-leading position in seeds and crop genes. That would tilt Bayer heavily toward agriculture in a long-range bet on high-tech crops to sustain a growing global population.”

The Journal writers noted that, “In the near term, the sale of St. Louis-based Monsanto, long a ubiquitous presence in American agriculture, spotlights a sagging U.S. farm economy that shows few signs of rebounding as farmers prepare to reap another in a string of record corn and soybean crops this autumn.

The Bayer-Monsanto union is the latest in a wave of tie-ups that have reordered the $100 billion global market in crop seeds and pesticides in the past 10 months. Major fertilizer producers also have pursued deals. Seed makers, having laid off thousands of employees and mothballed some research projects, regard mergers as a way to cut costs while more deeply integrating the development of new seeds and chemicals.”

The Journal article added that, “Bayer plans to fuse its prowess in pesticides—it ranks among the world’s largest suppliers—with Monsanto’s capabilities in seed genetics and biotechnology, which have allowed it to develop corn, soybeans, cotton and other crops that can survive weed-killing sprays and make natural toxins to repel bugs. The merged company would be the largest supplier by sales of both seeds and pesticides.”

This article also noted that, “While farmers prize biotech seeds for simplifying weed and insect control, they also have locked horns with Monsanto. At times they have bridled at the higher cost and the company’s efforts to protect its intellectual property; it sometimes has taken farmers to court when it suspected them of illegally saving and replanting its seeds.”

In the second article from the the front page of Thursday’s WSJ, Mr. Bunge reported that, “Behind a wave of multibillion-dollar mergers in the agriculture business is a moment of change in American farming. The dominance of genetically modified crops is under threat.

“Since their introduction to U.S. farms 20 years ago, genetically engineered seeds have become like mobile phones—multifunctional and ubiquitous. Scientists inserted genes to make crops repel insects, survive amid powerful herbicides, survive on less water and yield oils with less saturated fat, in turn eliminating farmers’ amateur chemistry. The U.S. Department of Agriculture estimates this year that 94% of soybean acres were planted with biotech varieties, and 92% of corn acres.

Today, farmers are finding it harder to justify the high and often rising prices for modified, or GMO, seed, given the measly returns of the current farm economy. Spending on crop seeds has nearly quadrupled since 1996, when Monsanto Co. became the first of the companies to launch biotech varieties. Yet major crop prices have skidded lower for three years, and this year, many farmers stand to lose money.”

The Journal article stated that, “Biotech farming has also shown limitations, given how certain weeds are evolving to resist sprays, forcing farmers to fork out for a broader array of chemicals. Some are starting to seek out old-fashioned seed, citing diminished returns from biotech bells and whistles.”

Mr. Bunge noted that, “Robert Fraley, Monsanto’s chief technology officer who helped develop the company’s earliest incarnations of genetically engineered crops in the 1980s, said farmers will remain faithful to biotech crops.”

“Kyle Stackhouse, who grows about 1,600 acres of corn and soybeans near Plymouth, Ind., is questioning the high-price seeds’ value,” the Journal article said, while adding that, “Mr. Stackhouse estimates he typically spends about $53 per acre on soybean seeds and $40 on pesticides, versus $83 he would have spent on biotech soybean seeds an additional and $24 on related crop chemicals. That puts him ahead about $14 per acre on costs. Mr. Stackhouse says he has planted no biotech crops for three years.”

The article concluding by pointing out that, “[Jim Kline, president of Kline Family Farms, which raises corn, soybeans and wheat near Hartford City, Ind.], in mid-September was repairing a combine as he prepared to harvest this year’s corn crop, each plant containing genes protecting against Roundup and root-chewing worms. But he has already placed orders to reserve seed for next year, when he anticipates that only about two-thirds of his cornfields will be sown with genetically engineered seeds.

“‘Commodity prices go down every day,’ Mr. Kline said. Since biotech farming isn’t working as well as it once did, he said, ‘why spend the money?.'”

Meanwhile, Leslie Picker, Danny Hakim and Michael J. de la Merced reported on the front page of the business section in Thursday’s New York Times that, “Don Halcomb, a 63-year-old farmer in Adairville, Ky., is expecting his profit to vanish this year, largely because of the confluence of falling crop prices and rising costs for seeds and other materials.

“The price of an 80,000-kernel bag of seed corn rose to $300 from $80 in the last decade, as the companies that produced them consolidated, he said. And with the recent decline in commodity prices, Mr. Halcomb said he expects to lose $100 an acre this year.

“‘We’re producing our crops at a loss now, just like the oil guys are pumping oil at a loss,’ Mr. Halcomb, who grows corn, soybeans, wheat and barley on his 7,000-acre family farm, said by telephone on Wednesday. ‘You can’t cut your costs fast enough.'”

Front page of the Business Section of Thursday’s New York Times

The Times writers explained that, “It is a common plight of farmers across the United States, with the global agriculture industry in a wrenching downturn. Because farmers have produced too much corn, wheat and soybeans, they have been forced to slash prices to sell their crops. They have also reduced spending on seeds, pesticides and fertilizer, which has eaten into sales at agribusiness giants, including Monsanto and DuPont.

In response, these companies have sought multibillion-dollar deals to cut costs and weather the industry’s storm. Four major agribusiness mergers have been announced in the last year. The latest is Bayer AG’s $56 billion takeover of Monsanto — the largest acquisition of 2016 — announced on Wednesday. Every merger creates the possibility of higher costs for farmers.”

The Times article stated that, “Bayer and Monsanto said they planned to cut about $1.2 billion worth of costs as part of the deal, helping to improve efficiency.”

The trio of Times writers added that, “Christine Hamilton manages a farm of more than 12,000 acres in Kimball, S.D., growing crops like corn and operating a ranch. She said that if the deal can pass the antitrust screening, then maybe it could actually help farmers.

“‘I understand how companies need to get bigger in order to be competitive,’ she said. ‘As we are in a low part of the cycle, anything that might have a chance of reducing our input prices would be great.'”

In a similarly based look at the potential impact of large agri-business deals, Christopher Doering reported on the front page of Thursday’s Des Moines Register (picture, right) that, “Iowa farmers are anxiously waiting to see if they will be helped or harmed by the purchase of seed giant Monsanto Co. by Germany’s Bayer AG — a deal that could shrink competition and increase prices, but also raises the prospect of better seeds and chemical products that could bolster their profits.”

The Register article indicated that, “‘It’s mixed emotions for all of us in farming and agriculture,’ said Ray Gaesser, a corn and soybean producer in Corning, Ia., who has been farming since 1967. ‘We definitely need new traits. Finding the best avenue to get that done is what we should be after, but at the same time we’re concerned about the consolidation and being down to three or four majors instead of six we had even a year ago.'”

James F. Peltz reported on the front page of the business section in Thursday’s Los Angeles Times that, “Farm profits are forecast to drop for the third straight year in 2016 to their lowest level since 2009, according to the U.S. Department of Agriculture.

“In turn, spending on seeds and pesticides as been flat or down in the last three years, the agency said.

“The deal may also be the catalyst needed to start a new green revolution where investment in R&D in seed and crop-chemical combination solutions could significantly increase global crop yields,” said Christopher Shanahan, agriculture and nutrition director at consulting firm Frost & Sullivan.”

With respect to the regulatory aspects of the Bayer/Monsanto deal, Reuters writers Diane Bartz and Greg Roumeliotis reported today that, “U.S. Senate Judiciary Committee Chairman Chuck Grassley has called a hearing next Tuesday to scrutinize the wave of consolidation. Farmers in Iowa, the Republican senator’s home state, are worried that seed and chemical costs are rising while grain prices are near their lowest levels in years. Farm incomes have plunged.

“Senator Bernie Sanders, who recently ended a run for the Democratic presidential nomination, called the deal ‘a threat to all Americans.’

“‘These mergers boost the profits of huge corporations and leave Americans paying even higher prices,’ he said.”

The Reuters article added that, “Senators Mike Lee and Amy Klobuchar, the two top antitrust lawmakers, also expressed concern. ‘The transaction has the potential to result in a significant loss of competition and reduced incentives and ability to innovate, thereby raising prices,’ said Lee, a Republican from Utah.”

And Jacob Bunge reported yesterday at The Wall Street Journal Online that, “To secure its deal to buy Monsanto Co. for $57 billion, Bayer AG will require approvals from a host of government regulators already scrutinizing a wave of consolidation in the agricultural sector.

“While Monsanto’s seed-focused business doesn’t vastly overlap with Bayer’s pesticide-heavy agricultural franchise, combining two of the world’s largest farm suppliers will test the tolerance of farmers and politicians already wary of multibillion-dollar deals to merge other top players in the $100 billion global market for seeds and pesticides, while fertilizer producers also consolidate.”

Mr. Bunge noted that, “The companies have had ‘some initial contacts with regulatory agencies describing what this combination would be about,’ Bayer Chief Executive Werner Baumann said on a call with investors after the deal was announced. ‘We have so far received encouraging feedback but nothing beyond that.’ He said regulatory filings will now begin.

“Monsanto CEO Hugh Grant said on the call that between the two companies, ‘the overlap is quite small, with a few obvious exceptions.’ One area of overlap frequently cited as possibly prompting divestitures is seeds. ‘We feel quite good’ regarding regulatory approval, Mr. Grant said.”

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