Merger mania is the name of the game for crop inputs

M & ALon Swanson, Wells Fargo Sector Manager, Crop Inputs and Feed
Chris Eggerman, Wells Fargo Sector Analyst, Crop Inputs and Feed

Mergers in the Food and Agribusiness industry have been taking place for decades as farmers, suppliers, and processors have worked to improve efficiencies in effort to increase their bottom lines.

I remember when my Dad “merged” his farm with my Uncle Evert’s farm operation so they could share their harvesting equipment. The purchase of a new combine at a price tag of $300,000 made far more sense when it could service 2,000 combined acres rather than 1,000 acres, therefore spreading this capital expenditure across more acres.

Additionally, my father and my uncle were able to take advantage of inexpensive labor – myself and my cousins. While my family’s merger didn’t approximate that of the $66 billion acquisition/merger of Bayer and Monsanto, it was based on the same concept.

Let’s take a look at the recent large mergers, examine what’s driving these, and speculate on what else might be on the horizon. Additionally, we’ll rank the top impact − fertilizer, chemical, or seed − according to how the current proposed mergers will influence pricing for the producer.

Recent mergers

  • Dow/DuPont – The $130 billion Dow and DuPont merger, announced in December, is expected to become final in late October or early November before the combined company proceeds with splitting into three operations – agriculture, material sciences, and specialty products across the next two years.
  • Bayer/Monsanto – Germany-based chemical and pharmaceutical firm, Bayer, announced in mid-September that it is acquiring U.S.-based agricultural seed and chemical firm Monsanto for $66 billion, or $128 per share. The two companies have been in talks since at least May, when Bayer made an initial offer of $122 per share. Together these two companies account for $67 billion in annual sales, and will be the world’s largest seed and crop-chemical company should their deal be approved.
  • ChemChina/Syngenta – In February 2016, Syngenta AG announced ChemChina’s interest in acquiring their company, in a deal valued at over $43 billion. This deal was termed the largest-ever, foreign deal offered by any Chinese company. The Committee on Foreign Investment in the U.S. (CFIUS) reportedly approved the acquisition in August. If the deal successfully closes, it will give Chinese companies access to the North American market, where Syngenta claims to have widespread existence through the pesticides and seeds markets.
  • Land O’Lakes/United Suppliers – Land O’Lakes, Inc. and United Suppliers, Inc.’s seed and crop protection businesses have now merged. The new entity will do business as Winfield US. Under the merger, Ames, Iowa-based United Suppliers, Inc. joins Arden Hills, Minnesota-based Land O’Lakes, Inc.’s crop inputs business. A second step will merge the crop nutrient business.
  • Agrium/Cargill – Agrium, Inc. announced in July a binding purchase agreement between its Crop Production Services (CPS) and Cargill AgHorizons for the acquisition of 18 ag-retail locations with annual revenues in excess of $150 million.
  • Agrium/Potash – Agrium, Inc. and Potash Corp. of Saskatchewan announced in September that they are merging. If approved, the merger of the two companies that account for a combined 56% of North American fertilizer production capacity for potash, 21% for nitrogen, and 13% for phosphates, reportedly will close in mid-2017.

The above are the major mergers in the crop input industry over the past year. As a subset to this, there have been numerous regional cooperative mergers: Pinnacle Ag has acquired several regional based input suppliers with the goal of going public at some point. Also, countless equipment dealer consolidations have occurred.

 
Largest Crop Protection and Seed Manufacturers

Source: ETC Group

 

What’s driving the accelerated pace of these mergers?

All mergers are financially motivated. Crop producers enjoyed increased revenues from 2005 to 2012 as a result of the ethanol-driven rise in corn prices and the rapid growth in China’s soybean imports, coupled with improving crop yields during most of these years. The chart below illustrates this growth.

 
U.S. Cash Receipts Grains Oilseeds and Cotton

Source: USDA

 

As the total revenue grew larger, the production costs also grew as input suppliers grabbed their portion. Initially these costs grew in terms of dollars, but the percentage of total gross income stayed the same. Subsequently, as commodity prices dropped significantly, crop input suppliers were reluctant to reduce prices, so they held on to a larger percentage of the shrinking revenue. Since then, with declining profits and pressure to churn out new products faster, competition has increased and there is a need to reduce costs and increase efficiencies. So, this has created the incentive for businesses to combine or merge. The graph below illustrates this cost trend with respect to rent, fertilizer, machinery, seed, and chemicals.

 
Percent of Yield Spent

Source: Univ. of Minnesota

 

What’s next?

While not defined as a “crop input,” the primary area in which farmers have cut back over the past few years has been equipment. Rather than purchase a new planter, combine, or tractor, they have kept their older equipment with hopes of making them last a few more seasons. This decision has definitely had an impact on overall machinery sales, and should also drive the next wave of mergers. As mentioned earlier, dealerships have already been merging. As an example, Van Wall Group acquired 12 dealers in the past four years. However, now the manufacturers are also beginning to merge, and some have laid off percentages of their workforce at manufacturing facilities.

  • Deere & Co. purchased Hagie Manufacturing (high-clearance sprayers)
  • Deere & Co. purchased Bauer Built (ultra-wide planters)

This trend will likely continue, and also will include combinations/mergers of high technology following recent applications such as self-driven tractors, along with variable rate and variety seed planters. Examples of this already occurring include:

  • Deere & Co. purchased Monosem, a European precision planting company.
  • Deere & Co. and The Climate Corporation, a subsidiary of Monsanto jointly purchased Precision Planting LLC (an equipment business) from Monsanto.

Ranking the crop input in terms of producer impact

As mergers continue, competition is reduced, allowing the survivors to raise prices. Because chemical companies now own the crop seed rights, the first two could be interchangeable.

  1. Chemicals – The top three companies accounted for 51% of sales in 2015.
    The chemicals portion of the crop input sector could see the most significant impact. Availability of chemicals and seed will not decline due to the aforementioned mergers, but the impact on technological advances may be the primary result. As fewer companies compete for sales, the research and development is likely to be curbed. Coupled with increasing regulatory oversight and related costs, this may force these companies to move resources away from the development of new and impactful products. This has already led a movement back to older chemistries to combat glyphosate (Roundup Ready) weed escapes.
  2.  

    Seed Family Tree
    2016 Seed Family Tree (click to enlarge)

    Source – Cornland Consulting via Farm Journal
  3. Seed – The top two companies accounted for 70% of corn seed, and over 61% of soybean seed in 2015.
    Over time, all the independent seed companies listed in the graphic merged with, or were acquired by, the six corporations on the left of the graphic. Technology − Roundup resistance, corn borer resistance, drought tolerance − has been the primary driver to increase seed costs over time, but the deteriorating competition has also driven prices higher. While farmers have become more selective and efficient with their seed purchases by varying varieties and seed populations across the field, decisions to purchase will be dependent on the probability of higher yields or fewer required passes across a field for weed control in order to achieve a higher return per acre.
  4.  

  5. Fertilizer – The top three producers represented between 65% and 95% of production capacity for the N, P, and K nutrients as of 2015.
    There has been a dramatic shift back to North America for fertilizer production in recent years due to significantly lower natural gas prices. This, coupled with the stronger dollar fueling imports, has resulted in an ample supply and much lower prices. There will likely continue to be mergers of fertilizer companies in an attempt to gain efficiencies and market control. However, the supply side, including the global aspect, will likely result in plenty of fertilizer on the market and continued low prices, thereby limiting the extent to which farmers are affected by consolidation within the industry.

In conclusion, the current economic environment in the crop input world has led to a flurry of mergers and acquisitions as corporations attempt to grow quarterly earnings for their stockholders. The base inputs will certainly be available for crop producers, but technological advances and associated higher costs, may limit the level of advances enjoyed in the past. This outcome is even more likely if low commodity prices persist, causing farmers to focus more on family-related mergers, or at least to think twice about buying the higher-value products available from input suppliers.

Lon SwansonLon Swanson, Sector Manager, crop inputs and feed, is a member of Wells Fargo’s Food and Agribusiness Industry Advisors group and has a primary focus on the Crop Inputs and Feed industry sector across North America.

Lon joined Wells Fargo in April of 2002. Previously, he worked for Bank of America for 15 years in the Trust Department as a Farm Manager and Midwest Regional Supervisor. He began his professional career with Oppenheimer Industries as a farm manager following college.

Lon received a Bachelor of Science Degree in Agricultural Economics/Animal Science from the University of Nebraska in 1984. He also earned an MBA from Baker University in 1992.
Professional credentials include a Certified Trust and Financial Advisor (CFTA) since 1992 and Accredited Farm Manager (AFM) since 1991. He has also has maintained a Kansas Real Estate License since 1994. Lon also was raised on a crop and livestock farm in northeast Nebraska.

 

Chris EggermanChris Eggerman is Sector Analyst within Wells Fargo’s Food and Agribusiness Industry Advisors group and covers the Grains and Oilseeds, Crop Inputs/Feed, and Forest Products sectors.

Chris joined Wells Fargo in 2016. Prior to Wells Fargo, he spent 10 years with Informa Economics managing feed grain and oilseed analysis with responsibility for long-term supply, demand, and price forecasting for U.S. and world crops. At Informa, he also served as a Senior Commodity Analyst with responsibility for analysis of U.S. and world oilseeds, protein meals, and vegetable oils. In advance of Informa, Chris was a research assistant within the Agricultural & Food Policy Center of Texas A&M University, where he developed a stochastic model of Texas crops to forecast state-level farm income and analyze the impact of rising fuel prices on state-level farm income.

Chris earned his B.S. in Agribusiness from Missouri State University in Springfield, MO, and his M.S. in Agricultural Economics from Texas A&M University in College Station, TX. He was raised on a row-crop, dairy and beef farm in southwest Missouri and Chris offices in Overland Park, Kansas and his geographic coverage is all of North America.