Thursday, 22 September 2016

Wake up and smell the fertilizer? Big changes ahead for agribusiness

High tech solutions have taken much of the
sweat out of the modern farmer's routine
Agribusiness is big business for several reasons. Most obviously, there are over 7 billion people on this planet and they all consume food that someone, somewhere has grown.  Producing more food, better food and cheaper food is therefore a market that will likely continue for as long as the human race continues to exist.  Food production generates research into other areas too, such as making crops resistant to pests, diseases and the vicissitudes of the weather. Humans are not the only consumers either: domestic animals must be fed, pastured and generally well looked-after too.

This Cipher Snapshot focuses on agribusiness and on the continuing consolidation of the field as the number of players shrinks further. Who owns the patents, and where? How is the balance of power tilted in markets for seeds and fertilisers?  Who are today's successes -- and tomorrow's possible winners?  To help assist you in forming your own opinion and drawing your own conclusions, read on ...


The ‘Big Six’ to be the ‘Fantastic Four’?
• Agrochemical companies increasingly patent in seed technologies
• M&A activity would strengthen companies’ territorial coverage
• DuPont’s and Monsanto’s presence in NUE technologies is very strong
A lot has changed since humans began farming back in 10,000 BC or thereabouts. At the beginning of the previous century an overwhelming proportion of the global population were farmers. In contrast, agriculture today only makes up for about 4% of employment in developed nations.

Scientific developments in crop protection have been especially striking. While the seed market was dominated by 30 companies back in the 1970s, today just three companies -– Monsanto, DuPont and Syngenta -– control the majority of the seed market. Together with Bayer, Dow Chemical and BASF they occupy an even stronger position in the overall crop protection market. Few industries have undergone such a rapid consolidation, but the market is going to become even more concentrated as ‘the Big Six’ are about to become four.

A lot can be understood of the current playing field by taking a historical IP view. Breakthroughs in crop protection research during the '70s coincided with the introduction of stronger intellectual property rights leading to companies claiming ownership of new evolutionary directions in gene expressions. These developments marked the start of an intensifying M&A activity in the agribusiness sector.

The first wave of M&A in the 70s-80s was mainly led by pharmaceutical and petrochemical companies. However, the largest structural consolidation begun in the '90s when chemical companies saw pesticide sales declining due to new genetically modified seeds. Chemical companies Dow, Bayer and BASF were the leading acquirers of several seed companies. The trend continues as seen in Figure 1 with seed technology patent portfolios growing larger and faster than agrochemical portfolios since 2000.

Over the past year, three major M&A deals have been disclosed, all involving at least one of the ‘the Big Six’; DuPont and Dow Chemical are merging; ChemChina is acquiring Syngenta; and Bayer is in the process of acquiring Monsanto. Figure 2 shows the portfolio size of these potential M&A cases relevant to agrochemical and seed technologies. If all were to get regulatory approval, it would put Bayer Monsanto in a proprietary throne both in seed technologies and agrochemicals taking the lead over what is left of the Big Six.

From a technological perspective the merger of agrochemical and seed companies has undoubtedly been a strong trend, but what led to these M&As to emerge? Part of the answer may lie in the companies’ geographical patent coverage.

Figure 3 displays the companies’ territorial coverage. ChemChina and Bayer have a relatively low US coverage and will -- with their acquisitions of Syngenta and Monsanto -- respectively gain a stronger US coverage. DuPont and Dow have a fairly similar profile with the exception of DuPont’s strong US coverage and Dow’s strong presence in APAC. Clearly there are some dissimilarities to synergise and leverage.

While diving into the past and present industry developments sets the current scene, the future also tells a compelling story. The genetic modification technology field of increasing the ability of plants to absorb nitrogen (NUE) is deemed a highly potent solution to a global agricultural productivity and waste problem. In Figure 4, nine companies -– five seed, three agrochemicals and one fertiliser –- are analysed in relation to NUE in a landscape view showing relative growth and size. What stands out is the large presence of “the Big Six”. Especially Monsanto and DuPont show large shares in the technology with one increasing its share and the other decreasing.

If genetically modifiable NUE becomes commercially viable in the near future, the fertiliser companies will be lagging behind. With a technology that will reduce the need for their products, it looks like history could be repeating itself –- only this time with fertiliser companies.

This is a slightly amended version of a post that appeared last month on the Aistemos website, here.

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