4 I EUROPEAN SEED I EUROPEAN-SEED.COM EDITOR’S MESSAGE A griculture has for a long time been a sector of the economy that was more resistant to the capitalist logic of accumulation than most others as it poses a number of challenges to this process. Production typically requires large amounts of land, involves long periods of time, and is highly unpredictable, due to natural forces such as weather, pests and the perishable nature of food. Post-World War II technologies and research have succeeded in increasing the potential to extract profits from agricul- ture. And the commercial seed industry in the last 40 years has transformed dramat- ically. From a competitive sector of agri- business, composed primarily of small, family-owned firms, it has shifted to an industry dominated by a relatively small number of transnational corporations. And in the past 18 months, three mega deals were announced that will fur- ther shake up the agriculture and seed industry as we know it. In the most recent of these three deals, Bayer is pursuing a 66 billion USD takeover of Monsanto. Shortly before that, ChemCh i na announced a 44 billion USD takeover of Syngenta and last but not least, Dow Chemical and DuPont are in the process of a merger in a 130 billion USD deal. In general, the level of concentration within an industry refers to the degree to which a small number of firms are respon- sible for a major portion of the industry's total production. And if the level of con- centration is low, then the industry is considered to be competitive. However, if the level of concentration is high, then the industry is likely to be viewed as oli- gopolistic or monopolistic. One way of looking at the level of concentration is using the ‘concentration ratio’, which, in economics, is a meas- ure of the total output produced in an industry by a given number of firms in the industry. The most common concen- tration ratios are the CR4 and the CR8, which means the market share of the four and the eight largest firms. The problem with this approach is that the definition of the concentration ratio does not use the market shares of all the firms in the industry and does not provide the distri- bution of firm size. It also does not pro- vide a lot of detail about competitiveness of the industry. The concentration ratios just provide a sign of the oligopolistic nature of an industry and indicate the degree of competition. A better way and more commonly used method of measuring concentration is the Herfindahl-Hirschman Index (HHI) which calculates the level of concentra- tion by squaring the market share of the fifty largest firms in an industry. And the formula it uses to calculate the level of concentration is the following: HHI = s12 + s22 + s32 + ... + sn2 , where ‘s’ is the market share of the each firm expressed as a whole number, not a decimal. And extrapolating from there, a monopoly would therefore have the larg- est possible value which is 1002 = 10000. The HHI for a highly fragmented industry would be close to zero. Most regulators generally consider markets in which the HHI is between 1,500 and 2,500 points to be moderately concentrated, and consider markets in which the HHI is in excess of 2,500 points to be highly concentrated. And as a gen- eral rule, mergers that increase the HHI by more than 200 points in highly concen- trated markets raise antitrust concerns. However, experience tells us that it CONCENTRATION EVERYONE! A CLOSER LOOK AT WAYS TO DETERMINE WHEN MARKET SHARES BECOME A CONCERN is not as easy as it may seem because reality (as always) is a bit more complicated than on paper. There are several limitations to the application of this method to calculate concentration ratios. First of all, there is foreign production where concentration ratios often fail to fully incorporate the revenue from foreign compa- nies, thus overestimating the concentration of a domestic industry and underestimating the impact of foreign goods on competition. Secondly, one needs to take into account the ease of entry. An industry may have rel- atively few participants, but low barriers to entry. In such cases, a concentration ratio will overstate the power of current suppliers. One also needs to consider that con- centration ratios often do not factor in the elasticity of demand and the availability of substitutes. Many highly-concentrated industries (metals, airlines, et al) are con- strained by the availability and cost of sub- stitute products and services. And then there is the problem of impre- cise definitions. A narrowly-defined industry will appear to be more concentrated than a more broadly-defined industry. Suppose we were looking at concentration within the tomato industry. Should the market be simply assessed as "tomatoes", or do we break that down further into “determinate types”; “indeterminate types”; "beef toma- toes", "cherry tomatoes", "San Marzano’s", etc.? Especially on the vegetable seeds side of things, it is obvious that within each crop species there can be numerous different types, each with their own market leader and varying rates of market share. It is crucial that regulators take all such factors into account when assessing the level of concentration. Marcel Bruins editorial director, European Seed mbruins@issuesink.com Editors note: At press time, the EU approved the deals between Dow and Dupont and between Syngenta and ChemChina. ChemChina has won U.S. antitrust approval to buy Switzerland’s Syngenta AG. Marcel Bruins