JANUARY 2019 SEEDWORLD.COM / 35 deals will lead to increased competition, but that is not to say that there will be a decrease of competition,” Stoerger says. “Increased competition was not a driver for these deals. Instead, the drivers were cost efficiencies and returns to sharehold- ers. The regulatory bodies around the globe have made sure that appropriate divestitures have taken place so that areas where there is tremendous overlap in the assets are removed, in part or whole, and sold into the market.” To analyze the impact that mega- mergers will have on corn, soybean and cotton seed prices, the Texas researchers looked at market factors that have a direct bearing on competition and its effects on prices. One of the most influential factors is contestability. A market is contestable if there is eco- nomic freedom for companies to enter and exit into the market with little to no sunk costs. Because of the threat of new entrants, existing companies in a contest- able market must behave in a reasonably competitive manner, even if they are few. Concentrated markets do not nec- essarily imply the presence of market power. Key requirements for market contestability are: (a) Potential entrants must not be at a cost disadvantage to existing firms, and (b) entry and exit must be costless. For entry and exit to be costless or near costless, there can be no sunk costs. If there are low sunk costs, new firms would use a hit-and-run strategy. However, if there are high sunk costs, firms would not be able to exit without losing a significant portion of their invest- ment. Therefore, if there are high sunk costs, hit-and-run strategies are less prof- itable. Established firms can keep prices above average costs and markets are not contestable. There exists substantial sunk costs in agricultural biotechnology and firms charge prices above marginal costs. The seed and chemical industries are not contestable; therefore, the threat of entry cannot be relied upon to keep profits at normal levels. Rapidly evolving and costly agricul- tural biotechnology innovations tend to limit entry. Investments in agricultural input markets are often risky, expensive and long-term. Using data from 1972-89, Bryant et.al. reports that research costs and pesticide regulatory costs negatively affected the number of companies in the industry. Smaller firms are affected more strongly by these costs than are larger firms. Increased concentration has led to firms controlling the major processes by which genetic manipulation occurs, thereby blocking use of those technologies by other firms. The capital needed to conduct the research required to maintain a prod- uct flow similar to the firms pressing for monopoly-like concentration levels is one of the main barriers to entry. Smaller firms are unable to maintain access to higher performing germplasm and would not be able to survive economically. Settling Up In May 2018, the DoJ announced a set- tlement agreement with Bayer AG that requires the company to divest businesses and assets collectively worth approxi- mately $9 million to BASF. In making the announcement, the DoJ said that without the agreed-to divestitures, the proposed merger would likely result in higher prices, lower quality and fewer choices across a wide array of seed and crop protection products. Under the terms of the proposed set- tlement, Bayer must divest its businesses that compete with Monsanto. These include Bayer’s cotton, canola, soybean and vegetable seed businesses as well as Bayer’s Liberty herbicide business, a key competitor to Monsanto’s Roundup herbicide. The settlement also requires structural divestitures to remedy the competitive harm that would result from the vertical integration of certain Bayer seed treatment businesses that compete with Monsanto’s leading seed businesses. Finally, to fully prevent competitive harm from the merger, the DoJ settlement requires the divestiture of additional complementary assets that are needed to ensure that BASF has the same innova- tion incentives, capabilities and scale that Bayer would have as an independent com- petitor including, most notably Bayer’s “digital agriculture” business. “Bayer and Monsanto approached the transaction in a conservative way,” Garrett says. “They proactively and pre-emptively offered concessions to the regulators by putting forth certain assets, and in some cases even their crown jewels." Looking to the Future According to calculations by Bryant et. al., the DuPont/Pioneer-Dow merger will increase market concentration. That will result in modest seed price increases. Average price increases for corn seed could be around 2.6 percent. For soybeans, the results are similar. Assuming no changes in marginal costs, the market-share weighted expected price increase will be 1.9 percent. According to the Texas A&M study, there is a 75 percent chance that the Monsanto–Bayer merger will increase cotton seed prices by more than 14.5 percent for Monsanto and 13.1 percent for Bayer. The market-share weighted expected increase in market price for cotton seed is 18.2 percent. As the seed industry heads into the 2019 crop year, some effects of the merg- ers are already being felt. ”Seed pricing has become very com- petitive with the mergers in the very near term,” says Independent Professional Seed Association (IPSA) CEO Todd Martin. “There is a lot of jockeying for position and market share, I believe this is short-term and is putting pressure on independent seed companies that drive competition. The danger is that near-term competitive pressure will cause compa- nies to cease business activities. The out- come in that scenario is less competition and higher prices to farmers.” SW “There is very much an interwoven web of licensing structures that are taking place across the seed industry ... As long as these stay intact, there is plenty of room for competition. It is only when those relationships start to crumble that we may start seeing some blockages and barriers to entry.” — Garrett Stoerger