Feb 12, 2017
This winter, a big question at ag meetings has been the impact of ag business mergers.
Recently, US Farm Report shared insightful comments from an ag banking official who suggested farmers would not feel adverse impacts so much as the distribution chain.
I agree with the farmer part, but for a more unsettling reason: I believe ag mergers will have relatively little impact because we lost that war years ago. It’s hard to see the market difference between humongous and ginormous.
The seed market especially is already resembles monopolistic pricing. It is also suspiciously uniform across competitors. Seed is often our number two cost challenge after cash rents.
The evidence is on this chart. Seed costs, as a percent of revenue have risen from 6% to over 15% since 1990. More importantly, lately they show little sensitivity to commodity prices. Seed prices more so than any other input have exhibited impressive pricing power even as corn and soy prices have declined.
We’ve moved beyond traditional competitive forces for farm inputs, and returning to more competitive markets seems unlikely in the current regulatory environment.
The promise that even-larger firms will be more likely to bring new technologies to the farm faster says nothing about what those promised benefits will cost.
Indeed, an argument could be made that mergers could actually decrease the urgency for new products, as larger market share and profits won’t have to be won with better products, but simply by borrowing large sums and buying rivals.
While we keep telling ourselves the eighties can’t happen again because interest rates are so much lower, we need to look at what share of revenue we spent on interest compared to seed in the eighties.
It looks to me like we’re finding false comfort by focusing on the wrong expense as the major threat to our bottom line.