Are you kidding? Only $45 Billion?

by Glenn Caleval
Views expressed reflect the author and do not represent the views of FNA. The author is solely responsible for the content.

As Reuters reported this past Friday(1), Monsanto made a move to buy Syngenta for $45 Billion U.S. Syngenta dismissed the offer as woefully insufficient.

Little wonder given that Syngenta views their own $15 Billion in 2014 sales and gross profit of just shy of $7 Billion as unacceptable anomalies that need to be significantly increased. They are on a path of a billion dollar cost reduction plan relying on their massive purchasing power to drive down costs and drive up efficiencies. And they are leveraging their capital base not to be sold, but to pursue a sales target of $25 billion within 10 years.

It’s interesting how the trade press compares the two giants, characterizing Syngenta as a “crop protection chemicals business” (2) and Monsanto as having the “leading position in seeds, crop traits, and information technology.” (2) The Wall Street Journal headlined its story, “Monsanto Makes Bid to Go Big in Pesticides.” These major media are reporting as if Monsanto is a bit player in agriculture chemistry. Presumably they’ve never heard of Monsanto’s RoundUp family of products or Syngenta’s comprehensive seed portfolio.

Short of outright buying one another, the big chem / seed companies have been building business alliances for years, to maximize the revenue they capture from the agriculture value chain, i.e. their share of the value of your crop. Syngenta and Monsanto are not new to the dance as they created a global business alliance in May 2008 (7). Monsanto’s alliance with with BASF dates back to 2011 (4). They entered a business alliance with Dow Agro in April 2013 (3). And still in April 2013, Monsanto inked an alliance with Bayer Crop Science(6).  Monsanto and DuPont created their own in March 2013(5). The other companies also built alliances with one another, so we really have a network of interlocking business alliances, all highly effective at maximizing shareholder value by leveraging pooled assets to earn higher revenue from farmers.

The point is that business alliances are exceedingly common in agriculture. It’s just that they are common among suppliers, not farmers, and no competition watchdogs anywhere bat an eye. So that when suppliers talk about “cooperation in the value chain,” boy do they mean “cooperation.”

There is nothing secretive or shady going on. The efforts are clearly to align one another’s capital and costs in ways that multiply opportunities for everyone in the alliance. I won’t have to spend money on building intellectual capital as would be required if I want to compete with seed traits you have already obtained or created. And you won’t have to spend money to compete with me on new chemistry that I have already bought or created. Instead we’ll do a deal that makes competition on those things unnecessary and maximizes our positions together.

This all should drive home that a key strategy for farmers is to continue to build their own farm business alliance. We can tilt at windmills and curse the tide – I often do – but ultimately only market power matters. Farmers maximize their market power by aggregating their purchasing power and leveraging their enormous capital base. As the supply industry so well demonstrates, both of those factors can produce outstanding results when properly executed.

(1) Reuters, May 8, 2015
(2) Chemical & Engineering News, May 11, 2015
(3 )Monsanto – Dow Agro
(4) Monsanto – BASF
(5) Monsanto – DuPont
(6) Monsanto – Bayer
(7) Monsanto – Syngenta