Merger mania in world agrochemicals market

Agrochemical companies play a major role in shaping agricultural production. While there has been no significant increase in the $30 billion market in recent years, the shift towards genetic engineering – with about 90% of the genetically modified seeds marketed owned by pesticide companies – marks a new trend in consolidation. But a relatively static and fiercely competitive market has led to mergers in the industry with only seven companies now dominating 80% of sales: a figure expected to be reduced to five in the next few years. So who are the giants of the industry, and what are their strategies? Barbara Dinham reports.

For the agrochemical industry, 1999 was not a good year. After adjusting for inflation, sales dropped for the first time in almost ten years to US$29.6 billion, 3.5% lower than in 1998. According to the annual overview provided by industry analysts Wood MacKenzie, the only market where sales increased was China(1). 

    The 1999 market was affected by several factors. Low pest pressure, welcomed by farmers, provokes industry complaints of missed sales opportunities. But the decline in sales also reflects the plight of farmers suffering from a drop in commodity prices and falling farm incomes – at least some of which result from the globalisation of agriculture. In the US, the largest single market, the fall of 10% in sales also reflected the increased cultivation of genetically modified (GM) crops. While local factors are difficult to isolate, sales also dropped in Pakistan, the Middle East, Turkey and Africa. As the giant US and European markets for agrochemicals are no longer growing, companies have targeted Latin America and, more particularly, East Asia, where sales are now beginning to rise as the economy improves. 
    But the 1999 figures are not considered part of a trend, and the major companies expect sales to grow slowly from 2001(2). By early 2000 some companies were achieving record sales. 
A small number of companies dominate the industry. With the merger of AgrEvo (formerly Hoechst and Schering) and Rhône-Poulenc in 1999, nine companies accounted for 80% of sales (see table 1). Competitive pressures have fuelled consolidation as companies seek economies of scale to cover the global market and to generate funds for research and development(3). Two more mergers in 2000, when Novartis and Zeneca join to form Syngenta, and BASF and Cyanamid form a joint company, will reduce the number of leading companies to seven (see table 2) by the end of the year. 

Market consolidation – GM crops
Many farmers who saved on pesticides in 1999 are paying more for seeds, particularly in the big US, Canadian and Argentinean markets where GM crop plantings reached 39.4 million hectares in 1999. Nine other countries grew 0.5 million hectares between them(4). Although industry anticipates a slowdown in the meteoric expansion of the late 1990s, one study expects global sales of GM seeds to reach $2.9 billion in 2004, a growth of 13% on 1999(5), and Zeneca expects the market to reach $5 billion in 2005(6).
    The principle GM traits were herbicide tolerance, accounting for 71% in 1999, followed by insect resistant crops (22%), and crops that are both insect resistant and herbicide tolerant increased to 7%. Cotton farmers appear willing to pay substantial premiums for insect-resistant and/or herbicide-tolerant seeds(7).
    Taking a longer term view of the pesticide and GM seed market together, DuPont anticipates that these trends will lead to a combined market worth over $500 billion: high stakes indeed for the companies(8). Zeneca has estimated that Monsanto’s biotechnology sales will yield it $100 billion by 2015(9). 
    More than 23% of the seed industry is in the hands of agrochemical companies, primarily GM seed production (see PN44, p7.)(10). Almost all the major companies now market GM seeds. Only Bayer has resisted the trend, and this is primarily because its main products are insecticides (43%) and fungicides (28%), which do not lend themselves to the development of GM traits. Bayer believes that chemical products will still take 80% of a predicted $40 billion crop protection market over the next decade. Nevertheless, the company maintains close links with research establishments focusing on biotechnology, such as the Max Planck Institute, and collaborates with genomics companies.
    Farmers are concerned by the increasingly narrow range of crop varieties available as the seed industry consolidates. The world’s biggest vegetable seed producer, Seminis, for example, recently announced that as a result of increased competition it would drop 2000 varieties of vegetable seeds, or 25% of its global product line(11). 

The other 20%
About 16 companies share the remaining 20% (roughly $6 billion) of the global market, with a significant gap between the ninth and tenth companies.
    In the past it was thought that Japanese companies would muscle in on the sales of the top US and European companies, but most are heavily dependent on national sales. The two exceptions are Sumitomo – the largest Japanese company (ranking 12th globally) with sales of $675 million in 1998 – and Nissan ($287 million). North America and Europe account for over 50% of the overseas sales of both companies. The other Japanese companies in the top 25 – Kumiai, Sankyo, Nihon Nohyaku, Takeda and Hokko – all sell between 83-97% of their products nationally.
    Commentators have predicted that the generic pesticide producers – companies making off-patent products – would increase their share of the market. There is, nevertheless little sign of this shift. Five generic companies were ranked in the top 25 in 1998: Makhteshim-Agan (Israel), Nufarm (NZ/Australia), Cheminova (Denmark), Griffin (US) and Elf (France)(12). However a product being off-patent does not automatically mean that the main producer loses the lion’s share of the market: Zeneca, for example, is still the main producer of paraquat, whose patent expired over ten years ago. The major companies take a strategic view of generic producers, and are beginning to buy into some of these smaller or specialised companies. They may also licence them to produce actives. DuPont has formed a joint venture with Griffin, BASF bought MicroFlo to channel all its commodity pesticides, and Dow AgroSciences formed a joint venture with Cheminova. 

Uses and usage
Five crops account for half of all agrochemicals used worldwide according to the German agrochemical industry association IVA: cereals, maize, rice, soybeans and cotton. Herbicides now account for nearly half of the global market, and cotton accounts for 65% of insecticides used(13). 
    Outside the big US, European and Japanese markets, details of country-by-country agrochemical usage are not easily accessible. Information on the African market is particularly difficult to find. According to the UK industry association, the Crop Protection Association (CPA) (formerly the British Agrochemical Association) global sales by region in 1999 were shared as follows; North America 29.4%, Latin America 15.3%, West Europe 22.4%, East Europe 2.9%, East Asia (including Japan) 25.3% and the rest of the world (Africa, Middle East, India, Turkey, Pakistan) 4.7%. 

The search for new products
A driving force behind consolidation in the industry is the cost of research and development, typically around 10% of a company’s sales. Without this investment it is impossible to maintain a range of agrochemical products. Regulators require higher standards than in the past. Many products have come off the market not only because they are too hazardous, but also because the cost of registrations mean that companies will only support profitable products. 
    Both biotechnology and discovery of new chemical active ingredients requires long-term, costly research. Yet in spite of the focus on GM crops, all companies predict chemical pesticides will remain central to crop protection. The average rate of introduction of new active ingredients since 1980 has been 12.7 compounds per year. In 1997 and 1998 respectively, 19 and 13 new actives were introduced(14). The latest edition of the Pesticide Manual, the most comprehensive record of active ingredients, lists 759 actives available on the market(15).

Feeding the world?
Corporate strategies are primarily designed to maintain their hold on the agricultural market and increase their rate of return on investments. Industry suggests that only by increasing production on existing land through using higher chemical inputs can expansion be maintained in order to feed the world. But highly aggregated figures on food production and population growth need to be treated with enormous caution. More than enough food is produced to feed the present world population and poverty rather than food shortages cause food insecurity. In India farm harvests have increased annually for the past 12 years. According to the New Delhi-based Centre for Humanities, subsistence farmers rather than the Green Revolution areas generate most of the surplus. Official statistics show that the two main Green Revolution states of Punjab and Haryana together produced less than 18 million of the 203.04 million tonnes of foodgrain harvest in the 1999-2000 farming season(16). Globally, the greatest increase in crop area in 1999 was the non-food crop oilseed rape where production expanded by 3.3% in Canada and nearly 10% in the EU. 

Conclusion
While 1999 proved a slow year for the industry, agrochemical sales are likely to begin expanding from 2001. The research-based companies are confident that their investments in GM crops will bring increased profits in both the short and long term, but that pesticides will continue to meet the bulk of crop protection needs. These aggregated figures, however, provide little insight into whether pesticides are meeting the needs of most of the world’s food producers, or whether they are the best means of pest management, particularly for most farmers in developing countries. (BD)

This article draws heavily on information in Agrow Top 25, 1999, PJB Publications, Agrow Reports, 18/20 Hill Rise, Richmond, Surrey, TW10 6UA, UK, Tel. +44 (0)20 8332 8956, Fax, +44 (0)20 8332 8992, £350, 400pp. (Agrow offers its reports at half price to non-profit organisations).

References
1. CPA (formerly the British Agrochemicals Association), Handbook 2000, Peterborough, UK, 2000, p 14. Information provided by Wood MacKenzie.
2. Ibid.
3. Agrow Top 25, 1999 edition, PJB Publications Ltd, 1999, p35.
4. International Service for the Acquisition of Agri-biotech Applications (ISAAA), Global Review of Commercialized Transgenic Crops, 1999, www.isaaa.org/global%20Review%201999/briefs12cj.htm.
5. Agrow No 352, 19 May 2000 – GM seed sales to rise. Report on a study by the Freedonia Group.
6. Op. cit. 3, p.59.
7. Op. cit. 5.
8. Op. cit. 3.
9. Op. cit. 3.
10. RAFI, The Gene Giants: Update on consolidation in the life industry, RAFI Publications, Canada, 30 March 1999. 
11. Crop Choice News, 28 June 2000.
12. Op. cit, 3, p.36.
13. Agrow No. 354, 16 June 2000. 
14. Matthew Phillips and John McDougall, Crop Protection’s Changing Face, Farm Chemicals International, WOW 2000 Global, November 1999.
15. CDS Tomlin, The Pesticide Manual, British Crop Protection Council, 1999.
16. Ranjit Devraj, Agriculture-India: Food glut not from Green Revolution alone, article distributed by email, 11 July 2000.

[This article first appeared in Pesticides News No.49, September 2000, p10]