Researchability of modern agricultural input markets and growing concentration.

Scientific discoveries in the fields of chemistry and genetic engineering have led to major and continuing improvements in agricultural productivity (Fernandez-Cornejo 2004; Just, Alston, and Zilberman 2006). Advances owe much to the application of science to chemical engineering, plant breeding, and genetic engineering of input attributes.

As the productivity of pesticides and seeds has increased, the concentration of these input industries has also increased. In the 1960s, over 70 basic manufacturers of pesticides were operating in the United States, but mergers and acquisitions have combined those firms into roughly eight major multinational manufacturers (Just 2006). Concentration has increased similarly in the seed industry. Until the 1930s, most commercial seed suppliers were small, family-owned businesses that multiplied seed varieties developed in the public domain (e.g., state agricultural experiment stations). With the development of hybrid corn and with greater intellectual property right protection, the number of private firms engaged in plant breeding grew rapidly at first. But consolidation has prevailed since the early 1990s. By 1997, the share of the U.S. seed sales controlled by the four largest firms reached 92% for cotton, 69% for corn, and 47% for soybeans (Fernandez-Cornejo 2004). On a crop-by-crop basis, the seed industry is more concentrated than the pesticide industry (Ollinger and Fernandez-Cornejo 1995), although pesticide markets tend to be more concentrated use-by-use.

Increasing concentration of these industries raises concerns about the impact of market power. Major crop production is increasingly dominated by inputs for which benefits can be appropriated by use of market power. Half of soybean operating costs and a third of corn operating costs are due to seed and pesticide inputs alone (USDA 2006b). A recent study shows that lack of competition in post-patent pesticide markets explains 30-50% of current prices (Just 2006). The U.S. Department of Justice has had similar anticompetitive concerns in the seed industry (Ross 2000).

Increased industry concentration has at least two competing effects presenting a social trade-off. A tendency toward monopoly pricing restricts markets, limits the social benefits of new technologies, and skews benefits away from farmers and consumers. However, economies in research and development (R&D) and other cost savings can arise from mergers and concentration (Williamson 1968). An additional possibility is that concentration leads to political economies of scale in influencing government regulations.

While economists have developed theory and methods to measure market power and analyze effects of concentration, the main limitation is the availability of data. Although several potential sources of data on modern agricultural input markets are available, they vary widely in accessibility, ranging from confidential proprietary data to public data collected by government agencies. In this paper, we first show how concentrated these modern input industries have become and then demonstrate potential economic impacts of concentration in these input markets. Next, we discuss the data needed for reliable economic analysis of these issues and the adequacy of existing sources of data. The need for additional public data is assessed and approaches for obtaining them are explored. We conclude with suggestions regarding how the influence of the American Agricultural Economics Association (AAEA) can be used to support such data collection efforts.

Concentration in the Seed Industry

Until the late 19th century, most U.S. farmers depended on seed saved from their own harvests and did not purchase significant quantities of commercial seed. From 1915-30, seed certification programs began to provide quality assurance, which led to an increase in the role of commercial seed markets. Until the 1930s, most commercial seed suppliers were small, family-owned businesses lacking the financial resources for R&D. Their primary role was to multiply and sell seed varieties developed in the public domain (Duvick 1998; McMullen 1987). Improved variety R&D was carried out almost exclusively by land grant institutions and other public agencies.

The development of hybrid corn varieties, with its inherent capacity to protect returns to private investment, transformed the U.S. seed industry. From 1930 on, the number of seed producers grew rapidly. Some 150 new companies joined some 40 existing seed companies in the production of hybrid corn seed. Some instituted in-house research and breeding programs. Early growth shifted corn production to hybrids so extensively that by 1965 over 95% of American corn acreage was hybrid (Duvick 1998). However, the ability of farmers to save nonhybrid seeds limited expansion into other seed markets (sorghum and sunflower are the only other hybridized field crops).

The Plant Variety Protection Act (PVPA) of 1970 (along with amendments and rulings) strengthened property rights and brought further significant increases in R&D expenditures and changes in seed industry structure (Fernandez-Cornejo 2004). Merger and acquisition activity began to expand. Traditional seed industry structure gave way to the entry of much larger R&D companies with extensive investments in sectors such as pharmaceuticals and chemicals including Ciba-Geigy and Sandoz (Kimle and Hayenga 1993). Private sector acquisitions expanded rapidly, and by the early 1980s several international firms were among the top seed sellers worldwide.

Beginning in the early 1980s, the development of biotechnology brought additional incentives for expansion and R&D in seed production. As early crop biotechnologies entered large-scale testing, further mergers, acquisitions, and joint ventures sought economies of scale to offset the high costs of biotechnology R&D. Chemical and seed businesses were combined, taking advantage of strong demand complementarities (Just and Hueth 1993), as evidenced most clearly by the case of glyphosate and glyphosate-tolerant soybeans. Still, many large chemical and industrial manufacturing companies that invested heavily in the seed business in the early 1980s have since exited (e.g., Royal Dutch/Shell Occidental Petroleum, Upjohn, and Celanese).

Although determination of precise market size and structure for the overall seed industry is difficult, estimates of four-firm concentration ratios (CR4) can be made for individual field crops. The corn seed industry has included many small firms since its inception (105 of the original 190 companies of the 1930s still existed in the 1990s) together with market leaders, such as Hi-Bred Corn (which became Pioneer), Funk Brothers, Dekalb and Pfister (Duvick 1998). Until the 1970s, small firms accounted for about 30% of the corn seed market but the four largest firms held 50 to 60% of the U.S. market in the 1970s (Fernandez-Cornejo 2004). By 1997, this CR4 ratio had risen to 69% with the strategic entry of multinational firms (table 1).

The public sector dominated development of soybean varieties longer than corn varieties. However, the transformation to private development was more rapid. In 1980, over 70% of the U.S. harvested acreage represented publicly developed varieties, but this share fell to 10% by the mid-1990s (Fernandez-Cornejo 2004). This privatization is apparently due to the strengthening of intellectual property rights and has led to a fairly concentrated industry with a CR4 ratio close to 50% (table 1).

Until the early 1980s, the two largest private cottonseed firms, Delta and Pine Land and Stoneville, controlled roughly 40% of the varieties planted. Several smaller public and private breeders each held between 5% and 15%. In the 1980s, new developments in cotton breeding improved seed varieties, causing the cottonseed market to expand as farmers found saving seed to be less economical. Large private firms rapidly replaced smaller firms and public institutions as suppliers. Delta and Pine Land led the market and, following acquisition of Paymaster in 1994 and Sure-Grow in 1996, held 73% of the market by 1997, leaving the second largest firm, Stoneville, with only 11% (table 1). By 2006, the CR4 ratio was more than 95% with Delta and Pine Land holding 51.2%, Bayer Crop Science 29.7% (including purchased subsidiaries), and Monsanto/Stoneville 12.2% (USDA 2006a).

Concentration in the Pesticide Industry

Major changes have occurred in the pesticide industry over the past four decades. The number of innovative firms has declined, and the industry has become international (Ollinger and Fernandez-Cornejo 1995). The number of basic pesticide manufacturers with U.S. registrations has fallen rapidly since the 1960s as a result of numerous mergers, with some of the most important occurring recently. For example, Syngenta represents the merger or acquisition of at least 45 pesticide manufacturers that grew out of some 25 that existed in the 1960s, with mergers since 1995 including Merck, Ciba-Geigy, Sandoz, Novartis, Zeneca, and G.B. Biosciences. Bayer Crop Sciences combines at least an additional 34 pesticide manufacturers that grew out of some 19 that existed earlier, with mergers since 1995 including AgrEvo, Aventis, Hoechst-Roussel, and Rhone-Poulenc.