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Buying Agriculture Anywhere – a Primer

August 25, 2017
In 2015, six companies dominated the seed and agricultural chemical markets: BASF and Bayer from Germany, Dow Chemical, Dupont and Monsanto from the United States, and Syngenta from Switzerland. Their combined pest control and seed business generated over 60 billion dollars in revenue. [1]

Yet, just one year later the Big Six became a proposed Big Four as these massive players attempted to further merge with each other or other foreign entities. [2] Although the legal hurdles for the consolidation have not yet been cleared, the attempts themselves reveal the drivers of recent international acquisitions of agriculture assets. These drivers include national security, resource retention, bargaining power, and long-term strength all of which have important policy implications for countries and regulators.

Types of Assets Being Purchased

To understand the purposes and implications of international agricultural assets, it is important to understand what types of assets are being purchased. The first asset is simple – land in its direct form. In fact, the world’s wealthiest nations dominate the world land trade with China, the United States, and the United Kingdom leading the way. [3] Although only an estimated .75% to 1.75% of the world’s agricultural land has been exchanged through international deals, it can still have profound affects regionally. In the South West United States for example, Saudi Arabian companies have bought tens of thousands of acres in drought stricken regions to grow alfalfa purposed for their domestic dairy herds. [4]

Image: Imports are the number of countries said country buys land from, while exports are the number of countries said country sells land too. Source: Washington Post. Image: Imports are the number of countries said country buys land from, while exports are the number of countries said country sells land too. Source: Washington Post.

Direct land buying does not even account for the increased interest in land equity being traded publicly. Instead of an individual, or a company owning land, current investment vehicles have enabled shareholders to own land. The most typical is a Real Estate Investment Trust (REIT), a company that owns or finances income producing real estate (like agriculture land) where investors buy a stake and collect a portion of the yearly revenue through dividends. [5] These investment vehicles create easy access for any investor, including international ones, and have an average investment return of 12% which tops the S&P 500 return and investment grade corporate bonds. [6] Because of macrotrends in the agriculture industry, including a rapidly growing world population, the aging farmer, and land scarcity more land is coming on the market at an unprecedented price for sellers. [7] The result is a world where more individual localized ownership is transferred to teams of investors and international players.

The last type of agriculture asset being acquired are companies. Starting with the Shuanghui buying Smithfield Foods, the United States’ largest producer of pork, a series of mergers acquisitions has rocked the international agricultural market. [8] These include the Dow DuPont merger which is expected to be finalized in August (and split into three companies later next year), the 66 billion dollar Bayer purchase of Monsanto, and the China Chemical Corporation’s (ChemChina) 43 billion dollar purchase of Syngenta. [9]

Why these assets are valuable to companies (and governments)

The international pattern of buying agricultural assets is reflective of the increasing globalization of the world economy. However, no matter how interconnected the world becomes, there are some resources like climate and water that cannot be transported by a cargo ship. [10] Consequently, the only way to trade for these types of resources is to trade for them virtually – using them onsite to produce a product and then transporting the product itself. [11] One of the reasons agriculture assets like land are so valuable is that they facilitate this virtual trade. By buying up farmland in the U.S. Southwest, the Saudi Arabians get access to abundant groundwater with little regulation on its use. That groundwater is used to grow alfalfa that is sent back to Saudi Arabian dairy herds. They are growing overseas to save local water, essentially trading the natural resource. [12]

Interconnectivity of countries’ economies, also means increased volatility. Economic struggles in one country can metastasize and affect others. In the agriculture commodities market, falling prices for staple crops like corn due to global supply outpacing global demand during 2015-2016, resulted in low profits for farmers. [13] Low profits for farmers translates to more cost-conscious behavior and less of a willingness to spend on fertilizers, chemicals, pesticides, and seed. These macrotrends have a substantial negative impact on firms that sell primarily to growers which includes the Big Six.

To preserve shareholder value and address falling commodity prices, the Big Six sought to diversify to spread out risk and cut costs. [14] Bayer, primarily a healthcare products firm, purchasing Monsanto, a firm driven by seed sales, is expected to save billions of dollars in cost-cutting synergies while improving both firms ability to withstand turmoil in their respective industries. [15] According to the Big Six themselves, these mergers and acquisitions will also help them dedicate more resources to the innovation needed to feed a growing world population. [16] There is research that shows that more competition in an industry can lead to less research and development because there are fewer funds to invest more potential for firms to quickly copy ideas. However, “beyond some high levels of concentration, further concentration is probably less likely to lead to innovation,” as fewer rivals can mean less of an incentive to get ahead of competition or cannibalize existing product lines. [17]

Image: Chart depicting the diminishing returns between concentration and innovation. Source: USDA.Image: Chart depicting the diminishing returns between concentration and innovation. Source: USDA.

For regulators, finding the sweet spot between these two opposing forces can be a challenge. The last major reason driving international acquisition of agriculture assets is national security. Adequate food and preservation of government go hand in hand. During President Reagan’s term, the Soviet Union had to buy grains from the United States. The purchase significantly boosted the President’s popularity as naysayers had said that the Soviets would never deal with the Americans. [18] Reagan exploited the accomplishment to no end, using it to weaken the Soviet Union’s national reputation. [19] On the other hand, even though the Soviets lost the rhetorical argument, it was much more dangerous for them to have a population that went hungry. They would rather lose face than lose their jobs. As the saying goes, society is only a few meals away from pitchforks.

It cannot be understated how much China’s recent acquisitions of agricultural companies were motivated by the lessons learned by this previous communist government. In Chinese history, most of the civil unrest has come from food shortages. Actually, China’s largest overseas acquisition ever, its purchase of Syngenta, is to make sure that its farms can produce enough for its still growing population. [20]

Unfortunately for the People’s Republic of China, China has 19% of the worlds global population but only 8% of it arable land. [21] Furthermore, years of land abuse have resulted in more than 40% of that land being degraded. [22] Land degradation combined with a rapidly growing middle class that is eating more meat (more meat means more grain needs to be produced to feed livestock) necessitates that China experiences a revolution in agricultural productivity. By purchasing agriculture companies, the Chinese government hopes to gain access to agriculture resources and practices that can help it accomplish that agriculture revolution. For perspective’s sake, Chinese oil imports already top $150 billion a year, food is at $115 billion and growing. [23]

The Future?

The Chinese government supporting the international acquisition of companies has major implications for the future of free market policy and national security. For one, it marks the first instance in human history where a government is actively financially supporting the acquisition of another country’s companies. [24]

When the Chinese conglomerate Shuanghui international bought Smithfield foods which represented 25% of the United States pork industry, they were able to secure 4 billion dollars worth of financing within a day, a speed of approval unprecedented in traditional capitalist economies. [25] At the time, Senator Debbie Stabenow, then the chair of the Senate Agricultural Committee, said that food is a strategic resource that should be as important to the U.S. government as oil. [26] It is a reality that the Chinese government recognized and continued to support through its multibillion dollar purchase of Syngenta by the Chinese Chemical Corporation, ChemChina, which is state owned. Effectively, a government was taking over a foreign, private company. These types of transactions can have a drastic distortion effects on the global economy, rewarding competitive advantage based on country of location and not underlying value. As the economy continues to globalize, policies governing public entry into the private market competition should be examined.

Another future policy implication are the upcoming decisions of regulators. First, antitrust regulators must still debate the practicality of the acquisitions of these major companies. They should determine at what point the increasing concentration of businesses in the agriculture industry hurts consumers and hurts innovation more than it strengthens the industry’s viability. So far, they have exercised their discretion on a case by case basis. For example, antitrust regulators scratched a potential acquisition by John Deere in the tractor business, but allowed the Dow/Dupont merger to go through as long as each firm sells a few arms of their current business. [27] Trade regulators must determine the pros and cons of international, virtual trading of resources. Lastly, security regulators must continue to examine new securities, such as Real Estate Investment Trusts, that are more focused on agricultural land and ensure that the corporate purchase of these types of assets protect consumers while also preserving the ability for these assets to feed a growing world population.

Student Blog Disclaimer
  • The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.

References

  [1] James M. MacDonald, “Mergers and Competition in Seed and Agricultural Chemical Markets,” USDA Economic Research Service, April 3, 2017 https://www.ers.usda.gov/amber-waves/2017/april/mergers-and-competition-in-seed-and-agricultural-chemical-markets/

  [2] Ibid.

  [3]Anne Swanson, “An incredible image shows how powerful countries are buying up much of the world’s land” , The Washington Post, May 21, 2015. https://www.washingtonpost.com/news/wonk/wp/2015/05/21/rich-countries-are-buying-up-farmland-from-poorer-ones-around-the-world/?utm_term=.173c3af5d0e6

  [4] Jeff Daniels, “Saudi Arabia buying up farmland in US Southwest.” CNBC, January 15, 2016 http://www.cnbc.com/2016/01/15/saudi-arabia-buying-up-farmland-in-us-southwest.html

  [5]Tim Maverick, “Farmland: a Growing Investment Option, Wall St. Daily, November 24th, 2015. https://www.wallstreetdaily.com/2015/11/24/farmland-reits-agriculture-investing/

  [6]Ibid.

  [7]Constance Gustke, “Farm to market: Taking stock of the agricultural land grab.” CNBC, January 21, 2016. http://www.cnbc.com/2016/01/21/getting-your-plot-of-american-farmland-.html

  [8]“Who’s behind the Chinese takeover of the world’s biggest pork producer.” PBS Newshour, September 12, 2014. http://www.pbs.org/newshour/bb/whos-behind-chinese-takeover-worlds-biggest-pork-producer/

  [9] Chad Bray, “U.S. Regulator Signs Off on ChemChina-Syngenta Deal.” The New York Times, August 22, 2016. https://www.nytimes.com/2016/08/23/business/dealbook/us-china-chemchina-syngenta-merger.html

  [10] Jeff Daniels, “Saudi Arabia buying up farmland in US Southwest.” CNBC, January 15, 2016. http://www.cnbc.com/2016/01/15/saudi-arabia-buying-up-farmland-in-us-southwest.html

  [11]Ibid.

  [12] Ibid.

  [13]Kent Thiesse, “Grain prices fall sharply after USDA releases Grain Supply and Demand report.” Corn & Soybean Digest, July 18th, 2016. http://www.cornandsoybeandigest.com/blog/grain-prices-fall-sharply-after-usda-releases-grain-supply-and-demand-report

  [14]James M. MacDonald, “Mergers and Competition in Seed and Agricultural Chemical Markets,” USDA Economic Research Service, April 3, 2017. https://www.ers.usda.gov/amber-waves/2017/april/mergers-and-competition-in-seed-and-agricultural-chemical-markets/

  [15]Drew Harwell, “Bayer agrees to buy Monsanto in $66 billion deal that could reshape agriculture.” The Washington Post, September 14, 2016. https://www.washingtonpost.com/business/economy/bayer-agrees-to-buy-monsanto-in-66-billion-deal-that-could-reshape-agriculture/2016/09/14/4599de48-7aa6-11e6-ac8e-cf8e0dd91dc7_story.html?utm_term=.d0691669d49b

  [16] James M. MacDonald, “Mergers and Competition in Seed and Agricultural Chemical Markets,” USDA Economic Research Service, April 3, 2017. https://www.ers.usda.gov/amber-waves/2017/april/mergers-and-competition-in-seed-and-agricultural-chemical-markets/

  [17] Ibid.

  [18] Bill Keller, “Reagan’s Russia Grain Harvest.” The New York Times, September 8, 1984. http://www.nytimes.com/1984/09/09/business/reagan-s-russian-grain-harvest.html?pagewanted=all

  [19]Ibid.

  [20]Keith Johnson, “Why is China Spending $43 Billion for a Farming Company?” Foreign Policy, February 15, 2016. http://foreignpolicy.com/2016/02/15/why-is-china-spending-43-billion-for-a-farming-company/

  [21]Ibid.

  [22]Dominque Patton, “More than 40 percent of China’s arable land degraded: Xinhua.” Reuters, November 4, 2014. http://www.reuters.com/article/us-china-soil-idUSKBN0IO0Y720141104

  [23]Keith Johnson, “Why is China Spending $43 Billion for a Farming Company?” Foreign Policy, February 15, 2016. http://foreignpolicy.com/2016/02/15/why-is-china-spending-43-billion-for-a-farming-company/

  [24]“Who’s behind the Chinese takeover of the world’s biggest pork producer.” PBS Newshour, September 12, 2014. http://www.pbs.org/newshour/bb/whos-behind-chinese-takeover-worlds-biggest-pork-producer/

  [25]Ibid.

  [26] Ibid.

  [27] “Revisiting Dow-DuPont Merger Motivation As Companies Win U.S. Anti-Trust Approval.” Forbes, Jun 23, 2017. https://www.forbes.com/sites/greatspeculations/2017/06/23/revisiting-dow-dupont-merger-motivation-as-companies-win-u-s-anti-trust-approval/#573bedf96355

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