The Agricultural Biotechnology Industry

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1 The Agricultural Biotechnology Industry Introduction Biotechnology is bringing about dramatic changes in the agriculture sector. It is presented as a means to feed the world, help the environment and much more by advocates. Despite the benefits that biotechnology could deliver, many still, most notably the European Union, do not accept biotech products. Biotechnology is also changing the structure of many agriculture companies, with a few becoming the dominant market participants. With this changing structure, the future of the industry could be different from what it is today. These topics and more are discussed in more detail below. Industry Structure Agricultural biotechnology has lead to a substantial number of mergers and acquisitions, as well as an increase in vertical and horizontal integration in the seed and chemical industries (Fulton and Giannakas). During the period from , Monsanto alone formed 30 research alliances and initiated 16 separate acquisitions (King, et. al). Table 1 below shows consolidations for 10 companies in the agricultural biotechnology industry. Table 1: Consolidation for the 10 Most Active Biotechnology Firms, 1998 (Fulton and Giannakas) Company Mergers Acquisitions Joint Ventures Monsanto DeKalb Genetics (Now a part of Monsanto) Other AgriBiotech Total

2 Novartis AgrEvo/Aventis AstraZeneca Limagrain Empressa La Moderna Rhone-Poulenc DuPont What is Driving These Consolidations? Consolidating costs, pre-empting competitors from taking valuable assets, economies of scale and scope and regulatory costs are a few of the many reasons mergers and acquisitions have increased (Fulton and Giannakas). Chemical companies are vertically integrating into the seed and biotechnology industries to capture profits from biotechnology innovations. In some cases, these innovations go hand-in-hand with a chemical company s products. Roundup Ready soybeans are one example. Chemical companies are also interested in biotechnology because it is leading to the reduction in chemical applications, especially insecticides. Corn rootworm and corn borer resistant varieties in corn, for example, reduce or eliminate the need to apply insecticide. Thus, it is logical for chemical companies to enter the biotechnology industry in order to avoid profit loss (Hayenga). Where is the Industry Today? These new firms, which combine capabilities in biotechnology, agrochemicals and seeds, are emerging as the major players in biotechnology. These new firms are conglomerations of six main classes of firms involved in plant agricultural biotechnology. 2

3 The first group is biotechnology research and development firms, which are small, science-based firms that are generally financed by venture capital early on. The vast majority of these remain privately held, while a few have gone public or have been bought by corporations. The second group consists of agricultural products companies, which are primarily involved in grain processing; the manufacture and distribution of herbicides, pesticides, and fertilizer; and the supply of other agricultural products, equipment, and services. Seed companies are the third class. These companies specialize in plant breeding producing hybrids and better crop seeds. The fourth group is companies who mainly deal in pharmaceuticals, but who also have large divisions and subsidiaries in agricultural products, crop protection and seeds. Chemical corporations comprise the fifth group, which like the pharmaceutical group, traditionally have agrochemical interests as well. The last group is food corporations. Biotechnology is one solution these corporations are using to improve the crops that their products are made from. Table 2 below lists the revenues and net incomes for some of the leading firms in the agricultural biotechnology industry (GRAFF). Table 2: Leading Firms in Agricultural Biotechnology: 1994 Company 1994 Revenues 1994 Net Income ($US millions) ($US millions) AgriDyne Small Biotech Firms Biosys BioTechnica Calgene Crop Genetics DNA Plant Technology

4 EcoScience Escagenetics Mycogen Neogen Ringer DeKalb Delta & Pine Land Established Corporations Dow DuPont FMC Hoechst Monsanto Pioneer Zeneca Concentration Market concentration can be determined by examining innovation competition to assess the impact of mergers. The CR4 ratio at the Research and Development level was 87 percent in 1988, 63 percent in 1995 and 79 percent in In determining market concentration, the number of patents held can also be examined. The top four firms held 41 percent of the corn patents in 1996, 53 percent of the soybean patents in 1997, 77 percent of the tomato patents in 1997 and 38 percent of the Bt patents in 1998 (Fulton and Giannakas). In North America, for example, Monsanto and DuPont together own or 4

5 significantly influence 90 percent of the seed corn market. Monsanto, through its acquisition of DeKalb, controlled approximately 25 percent of the purchased soybeans in The cotton industry became even more consolidated with Monsanto s purchase of Delta & Pine Land in 1998, which has not yet been approved by the Justice Department. This acquisition will bring Monsanto s cotton market share to 87 percent (Hayenga). Production In 2002, the global area of biotech crops was 145 million acres, which was an increase of 15.1 million acres over This growth in 2002 followed nearly a 20 percent increase in acres for This upward trend in acres planted with biotech crops is shown by Figure 1 below (Council for Biotechnology Information). Figure 1: Global Plantings of Biotech Crops Global Plantings of Biotech Crops Year Million Hectares The main agricultural biotechnology crops used today are what are referred to as the first generation agricultural biotechnology products. These products are mainly the herbicide tolerance and insect resistance crops (Hayenga and Kalaitzandonakes). Four countries accounted for 99 percent of the global biotech crop area in The United 5

6 States had 68 percent, Argentina had 22 percent, Canada had 6 percent, and China had 3 percent. Four crops accounted for most of this, with soybeans accounting for 63 percent, corn 19 percent, cotton 13 percent and canola 5 percent (Council for Biotechnology Information). In the United States this year, 38 percent of all corn planted and 80 percent of all soybeans contain biotech traits ( Figure 2 below shows the countries around the world that have adopted biotech crops in 2002 (shaded areas). Figure 2: Global Status of Biotech Crops in 2002 Getting Value Restrictive contracts, as used by Monsanto, are a means of ensuring patent value. These contracts prohibit farmer-saved seed or use of any other glyphosate herbicide other than Roundup when a farmer grows a Monsanto product. Also, technology fees and seed premiums are a means of making additional revenue from sales. These methods are common today, but as more competitors bring substitutes to the market, fees are expected to decline. Licensing fees are also common for Monsanto as financial incentives to seed 6

7 companies as a means for Roundup Ready corn sales to attain a certain percentage, for example. All of these methods are used to tie the seed customer to the chemical product (Hayenga). Where is the Industry Going? When all the mergers and acquisitions are finished, there will likely be only three to five global agricultural biotechnology seed/agricultural chemical companies left. New crops being released are dubbed the second-generation products. These new products are transgenic plants with enhanced qualities like changed amino acid composition (Hayenga and Kalaitzandonakes). These new products are also likely to cause downstream movement by these remaining companies, as already shown by DuPont s acquisition of Protein Technologies, a specialty soybean processor. Linkages with food and industrial companies will be likely in order to control and capture value. The downstream users will also benefit because they will be awarded preferential access to value-added crops. Other future developments could include the ability to develop specialized genetically engineered industrial traits, such as biomaterials in crops. This development would expand the biotechnology market to non-traditional, agriculture-related markets (Shimoda). Genetically engineered crops that contain vaccines, for example, would shift much of the billions of dollars that processors and end-users now pay to have those ingredients manufactured into the agricultural realm. Some predictions state that in 10 years, more than half of all crops produced will be value-added. These high-value crops should increase cash flow throughout the system. However, because the value-added crop technology is owned and patented by a large company, independence will likely be lost. These large companies will own and control the crops all the way through the entire 7

8 production system. Thus, these companies possibly could control the crop from initial plant breeding to final delivery to the end user. As a result, farmers will potentially become contract growers for these large corporations (Freiberg). Biotechnology will also likely allow products to be tailored to various specifications, whether it is taste, texture, nutrient content or more. With biotechnology, a customer indicates the exact specifications and tolerances, and the biotechnology firm will deliver the seed to meet their desired output. This gene stacking will radically alter the industry (Kindinger). Barriers to Entry Research and development expenditures and regulatory requirements imposed by the government are major deterrents from entering the agricultural biotechnology industry. They are also reasons why companies are merging. Agricultural biotechnology companies spend a tremendous amount of money on these two items, but have more products to spread the cost over. New entrants have to incur these tremendous sunk costs in order to enter the market (Fulton and Giannakas). The cost of bringing a new biotechnology product to market is around $100 million or more (Freiberg). Licensing agreements and strategic alliances also hinder a company s ability to enter this market ( The large number of patent suits and contractual rights are also deterrents for entry (Lesser). This is not to say new firms cannot enter the industry. Due to the rapid growth prospect for this industry, entrepreneurial firms can fill voids missed by the large companies. Aquaculture is an example of a niche market that one of these entrepreneurial firms can command ( 8

9 Threats Legal issues are a major concern in the agricultural biotechnology industry at this point in time. Companies are feuding over ownership of, and infringement on, intellectual property rights. Antitrust and breach of contract issues are also widespread in this industry. Monsanto seems to be at the forefront of many of these issues. For example, when Monsanto acquired DeKalb, Monsanto had to negotiate some givebacks in order to ensure market competition. As companies become more and more concentrated, these issues will continue to arise at a heavy cost to all involved (Hayenga). Another issue that limits the potential growth of agricultural biotechnology is restrictions on the number of acres that can be planted to a biotech variety. Bt corn volume is around 50 percent, but the Environmental Protection Agency may limit the number of acres planted to Bt by as much as 40 percent in order to guard against resistant strains of the European Corn Borer (Hayenga). These restrictions, depending on their extent could significantly affect the agricultural biotechnology industry. A major concern for the agricultural biotechnology industry is that biotech products will be discovered to have a negative effect on mankind. This discovery would severely cripple the industry. This is the reason biotech foods are researched and reviewed to extreme depths, and why biotech products are tested more stringently than conventional crops. In the United States alone, three government agencies oversee biotech products (Council for Biotechnology Information). This concern is a major factor in people s acceptance level to biotech crops. Acceptance by major markets is another barrier that the agricultural biotechnology industry must overcome. The European Union is one of the major scenes of opposition to 9

10 the use of genetically modified organisms. Specific bans or forms of moratorium on these products are common (Joly and Lemarie). These markets represent tremendous sites for profit and thus, promotion, marketing and other forms of persuasion will have to be used by the large companies to potentially open these markets up. Conclusion The agricultural biotechnology industry is undergoing a major structural change. Large corporations are being created by combining companies from different sectors in the agricultural biotechnology industry. These companies are realizing the revolution that biotechnology is creating and are rushing to secure their positions. Looking ahead, the industry appears to be on the upward path. Acreage and sales are increasing, and the future products are quite enticing. The industry could head toward large companies controlling the entire production process due to the high-value crops that are being developed. This industry is highly concentrated and there are significant costs that limit entry; yet, niche markets exist for entrepreneurial companies to take advantage of. There are some threats this industry faces such as acceptance into certain markets, legal issues, regulations and others. Yet, only time will tell if the benefits of technology will materialize. 10

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