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BUSINESS
Monsanto

Consolidation in seed industry could pressure DuPont Pioneer

Christopher Doering
USATODAY
A sign of Swiss farm chemicals powerhouse Syngenta is seen on May 10, 2015 at the company's test site of Les Barges near Vouvry, western Switzerland. On May 8, Syngenta confirmed April reports that Monsanto had made an offer for a merger that would form a world market leader in both seeds and crop chemicals.

WASHINGTON — A merger proposed by Monsanto Co. with its Swiss rival, Syngenta AG, would create an agricultural giant that could have the heft to upend the seed industry and its few remaining players, including DuPont Pioneer in Johnston, Iowa.

By the numbers, Pioneer would fall to a distant No. 2 player in the seed business if the deal goes through. But analysts and others who follow the company say while it could place additional competitive pressure on Pioneer, a unit of DuPont Co., it remains in a favorable position to weather the deal along with the ongoing downturn in the farm economy.

In their most recent fiscal years, Monsanto - the world's largest seed company and producer of the popular herbicide Roundup - and Syngenta together posted total sales of about $31 billion. That compared to the $11 billion or so DuPont posted in its agriculture business, its largest division. The merger would give the combined company control of about 45 percent of the global seed market. Pioneer has about a 20 percent share.

"When we're talking about the Big Two here, it would put Pioneer somewhat at a disadvantage. But the bigger concern is probably going to be for agriculture as a whole," said Chad Hart, an associate professor of economics at Iowa State University. "I think U.S. and world regulators will be looking at this very closely, especially given that it has to deal with agriculture and food production."

Syngenta rejected the first offer, but media reports indicate Monsanto is planning another attempt after it finds a buyer for Syngenta's seed business to avoid regulatory concerns.

The impetus behind the merger, analysts say, hinges not only on the ability of Monsanto to tap into Syngenta's strength in the crop chemical business but because of broader, potentially enduring changes in agriculture that are affecting all the major players, including Pioneer.

It can take a decade and several hundred million dollars to develop new seeds and chemical sprays that help churn out ever-increasing yields for farmers. And with growing resistance to bugs from plant-produced toxins and sprays such as Monsanto's Roundup used to kill weeds, there is a growing demand to create new products.

All this comes as farmers brace for their income to fall 32 percent this year due to slumping commodity prices, according to the Agriculture Department. This has forced growers, many of whom are struggling to reach profitability, to look for cheaper seeds or plant more soybeans, which is less profitable for seed companies than corn. As a result, they could be under even more pressure to merge to lower costs and tap into the technology of their one-time competitor to produce better chemicals and seeds more quickly.

David Miller, director of research at the Iowa Farm Bureau Federation and a farmer in Lucas and Clarke Counties, expressed concern that a Monsanto-Syngenta tie-up could squeeze farmers by reducing seed options and hiking prices. He was hopeful regulators would take a close look at the ramifications of any deal.

"We know there is a fair amount of concentration in the seed industry," said Miller, who uses products from Monsanto and Pioneer on his corn and soybean fields. "It's one where the ag community is going to at least encourage the Justice Department to do its due diligence on this."

If the Justice Department and other federal regulators determine a merger would "radically change the competitive dynamics" of the industry, farmers would strongly oppose the merger, Miller said. "Is it a concern? The answer is yes, to the extent that it's analyzed."

Lawmakers are also expected to monitor the impact of the merger.

Iowa Sen. Chuck Grassley, who has closely followed corporate tie-ups in the past, said he would write the Justice Department. "I expect (them) to make sure the market is going to still be competitive and the antitrust laws not violated," Grassley said. "That's (their) responsibility to make sure it happens."

Pioneer, which was purchased by DuPont in 1999, has been an important cog in the Iowa economy and symbolic of the state's dominant position as a major U.S. producer of corn, soybeans, ethanol and other commodities. Paul Schickler, president of Pioneer, said the downturn in the farm economy has forced businesses such as his to reassess where they are investing their limited resources. He said Pioneer would consider a major deal or a smaller purchase "if the opportunity was right" but he wouldn't comment about any pending acquisitions.

"If you look at any industry, whether it's agriculture or any industry, consolidation is out there," Schickler said. "Ultimately, whether it is a large acquisition, a smaller bolt-on or internal investment, we're going to look at things from the standpoint of the farmer. Can we develop better products, faster? If we can do that, farmers are going to win and we're going to win."

The Iowa company has earned high marks from Wall Street analysts who say the division is DuPont's "crown jewel" and among the best-positioned to grow when the agricultural industry rebounds. It's a major reason DuPont has held on to Pioneer despite calls from activist investor Nelson Peltz to spin off its agricultural business into a standalone entity.

The company has been criticized by some for not being as innovative as Monsanto, its chief competitor. In fact, Pioneer agreed in 2013 to pay at least $1.75 billion in exchange for some of Monsanto's genetic technology as part of a patent-infringement lawsuit filed by the St. Louis agribusiness giant - a deal that has drawn criticism from Peltz.

Still, those who follow the seed industry say Pioneer has excelled in many areas. The company has done a good job developing improved genetics and traits, particularly in areas such as drought, and building its crop-protection chemical business. It also has bested Monsanto by embracing a more focused, regional strategy that has helped it sell seeds to local dealers.

"It's the No. 1 and No. 2 player depending on the markets and products you look at," said John Roberts, an analyst at UBS Securities in New York. "They're clearly a competitive company."

Analysts believe antitrust regulators would likely require Monsanto and Syngenta to sell soybean, corn and vegetable products along with some of its herbicides where the two firms overlap for the deal to be approved. Pioneer could be a buyer of these divested assets.

"Consolidation in the industry is an opportunity for Pioneer. There is an opportunity to broaden their reach across additional product lines, gain access geographically and gain enhanced access to certain markets," said Matt Arnold, a St. Louis analyst at Edward D. Jones & Co. "We would fully expect DuPont to be an interested party."

While Pioneer will look closely at any small purchases, those who follow the division are doubtful it will feel pressured to do its own megadeal on the heels of a Monsanto-Syngenta hookup to remain competitive.

"We continue to think it's a good business that should deliver good results. They don't need to recreate the wheel," Arnold said. "There is no need for them to rush out and do some kind of transaction in order to improve performance. When the ag cycle is blowing at their back again, and doing so for all players in the industry, I think Pioneer is going to do fine."

Founded in 1926 by agricultural pioneer Henry A. Wallace, who became U.S. vice president in 1941, Pioneer employs an estimated 3,400 Iowans, mostly in and around Des Moines.

Paula Dierenfeld, the mayor of Johnston, said the town has thrived because of the company's presence – one that predates when Johnston incorporated as a town by more than 40 years. Since 2007, the seed giant has pledged to create hundreds of jobs in Iowa and invested about $900 million in new facilities, including science laboratories, a seed treatment center and an insectary in Johnston.

Pioneer pays a lot of property taxes in the community and draws visitors from all over the world who contribute to the local economy by staying in hotels, eating in restaurants and shopping in stores, Dierenfeld said. And its science and research focus attracts a more educated population with fatter paychecks and higher expectations for the schools they want their children to attend – all of which helps the town and it's nearly 20,000 residents.

"If Pioneer had never been in Johnston, I think we would never have seen the growth we've seen," Dierenfeld said. "Because of the kind of company that they are, we have really grown as a community and what residents expect from our community."

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