FRANKFURT, Germany/NEW YORK -- Major Western agricultural pesticide and seed companies are working to expand in China, India, South America and other emerging markets where food demand is soaring. But with competition also mounting, these businesses are pumping ever more money into research and development to gain an edge.
The global population continues to rise, but the amount of arable land is limited, noted Liam Condon, CEO of Bayer CropScience, a subsidiary of German pesticide company Bayer. He said there is no other industry besides agriculture in which demand to improve production efficiency is so strong.
Condon's company estimates that a total of 100 billion euros ($124 billion) will be spent each year on the agricultural industry, including on pesticides and seed, by 2020 globally, double the amount in 2008. In 2013, the two biggest players -- Monsanto of the U.S. and Syngenta of Switzerland -- posted combined sales of roughly $15 billion each, while the figure was about $7 billion each for Dow Chemical of the U.S. and Germany's BASF. The six top Western pesticide and seed companies control an estimated 65% of the global market.
These companies also have fat operating profit margins, at about 20%. This enables them to funnel about 10% of their sales into R&D investment for their pesticide and seed businesses, including those for corn and soybeans, further widening the gap with smaller players.
Seeds of stability
Demand for high-calorie food products is growing in emerging economies as diets there become increasingly Westernized. However, a shortage of farmers and disruptions caused by droughts, floods and other extreme weather mean demand is rising for more resistant seed products that can ensure stable production.
It is against this backdrop that major pesticide and seed companies have shifted their focus to Asia and South America. Davor Pisk, chief operating officer of Syngenta, said the Chinese and Indian markets will continue to grow but the competition there is fierce.
The greatest pressure comes from local players, who turn out low-price generic products after patents on costlier Western goods expire. These homegrown versions, sold at low profit margin, are popular among farmers in these markets.
For multinational pesticide and seed companies, major agricultural countries in South America, such as Brazil and Argentina, are particularly attractive. Despite their slowing economies, these two nations are seeing an increase in food demand. The U.S., Brazil and Argentina produce 80% of the world's soybeans, and there is still room to increase production efficiency in South America. Adding to the attractiveness of that market is the fact that competition from local producers is not as strong as it is in China and India. That leaves the battlefield open mainly to the global majors, said Syngenta's Pisk.
Monsanto, the world's largest seed company, is making an especially aggressive push into South America. Speaking at a press conference in October, Monsanto President and COO Brett Begemann said the company is ready to expand its soybean acreage in North and South America to a combined 200 million acres (about 800,000 sq. km) over the next five years through the use of insect-tolerant products and new, genetically modified soybean products. Competitors Bayer and Dow Chemical are fighting back by acquiring local seed companies.
Since Novartis of Switzerland and AstraZeneca of the U.K. merged their pesticide businesses in 2000 to form Syngenta, the six majors, including DuPont of the U.S., have dominated the global pesticide and seed industries.
In June, there were reports that Monsanto had approached Syngenta about a possible takeover deal. Monsanto denied making any such moves, however, saying such an industry realignment was not necessary because companies that had been investing in developing their technology were enjoying success.