By Emmanuel Rougier, Senior Global Advisor, Verdant Partners
In January 2019, Verdant released its annual Agribusiness M&A and Investment Review
which featured summaries of observations and expectations for key trends in our sector. Over the course of the next several weeks, we will provide full reports on several of those summarized topics. The initial report is a unique feature on the changing dynamics and challenges facing the global vegetable seed industry.
Three significant developments and trends were apparent in the global vegetable seeds sector during 2018: 1) regulators’ decisions concerning the Nunhems divestment, as a whole, resulted in less opportunity for competitors to pick up valuable species / programs; 2) general market slowdown was observed but may be an extraordinary result of the trade war in the global market; and 3) the increasing complexity of the phytosanitary regulations is challenging international seed movement and trade. These challenges and concerns will certainly be felt in 2019 and will impact potential consolidation in the market.
Regulator Antitrust Divestment Requirement
The way that the US and European regulators have guided and eventually authorized the Monsanto acquisition by Bayer will deeply impact the competitive environment of the global vegetable seed market for some time. By forcing the sale of the Nunhems business, as a whole, to a company not involved in the vegetable seed sector, and prohibiting the opportunity for partial divestments, the regulators have frozen the competitive landscape for several years. None of the existing market leaders has been able to strengthen its respective position through the acquisition of one or several programs from Nunhems or Seminis. It is also now obvious that, for the time being, none of them will be authorized to make a significant acquisition, i.e. one of the top 6 acquiring another top 6.
After the transfer of the Bayer seed businesses to BASF, four seed leaders, Bayer, Syngenta, Limagrain and BASF are operating in field and vegetable seeds. Two seed leaders, Corteva and KWS, are only involved in field seeds, while both of them have clearly and publicly indicated their interest in adding vegetable seeds to their existing businesses. The mid-size family vegetable seed companies, which have experienced significant growth in the past five years, are quite healthy and currently not interested in divesting their businesses. If any of the other four leaders decides, for any reason, to exit the vegetable seed business, these two companies will be the most likely potential acquirers, as none of the four other leaders would be authorized to proceed with such an acquisition. In this context, the possibility for an investment fund to participate in the industry on a broad scale seems to be very limited.
General Market Slowdown
After many years of regular and significant growth, it appears that the vegetable seed market in 2018 has registered a very limited increase. Companies with average growth rates of 5% to 10%, have announced almost flat sales for 2018. It is still early to determine if this slowdown is exceptional or if it illustrates a new trend. The basics of the market evolution are still there: 1) world population increase; 2) improvement of the basic diet in many developed and underdeveloped countries; and 3) a general revenue increase per capita. However, some inventory corrections by dealers in developed countries, like in the USA, can explain the recent adjustment. More generally speaking, western companies have in the past significantly benefited from the globalization process. The recent turmoil on the world markets with the commercial war between the United States and China and the embargos on Iran or Russia are negatively impacting the previously felt positive effects of globalization.
Increasing Complexities of Phytosanitary Regulations
One of the specificities of the vegetable seed sector is the “no border” concept of operations. Dissimilar to field seeds, vegetable seeds are not heavy products, and it is usual that a seed is produced in one country, processed in another country, to be delivered in a third country thousands of miles away. The most professional companies have optimized this process, having organized a network of seed production in the best areas by specie around the world, with a limited number of state-of-the-art processing sites. This worldwide system is working as long as there is no technical barrier. The primary factor for the free movement of the products is linked to the phytosanitary regulations all over the world. It appears that these regulations are more and more complex, and more and more specific to local situations. That makes the quick and easy transfers of products from one country to another increasingly less smooth and efficient. For some countries, it is a way to limit imports. For others, it is a way to protect their own seed production. In any case, this element is a threat to the global and international development of the vegetable seed market.