Slumping farm economy spawns 'merger mania'

Justin Dammann, a young farmer in southwest Iowa, saw his neighbor's new home, shed and farm equipment and figured he was doing well .

Then the bank told his neighbor he had to sell some land and equipment so he could stay in business.

"It can happen to any of us," the 36-year-old, who grows corn and soybeans near Essex, said. "We need to be conservative."

Depressed commodity prices and plunging farm income across the Corn Belt are reshaping the Iowa and the U.S. agricultural landscape.

It is forcing mergers of ag giants such as Dow, DuPont, Monsanto and Syngenta; squeezing local and regional elevators, implement dealerships and manufacturers into consolidating; and winnowing the number of farmers dotting rural America.

"We talk about the mega-mergers, but acquisitions are happening across agriculture," said Chad Hart, an Iowa State University agricultural economist. "It doesn't matter if you're big or small."

Consolidation so far has centered on big seed and chemical companies, but mergers and buyouts could potentially push into farm equipment manufacturers, such as Deere & Co. and Caterpillar, say experts. 

The fallout likely will continue over the next three years as businesses and farmers alike face declining profits, Hart said.

"All businesses are looking at: 'How do we compete in this lower-price environment?'" Hart said. "A lot of companies find that merging or acquiring the competing business is the way to help bolster the bottom line, reduce the competition and create some cost synergies."

That, in turn, means fewer companies, fewer jobs, fewer competitors, and, potentially, higher prices.

"It's disturbing," Dammann said. "We have a couple million farmers in this country, but we buy our products from just a few companies.

"Consolidation has eliminated competition. But it’s not anything I believe I can do anything about."

Planting amid poor prices

The farm downturn is being driven by three years of lower commodity prices, combined with stubbornly high costs for seed, chemicals and other inputs needed to grow corn and soybeans.

Low prices are on Chris Edgington's mind as he wraps up planting on this year's corn and turns to planting soybeans.

So far, Iowa farmers have planted nearly 90 percent of the state's 13.9 million corn acres and 43 percent of 9.7 million soybean acres in this year's fast-moving planting season.

"I've been doing this for over 30 years, and there have only been a few that I knew when I put the seed in the ground I was going to have a good return at the end of the year," said Edgington, who farms with his family near Mason City.

"That's part of the risk — the uncertainty of yields and markets," said Edgington, chairman of the Iowa Corn Promotion Board.

Hart said farmers need to get about $4 a bushel for corn and $10.60 a bushel for soybeans to break even, based on ISU's cost of average production estimates. But Iowa prices on corn for October delivery are only around $3.50 a bushel and soybeans about $9.80 a bushel.

And prices are projected to go even lower. The U.S. Department of Agriculture expects a season average midpoint for corn of $3.35 a bushel and $9.10 for soybeans.

Farmers hope adverse weather in some part of the U.S. or world will ignite prices, giving them an opportunity to sell some of their crops and minimize their loss or even post a profit.

"We've got a lot of growing season, but given the amount of acres out there, I am concerned we're going to get squeezed this fall," Hart said.

Lower profits, more layoffs

Less money for U.S. farmers means fewer dollars for companies that supply growers, said Michael Swanson, Wells Fargo's chief agricultural economist.

"Farmers can't absorb all the costs' impact," Swanson said.

The costs to grow a crop aren't falling — farmland rent, seed, fertilizer, herbicides — as fast as corn and soybean prices, further squeezing farm profits, experts say.

Even with a recent rally, corn prices are still at half what they once were in 2012, a drought year, and soybeans are about 40 percent lower.

As a result U.S. farm income is projected to be $54.8 billion this year — 56 percent less than 2013, USDA data show. Farmers accordingly are spending much less, which is squeezing seed and chemical makers who just a few years ago were adding workers.

To save money and spur innovation, there has been a massive wave of mergers shaking up the ag industry: Monsanto confirmed it's fielding an offer from Bayer; and DuPont and Dow and ChemChina and Syngenta are in the midst of deals.

The farm slump and mergers have resulted in job cuts. DuPont, the parent of Johnston-based seed company Pioneer, said in December it would cut 5,000 to 6,000 jobs, or 10 percent, from its global workforce.

And Deere, Kinze Manufacturing and others have laid off hundreds of workers in Iowa.

"There is a very high appetite for activity, but it’s all on the buyer side, no interested sellers, especially now in the down cycle, where it would be easy to feel like you are getting a low price for your assets,” said Matt Arnold, a St. Louis-based analyst at Edward D. Jones & Co.

Bayer AG's bid to buy Monsanto, the world's largest seed company, could be among the biggest deals yet. It's a reversal of roles for St. Louis-based Monsanto, which twice tried to buy Syngenta, before ChemChina stepped in.

"Everybody out there is a potential target," Hart said. "Companies are looking for any combination to weather this storm. Whether you’re small or large, is there a dance partner that helps you hold market share?"

Hart said the mergers and buyouts in the seed and chemical industry could move into machinery manufacturing.

But Arnold said ag equipment “is already a pretty consolidated market. There are only a few big players in traditional ag machinery like tractors and combines,” he said. “There is just less opportunity.”

If any buyer would emerge for a big farm equipment maker such as Deere, Arnold said, it "would come from a financial buyer."

"It’s a big company, and there are only a few financial buyers that could do it,” he said.

Deere's largest investors are Bill Gates' Cascade Investment and Warren Buffett's Berkshire Hathaway.

Looking to make deals

It's not just the big guys who have their checkbooks out.

Moline, Ill.-based Deere & Co. is buying majority interest in Hagie Manufacturing, a Clarion-based maker of high-clearance sprayers, and purchased Bauer Built, the Paton, Ia., maker of ultra-wide planters. Land O'Lakes purchased Ames-based United Suppliers, a customer-owned crop seed, fertilizer and herbicide retailer, to fold into its Winfield U.S. division.

And several local farm equipment dealers and cooperatives are making deals.

"When producer margins are thin, our dealership margins are thin," said Bryce Ricklefs, part owner of Hultgren Implement, a Storm Lake dealership that's merging with Spencer-based Noteboom Implement.

Merging the Deere dealerships helps the companies buy products at lower prices, expand their companies' markets and boost services, Ricklefs said. Savings can be passed onto farmers.

Don Van Houweling, CEO of the Van Wall Group, a large Deere dealership based in Perry, said technology is another factor driving mergers.

"We’ve got 15 people on our team who do nothing but support precision agriculture — whether it be data management, collection and security, variable rate planting or nutrient management," he said. "At one time, that was my whole team to sell equipment."

The company has purchased 12 implement dealers over the past three or four years, Houweling said.

"Farmers are spending a lot of money, and they want service at a high level," he said, such as "auto-steer" technology that uses satellites to precisely plant, spray and combine crops.

"A tractor used to be just a tool to do hard work," Van Houweling said. "Today it's a tool to do precise applications … all within an inch precision at 16 miles an hour."

Making way for 'merger mania'

Farmers also look to technology — and sometimes growing scale — to bypass the effect of consolidation, said David Miller, director of research at the Iowa Farm Bureau Federation.

Miller, who also farms part time in southern Iowa, said he looks online to buy parts and supplies he uses a lot — such as tractor filters, hoses and other equipment that can slow down a farmer when under pressure to plant or harvest a crop.

"I end up carrying inventory for breakable parts," he said. "As a small operator that can get very expensive."

He also knows farmers who pick up fertilizer at the plant to cut costs, or who skip the local elevator and haul corn and soybeans to biofuels plants or end-users like Archer Daniels Midland.

Rich Roorda, who farms near Prairie City, said he's likely to look to the yellow pages when he needs parts and equipment. But his nephew Will Schott, 22, who farms with him, looks to Amazon.

"He'll say, 'I've got such and such ordered and it will be here tomorrow,'" Roorda said.

Roorda said "merger mania" is bound to sweep through farming just like it has banking, manufacturing and other industries.

"We’d like to go back to the way it was 20, 30, 40 years ago, but that's not going to happen," he said.