When Corporate Economics Works against Smallholder Farmers
Often, working in the middle of nowhere in rural Africa for a clientele of mostly subsistence farmers feel like the work is largely removed from the realities of global economics. Many farmers plant their local seeds and sell their produce to local markets. Many foreign food imports see little local demand due to local populations' lack of sufficient income and exposure (and thus palate) for foreign cuisines, and more often than not, insufficient infrastructure prevent large amount of local produce to be shipped globally, even when the qualities and pricing of the products are competitive.
But observe below the surface and one would realize that not only are these unfortunate subsistence farmers part of the global agricultural supply chain, they might as well be considered some of the most vulnerable people out there to any changes in the said supply chain. The reason is largely due to the inputs used for agriculture. Fertilizers, pesticides, and improved seeds are generally not produced (at least to a large enough extent in sufficient quality) within the country, making local farmers heavily dependent on external factors that massively influence their access to these inputs.
Such factors not only include shoddy infrastructure (leading to input damages) and fickle policymakers (who idiotically shut borders to "keep out competition" when domestic substitutes are unavailable), but also, much more importantly, changes among the producers of the said inputs that can dramatically change the availability and pricing of the products. This most greatly affect subsistence farmers who are supremely price-sensitive (slight price increase can represent a massive additional portion of income devoted to input purchase) and time-sensitive (no irrigation in place means no harvest if timing for rainy season is missed).
Given this background, several recent corporate deals reshaping the economic landscape of the global agricultural industry will detrimentally impact these subsistence farmers for years to come. The recent merger of seed-producing Monsanto with pesticide specialist Bayer, merger of agricultural chemicals producers Dupont and Dow Chemicals, as well as purchase of their competitor Syngenta by state-owned China National Chemical (ChemChina) are together dramatically creating a global agricultural oligopoly that will mean higher prices based on control of R&D and input distribution channels.
These firms will easily dominate the markets for agricultural inputs in rural Africa. By combining their respective R&D expertise, these large conglomerates will field heavy advantage over smaller firms. By better able to research on and then provide end-to-end input solutions for greater varieties of climates and soil types, these firms will in essence force small farmers to choose and then almost exclusively rely on their product lines because there will be few locally-made substitute products that can perform nearly as well as ones created by the conglomerates.
M&A allows for firms to pool greater resources together for a slew of other investments that then crowd out smaller competitors. Bigger conglomerates can invest much more heavily in marketing and logistics networks to promote and then distribute their inputs efficiently and cheaply to the farthest corners of the world. For small farmers, risk-averse due to unpredictable harvests and small annual incomes, the need for purchasing relatively cheap and what are perceived to be high-quality inputs at reliable times of the year is matched by the ability of these giant corporations to deliver stable supplies year after year.
The problem will occur after the market is largely carved up. The reality is that, despite the acute dependency of small farmers on products made by these corporations, these corporations are not at all dependent on incomes from small farmers. Selling to large plantations and middlemen responsible for nationwide distribution make up the bulk of their income. That means, unfortunately, they are unlikely to respond to differing needs of individual farmers, as long as the same needs are not apparent across many segments or among larger customers.
Furthermore, after crowding out smaller agricultural inputs providers, these large multinationals will be incentivized to act as an oligopoly that collude to keep pricing for their respective products relatively high to boost profits and returns on R&D. Small farmers not only will not enjoy the benefits of increase in purchase volumes that boost the producers' economy of scale, but will also have their near exclusive dependency leveraged as a rationale for no needing to make any price adjustments. Small farmers' loyalty to certain firms and their products will not be repaid with discount, all the while corporate revenues rise unimpeded.
The author is in no position to pose an alternative to this problem of colluding oligopoly. Even in the organization he works for, inputs produced by these major corporations are often the best products in the market for increasing yields at affordable prices. But as the firms grow larger through M&A, enlarge market shares, and consequently become less incentivized to respond to niche demands, ultimately it is the small farmers with few choices who will have the most to lose. Even in the isolated villages of rural Africa, the power of these multinational conglomerates will be felt.
But observe below the surface and one would realize that not only are these unfortunate subsistence farmers part of the global agricultural supply chain, they might as well be considered some of the most vulnerable people out there to any changes in the said supply chain. The reason is largely due to the inputs used for agriculture. Fertilizers, pesticides, and improved seeds are generally not produced (at least to a large enough extent in sufficient quality) within the country, making local farmers heavily dependent on external factors that massively influence their access to these inputs.
Such factors not only include shoddy infrastructure (leading to input damages) and fickle policymakers (who idiotically shut borders to "keep out competition" when domestic substitutes are unavailable), but also, much more importantly, changes among the producers of the said inputs that can dramatically change the availability and pricing of the products. This most greatly affect subsistence farmers who are supremely price-sensitive (slight price increase can represent a massive additional portion of income devoted to input purchase) and time-sensitive (no irrigation in place means no harvest if timing for rainy season is missed).
Given this background, several recent corporate deals reshaping the economic landscape of the global agricultural industry will detrimentally impact these subsistence farmers for years to come. The recent merger of seed-producing Monsanto with pesticide specialist Bayer, merger of agricultural chemicals producers Dupont and Dow Chemicals, as well as purchase of their competitor Syngenta by state-owned China National Chemical (ChemChina) are together dramatically creating a global agricultural oligopoly that will mean higher prices based on control of R&D and input distribution channels.
These firms will easily dominate the markets for agricultural inputs in rural Africa. By combining their respective R&D expertise, these large conglomerates will field heavy advantage over smaller firms. By better able to research on and then provide end-to-end input solutions for greater varieties of climates and soil types, these firms will in essence force small farmers to choose and then almost exclusively rely on their product lines because there will be few locally-made substitute products that can perform nearly as well as ones created by the conglomerates.
M&A allows for firms to pool greater resources together for a slew of other investments that then crowd out smaller competitors. Bigger conglomerates can invest much more heavily in marketing and logistics networks to promote and then distribute their inputs efficiently and cheaply to the farthest corners of the world. For small farmers, risk-averse due to unpredictable harvests and small annual incomes, the need for purchasing relatively cheap and what are perceived to be high-quality inputs at reliable times of the year is matched by the ability of these giant corporations to deliver stable supplies year after year.
The problem will occur after the market is largely carved up. The reality is that, despite the acute dependency of small farmers on products made by these corporations, these corporations are not at all dependent on incomes from small farmers. Selling to large plantations and middlemen responsible for nationwide distribution make up the bulk of their income. That means, unfortunately, they are unlikely to respond to differing needs of individual farmers, as long as the same needs are not apparent across many segments or among larger customers.
Furthermore, after crowding out smaller agricultural inputs providers, these large multinationals will be incentivized to act as an oligopoly that collude to keep pricing for their respective products relatively high to boost profits and returns on R&D. Small farmers not only will not enjoy the benefits of increase in purchase volumes that boost the producers' economy of scale, but will also have their near exclusive dependency leveraged as a rationale for no needing to make any price adjustments. Small farmers' loyalty to certain firms and their products will not be repaid with discount, all the while corporate revenues rise unimpeded.
The author is in no position to pose an alternative to this problem of colluding oligopoly. Even in the organization he works for, inputs produced by these major corporations are often the best products in the market for increasing yields at affordable prices. But as the firms grow larger through M&A, enlarge market shares, and consequently become less incentivized to respond to niche demands, ultimately it is the small farmers with few choices who will have the most to lose. Even in the isolated villages of rural Africa, the power of these multinational conglomerates will be felt.
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