Fighting tooth and nail with the competition is ingrained in every New Englander. We take a jaundiced look at the world as a bunch of outsiders trying to take us down; the mentality is truly us against the world. Which is why it just rubs me wrong when I see the anti-competitive forces that are at play in the world today. In particular, I’m speaking to the massive consolidation that is taking place in the farming industry. It’s a concern to both regulators and consumers…but is it a concern for investors?

This past week Agrium made a takeover bid for Potash. The $26-billion, all-stock merger would combine Potash's crop nutrient production capacity, the world's largest, with Agrium's farm retail network, North America's biggest.

This is the fourth major merger currently taking place in the farming industry, following on the heels of the Dow / Dupont merger, the Chem-China / Syngenta marriage, and the purchase of Monsanto by Bayer. All of these transactions combine major players in similar industries, consolidating market share and necessitating regulatory approval.

Some market watchers are fretting that the reduced competition could shrivel up innovation, leading to slower improvements in crop yields. Meanwhile, with their deep pockets and large lobbying staffs, there is a further concern that these new behemoths may have outsize political power.

"They’ll have more ability to lobby governments," says Phil Howard of Michigan State University, who studies consolidation in the food industry. "They’ll have a lot more power to shape policies that benefit themselves at the expense of consumers and farmers."

Due to an economic slowdown in China and a glut of food production over the past few years, the global agricultural economy has been slumping. And, it’s only getting worse. The U.S. is on track to produce huge amounts of staples like corn, wheat and soybeans this year, at a time when demand for those and other U.S. food products is falling in other parts of the world.

With profits being squeezed, the pressures to merge have only become more intense. Back in 1994, the world’s four biggest seed companies controlled just 21 percent of the market. Since then, companies like Monsanto, Syngenta, Dow, Bayer, and Dupont went on a feeding frenzy, buying up smaller companies and their patents. The result of which is the market share of top 5 global companies has increased to 89% in corn seeds and 79% in soybean seeds.

The consolidation is leading to a lack of competition and, thus, concern from anti-trust regulators such as the U.S. Department of Justice. The most commonly used method of evaluating the competitiveness of a market is the Herfindahl-Hirschman Index (HHI), a commonly accepted measure of market concentration. Calculated by squaring the market share of each firm competing in a market, and then summing the resulting numbers, the U.S. Department of Justice uses the HHI for evaluating potential mergers issues.

The DOJ considers a market with an HHI of less than 1,500 to be a competitive marketplace, an HHI of 1,500 to 2,500 to be a moderately concentrated marketplace, and an HHI of 2,500 or greater to be a highly concentrated marketplace. As a rule of thumb, if a merger increases the HHI by more than 200 points in markets that are already highly concentrated, it will raise anti-trust concerns.

According to Forbes, when they examine the Dow – Dupont merger, alarm bells should be going off at the DOJ. “We estimate the HHI for the corn seed market to be about 2700, which places it in the highly concentrated category in the framework above. The soybean seed segment, with an HHI of 2360, is categorized as moderately concentrated segment…We estimate that the post-merger HHI for corn seed market will be about 3100, reflecting an increase of 400. For soybean seeds, we estimate a jump in the HHI of nearly 360, reaching 2700.”

The Dow – Dupont merger, per Forbes, falls well into the anti-competitive catergory. This merger, however, doesn’t even come close to the monopolistic qualities inherent in the Bayer – Monsanto transaction. The scale of these two behemoths, combined with their overlapping business areas, creates a blowout HHI number. For example, in the US cotton industry, pre-merger the HHI is 2,760…an already highly concentrated market. Post-merger, that number increases to 5,161!

When you start seeing HHI numbers going into the stratosphere to levels of 5,000, you start to approach the monopolistic numbers put up by Microsoft back in the heyday of Windows. If you recall those years, Microsoft was THE stock to own. They could charge whatever they wanted for their product and consumers had no choice but to pay up.

Now, the farming industry is certainly not growing like the PC industry of the 80s and 90s. However, it is a huge industry and has suffered from weak margins for years. The mergers taking place, if approved, will dramatically change the landscape of this industry, putting pricing power firmly back into the hands of the dominant providers. Who, like Microsoft years ago, will have customers lined up with no viable alternative. All of which leads me to my investment conclusion that, while these mergers will likely harm the consumers, they are fabulous for investors.

Random Musings From Our Travels

The farming industry is not the only area suffering from a lack of competitive forces. As previously mentioned, I grew up in Boston during the 80’s. Larry Bird was my idol and watching him square off against Magic Johnson in the NBA finals seemed like an annual spring ritual.

Now that I live in the Bay Area, I’ve become a Warriors fan. I’ll admit that it’s somewhat of a bandwagon adoption of them, but realize that I played a lot of basketball in my life and I absolutely LOVE the way they play the game.

Yet, even still, the New Englander in me had very mixed emotions when Kevin Durant signed on to play for them in the upcoming season. Yes, they will be super fun to watch. And, yes, the odds of another championship season here in the Bay Area just went through the roof. However, would Larry Bird have signed on with Magic and Kareem as a free agent? Never!

I must sound very old school, but I just can’t see any of the heroes of my youth teaming up with their mortal enemies to waltz their way to victory. I get it…it’s fun to win. But still, doesn’t it have a lot more meaning when you earn it? My guess is that Lebron loves his win in Cleveland 100 times more than the “Decision” and the victories with the Miami Heat.

Similar to the agriculture business, I think Durant joining the Warriors is very anti-competitive for the league. While the Warriors will now have a dominant position, the competitors are being pushed aside and the consumers suffer. Unless you’re a “stakeholder” in the W’s that is, and my analogy is that Warrior’s fans equate to shareholders in the agricultural giants…they are both rooting for dominance.

Just how anti-competitive is the league, with the Warriors getting Durant? Using the HHI index, can help tell us. By my estimation, looking at the first and second team all-league players, in the upcoming season that W’s should have 40% market share in Curry, Thompson, Green, and now Durant. Second place would be the Cavaliers with 20% in Lebron James and Kyrie Irving (a superstar coming into his own). No other team has more than 1 player in the top 10.

The NBA has an HHI of 2,400. This is an increase of 400 from 2,000, which is where the league would have stood had Durant remained with Russell Westbrook on the Thunder.

So, according to the DOJ, the move of Durant from Oklahoma City to Golden State isn’t anti-competitive enough to justify blocking the transaction, since the HHI is only 2,400. However, I don’t think anyone who grew up in New England would agree.