Affected market: Crop protection
The OFT's decision on reference under section 22 given on 16 February
Masstock Arable UK Ltd (Masstock) provides agronomy advice to UK arable
farmers, together with the sale and distribution of crop protection
products, including herbicides, insecticides, fungicides, nutrients and
growth regulators. In the year ended June 2002, Masstock's turnover
was £59 million. Dalgety Arable Limited (DAL) is a significant supplier
of agrochemical advice and products across the UK. DAL's turnover for
the year ended June 2003 was £321 million.
Masstock has acquired the UK arable business of DAL on 3 December 2003.
The statutory deadline expires on 2 April 2004. The administrative
timetable will expire on 16 February 2004.
As a result of this transaction Masstock and DAL have ceased to be
distinct. The UK turnover of DAL exceeds £70 million, so the turnover
test in section 23(1)(b) of the Enterprise Act 2002 (the Act) is
satisfied. The parties overlap in the supply of crop protection products
and advice and the share of supply test in section 23 of the Act is
met. A relevant merger situation has therefore been created.
The parties' main area of overlap is in the distribution of crop
protection products and the provision of agronomy advice. There is also
a small overlap in the distribution of fertiliser and seeds.
There are three main groups of crop protection products: herbicides;
insecticides; and fungicides. Crop protection products are manufactured
by firms such as Bayer, BASF and Syngenta and are sold to end-users -
arable farmers ([see note 1]) - through distributors such as
Masstock and DAL. Masstock also acts as a wholesaler and supplies
smaller retailers who, in turn, also supply arable farmers. DAL only
supplies farmers directly. No single manufacturer produces the full
range of products required by customers, and the use of non-exclusive
distributors, who stock a range of products from all manufacturers, is
the most efficient route to market. In addition to the sale of crop
protection products, distributors also provide agronomy advice on the
suitability of these products, and the quantities in which and how they
should be used.
Crop protection products
On the demand-side it would appear that each group of crop protection
products has specific uses and is not interchangeable from the
customers' point of view. On the supply-side, it seems unlikely that
suppliers of crop protection products to non-arable customers could
quickly switch to supplying arable customers. Suppliers tend to focus
on a particular sector and products are supplied in different quantities
according to their use. Moreover, amenity and forestry distributors tend
to be much smaller firms because their customers are smaller and use
smaller quantities of the products distributed. They may find it
difficult to provide products in suitable volumes, which could prevent
them from supplying arable customers.
All distributors of crop protection products also provide agronomy
advice, a service that normally adds about 10 per cent to the price of
an order for crop protection products. According to a Farmstat survey
([see note 2]), 95 per cent of farmers took advice before
purchasing crop production products, and 60 per cent of farmers
purchased advice and products together, suggesting that, while the
majority of farmers do purchase advice and products from a single
supplier, there is a significant minority that do not.
As no competition concerns are raised whether the products and advice
are considered separately or as bundled items, the product frame of
reference can be left open.
This transaction is concerned with the distribution, rather than the
manufacture, of crop protection products. The key issue, therefore, in
determining the relevant geographic scope is whether customers are able
to purchase from distributors in other regions, and would do so if
prices were to increase by 5-10 per cent. There may be regional aspects
to competition - the majority of Masstock's customers are located
within an hour's drive of its depots although its competitors may
deliver further afield - but the trend is towards fewer, larger depots
to reduce costs.
No competition concerns are raised on either a national or regional
basis within the UK so the geographic frame of reference can be left
The parties estimate that their combined national share of supply of
crop protection products and advice would amount to 10-15 per cent, with
an increment of 5-8 per cent. The combined entity will continue to face
competition from four other national distributors as well as a number of
smaller distributors. The pre-merger HHI amounts to 623 (increment 84)
which suggests that the merger raises no competition concerns. On a
regional level the merger will reduce from seven to six the number of
major distributors in three regions and from six to five in two regions.
In North Yorkshire/ Humberside where the parties' combined share of
supply is highest, the parties will supply 25-30 per cent, being an
increment of 8-12 per cent.
The parties were unable to supply separate figures for crop protection
and advice. However, based on the value of crop protection products
sales, the parties' combined share of supply for crop protection
products will only be about 8-12 per cent (increment 1 per cent). No
regional estimates were available.
Barriers to entry and expansion
An ordinary warehouse can be used to store crop protection products as
long as a low, chemically sealed wall is constructed to contain possible
spillages. It is estimated that a distributor would need to make an
investment of £5 million to achieve a 10 per cent share of supply of
crop protection products and agronomy advice. For crop protection
products only, entry costs are not high relative to the size of the
While customers value the reputation and experience of distributors,
this does not prevent them from switching to a new distributor if they
were unsatisfied with prices. Customers, therefore, do not appear to
face any barriers to switching supplier. Indeed, third parties
indicated that, where they were dissatisfied with service and/or prices,
they would willingly switch.
The parties contend that large farms and co-operatives are able to
exercise negotiating strength. While larger farms and co-operatives may
have a degree of negotiating strength, it appears unlikely that smaller
customers possess any countervailing buyer power.
The transaction does not raise any vertical issues.
THIRD PARTY VIEWS
Suppliers, competitors and customers were contacted to assess whether
the merger raised any competition issues. Two competitors raised
concerns that the merger would result in high market shares nationally
and in certain regions. Further investigation of this issue did not
support this concern as sufficiently founded. One competitor considered
that the merger would allow the parties to cross subsidise their sales
of crop protection products, seeds and fertilisers. This view presumes
one-stop shopping and does not appear to be well-founded since customer
switching and customers buying from multiple suppliers would prevent
The transaction qualifies on the turnover test and the share of supply
test of the Act. Nationally, the parties' combined share of supply for
all crop protection products and advice will be 10-15 per cent,
increment 5-8 per cent. Regionally, the transaction has the largest
impact in North Yorkshire/Humberside where the combined share of supply
is 25-30 per cent, increment 8-12 per cent. Post-merger, there will be
at least five other larger suppliers as well as a number of smaller
suppliers who together account for a significant share of supply. In
the provision of crop protection products only, the parties' combined
share of supply nationally will be 8-12 per cent, increment 1 per cent.
Entry costs do not appear to be high relative to the size of the sector,
as all that is required to become a distributor is suitable warehousing,
distribution facilities and staff, including agronomists and customers
appear to be willing to switch distributor. Buying groups and
co-operatives may possess a degree of negotiating strength but this does
not appear to be very significant.
The OFT does not therefore believe that there is a significant prospect
that the merger would substantially lessen competition within a market
or markets in the United Kingdom for goods or services. Nor does it
believe that there is a credible alternative view that the merger might
substantially lessen competition.
This merger will therefore not be referred to the Competition Commission
under section 22(1) of the Act.
- Arable farmers produce cereals (principally wheat and barley),
oilseed rape, linseed, pulses, sugar beet and potatoes.
- Commissioned by the parties.