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Doing the Agrochemical Shuffle

Fortune Brainstorm E 2016Fortune Brainstorm E 2016
Monsanto CEO Hugh Grant speaks at Fortune Brainstorm E conference last week.Photo by Stuart Isett for Fortune

Bids like the $62 billion offer that Bayer made for Monsanto this week—and that the seed giant rejected today “as incomplete and financially inadequate”—don’t happen in a vacuum.

For months the major players in the agrochemical and seed industry have been flirting with possible combinations that would remake the entire sector.

Monsanto (MON) kicked off the reshuffle when it made a play for Syngenta just over a year ago that the Swiss chemical company ultimately rejected. Instead, in February, Syngenta agreed to be acquired by Chinese government-owned ChemChina. Then, in December, Dow and DuPont announced that they would merge and split into three companies, one of which would be an agriculture entity capitalizing on DuPont’s seed business and Dow’s chemicals.

On its last earnings call, Monsanto CEO Hugh Grant suggested that the company had moved on from the possibilities of a deal, saying that we “no longer see large-scale M&A as a likely opportunity.” Obviously that forecast changed this week. While the company said the bid was too low, it’s “open to continued and constructive conversations.”

So what’s been driving the sector’s deal mania? First is a tough environment for agriculture. Back-to-back seasons of record harvests have driven down commodity prices, meaning farmers have less to spend on the inputs that chemical, fertilizer, and seed companies sell. The industry giants have been further hit by weak international currencies.

The resounding wisdom seems to be that the best way for these entities to compete in this down ag cycle, and going forward, is to become companies that do it all—seed, biotech, and chemicals—rather than operate in silos. Monsanto’s belief all along has been that it can take better advantage of all it knows about plant biology by bringing a chemistry operation in house.

The remaining question then is why Monsanto choose Syngenta first over Bayer. CSLA analyst Mark Connelly has an interesting take:

First, we don’t know that it was “instead”—M&A talk takes place over years, not months. But the main reason, we think, is that gaining control of Syngenta, while perhaps one notch less valuable in pesticides…would have helped ensure that Syngenta trait business didn’t end up combining with DuPont’s Pioneer seed business—a combination that would have presented the most credible competitive threat to Monsanto.

It’s too soon to tell how this will all shake out. What we do know is that when this string of deals is done the agriculture industry landscape will be completely remade.