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Monsanto wants to sow a genetically modified future
(Tuesday, Feb. 25, 2003 -- CropChoice news) -- Rachel Mercer, St. Louis Post-Dispatch, 02/23/03: With a history of satisfying farmers, the agribusiness giant tries to weed out misguided Wall Street promises and to convince investors that it can employ new strategies.
If executives at Monsanto Co. had understood investors the way they know farmers, the agrochemical and biotechnology giant's stock might not be so low as it is today.
"You can't fool a farmer," said Hugh Grant, chief operating officer. "You have to continue to deliver value, and you have to do that every year."
Monsanto consistently has brought to market seeds bred to increase yield and genetically modified to ward off crop-killing pests. Its star product, Roundup herbicide, has been an industry standard for 28 years.
The company, with $ 5.46 billion of net sales in 2002, prides itself on working with farmers and delivering what they need, when they need it.
"Monsanto is doing a good job," said Ken McCauley, a corn and soybean farmer from White Cloud, Kan., and a board member of the St. Louis-based National Corn Growers Association.
"A company makes money by bringing new products to market. And that's how a farmer makes money, by adopting new technology and getting higher yields," he said. "If it works, everybody's happy."
Monsanto's products have kept U.S. farmers content and have made strides abroad, most notably in Canada, Australia, Argentina, Brazil and Japan. More than 130 million acres worldwide were planted with its soybean, corn, cotton and canola seed last year, up 12 percent from 2001.
Company scientists -- including Hendrik Verfaillie, who resigned as chief executive under pressure in December -- knew better than to promise farmers more than they could deliver. But its executives, Verfaillie among them, overreached when it came to Wall Street.
Monsanto, based in Creve Coeur, was beset with problems, mostly beyond its control. Yet it played down concerns and issued overly optimistic earnings forecasts, only to revise them downward twice last year.
"This is a company that has been optimistic on the borderline of lying," said Sergey Vasnetsov, senior analyst with Lehman Brothers in New York. "Monsanto has been feeding us these fantasies for two years, and when we saw they weren't real," its stock price fell.
Monsanto shares traded above $ 30 in early 2001 but plummeted over the summer. The stock closed Friday at $ 17.07 a share.
"It's not an issue that the company is financially in trouble. It's strategically in trouble," Vasnetsov said.
Since Verfaillie's departure, Grant and Chairman Frank AtLee have said they remain committed to the vision of developing genetically modified crops and better-performing seeds. This year, they expect that sales of seeds and genetically modified trait licenses will surpass sales of Roundup and its generic version, glyphosate, which have supported the company for years.
But Grant, who worked closely with Verfaillie and was named this month as a possible successor, said he knows that execution is key.
"I looked back . . . and we didn't deliver. It was naive," he told a group of chemical analysts Feb. 13, referring to promises that Monsanto would have met two of three goals by now: Brazilian regulatory approval of genetically modified cotton and soybeans, a restarted European genetically modified approval process and Indian approval of genetically modified cotton. It met only the latter.
"The key for us as a company, in the next two to three years, is execution . . . and making sure what we say will happen is going to happen," Grant said.
Riding the best horse
Many of Monsanto's problems are out of its hands:
Other issues might have come as a surprise, but analysts say Monsanto should have been prepared better to deal with them.
Roundup, which lost U.S. patent protection two years ago, is facing fierce competition. Prices fell 11 percent last year, more than the 8 percent to 9 percent Monsanto had expected. Though it cut production costs and sold generic glyphosate to some competitors, analysts say Monsanto hasn't had the "soft landing" executives touted.
Glyphosate made headlines this year with its failure to kill certain species of weeds that have developed resistance. Four weeds have proved resistant, and a fifth, waterhemp, is suspected. Scientists say that it's natural and that those weeds can be controlled with other herbicides.
But a Swiss company, Syngenta AG, one of Monsanto's fiercest competitors, is pushing the issue. Its marketing materials are designed to spread doubt about the effectiveness of Roundup and its companion Roundup Ready crops -- those seeds that aren't killed by glyphosate, allowing farmers to spray the weed-killer after planting.
"Since Monsanto came onto the market and is really dominating . . . Syngenta is taking potshots at them. But those are the two big, bad bullies in the market, so they're going to slug it out," said Bill Johnson, a weed scientist with Purdue University.
Syngenta did not respond to a request to comment.
Johnson said weed resistance is nothing to worry about, but in the long term, Monsanto's glyphosate-dependent business strategy could come back to haunt it.
Farmers are rotating crops, planting Roundup Ready corn one year and Roundup Ready soybeans the next, using the herbicide over and over again. The total number of Roundup Ready acres is growing.
The more glyphosate is used, the quicker other weeds will become resistant, scientists say.
Farmers have been warned to limit applications. But they are under economic pressure to do the most expedient and cost-effective thing, in this case, using Roundup Ready technology, which is cheaper and less labor-intensive than other weed-control methods, Johnson said.
"The knee-jerk reaction of 80 percent of these farmers is trying to survive this year," Johnson said. "And these companies are so concerned about earnings from quarter to quarter . . . they tend to think short term. If I were to think like a businessman, I would take my best product and ride that horse as long as I could. And, quite frankly, that's what Monsanto is doing."
Monsanto's cash cow
Monsanto's strategy of the moment is to continue developing genetically modified traits that can be stacked in a single seed product, along with Roundup Ready protection. And it's creating premium Roundup products, such as WeatherMax, that don't wash away immediately in the rain.
If Monsanto can't penetrate new markets in Europe or rely on revenue from countries like Brazil, then it must get the most from the farmers it has won over.
The company isn't anticipating any new European genetically modified product approvals in its 2003 forecasts. Despite growing consensus among U.S. government officials that they could bring a successful World Trade Organization complaint against the European Union, political reality is likely to stop such action.
America doesn't want to alienate the countries it would need for support in an Iraq war, industry watchers say. Besides, a WTO ruling might have a negative effect, if European consumers are put off by what they see as bullying by the United States.
It would be "the surest way to guarantee a European boycott of (genetically modified crops) and a hardening of irrational European fears and positions," said Clyde Prestowitz, president of the Economic Strategy Institute, at a forum this month held by the Pew Initiative on Food and Biotechnology in Washington.
But Monsanto seeds make up nearly the entire U.S. soybean crop, and its share of corn fields is increasing. Its new YieldGard Rootworm Corn could be approved in time for as many as 1 million acres to be planted in the spring. Monsanto hopes that the seed will cover as many as 6 million acres in 2005.
Farmers have said they are anticipating the new product and others to come, such as genetically modified wheat. They don't mind being seen as Monsanto's cash cow, so long as their profits grow, as well.
"We've got to have new products. If the industry decides that they don't want to bring them to us, that pretty much stops our business. It stops the yield increases. And if you start going backwards and that's because of industry, then that tells you they're not supporting us," McCauley said.
Monsanto also is intent on supporting its investors, starting with issuing realistic earnings guidance.
The company said it expects 2003 earnings per share in the range of $ 1.20 to $ 1.40, giving a broader range than usual to allow for further market instability. The ultimate earnings will depend on successful Roundup price management in the United States, an increase in stability and business in Latin America and good weather, said Chief Financial Officer Terrell Crews in an earnings call Feb. 5.
In the long term, Monsanto's fate will rest with foreign regulators and consumer opinion. Once it has exhausted room for growth in the United St ates, it will have to be able to exploit foreign markets, said AtLee, chairman and acting chief executive.
The company is continuing to invest heavily in research and development, with plans for building on its stable of patented biotech traits and intellectual property. Genetically modified wheat approval applications are pending with U.S. and Canadian regulators. Depending on consumer acceptance, the future promises crops that could contain vitamins and nutrients that could help to solve health problems in the developing world.
"We have a tremendous future in biotechnology and genomics. But until this thing breaks open with acceptance," it won't happen, AtLee said. "We have patience. But we have an urgency to execute, too."
THE CHALLENGES
Genetically modified foods: The European Union continues to resist genetically modified foods, and organizations such as Greenpeace are spreading distrust to nations in Africa and Asia. Protestors (above) have marched in London to support the halting of genetic engineering.
Roundup: Because of competition, the price of Monsanto's Roundup and generic glyphosate herbicide is falling fast. Syngenta AG, a Swiss competitor, is promoting the message that weeds are becoming glyphosate-resistant. Horseweed, or mare's tail (above), is one of those weeds.
Brazil: Brazil, a key market, is in turmoil. The economy is disrupted, and approval of Monsanto's genetically modified soybeans has stalled.
Leadership: Monsanto is without a chief executive. Hendrik Verfaillie (above) left under pressure in December.
THE STRATEGIES
New products: Monsanto is developing new products for the United States, including genetically modified wheat, and is counting on good sales of Yield- Gard Rootworm Corn if it wins regulatory approval in the spring.
Remaining patents: Premium glyphosate formulas, such as Roundup WeatherMax, are still under patent, and the company is promoting its service and distribution expertise to maintain sales of original Roundup.
Premium products: "Stacked" seed products, combining Roundup Ready traits with the ability to ward off pests, are being sold at a premium to boost profit.
New chief: The company said it will hire a new chief executive within six months and named Hugh Grant (above), chief operating officer, as a candidate. | |
