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Monsanto struggles even as it dominates
(Monday, June 2, 2003 -- CropChoice news) -- David Barboza, NY Times, 05/31/03:
Monsanto should be thriving.
The company has helped develop most of the world's biotech
crops; it produces the best-selling agricultural chemical
of all time; and after a series of huge acquisitions, it
can now call itself the world's No. 2 agricultural seed
company, behind the Pioneer Hi-Bred unit of DuPont.
Yet profits are in a slump, its shares have tumbled nearly
50 percent in two years, and the company continues to take
a beating over the introduction of genetically altered
crops.
In all the turmoil, the Monsanto Company even lost its
second chief executive in three years, Hendrik A.
Verfaillie, who stepped down in December. Only this week
did it name a successor - Hugh Grant, a longtime company
executive who most recently has been chief operating
officer.
Despite all the company's advantages, analysts say, its
progress has been impeded by heavy spending, management
shake-ups and the unexpected costs of trying to win the
world over to those altered crops.
"Europe is really the stumbling block for global
acceptance, and that's a problem," said Leslie Ravitz, an
analyst at Morgan Stanley.
And Andrew Cash, an analyst at UBS Warburg, noted that
"part of the problem was their infrastructure is for a
global market." He added, "If the world market had accepted
biotech two years ago, or even now, they'd be much more
profitable."
Monsanto executives, for their part, say they are right on
course. While Mr. Grant, on his promotion, acknowledged
that "we're at an important crossroads," he stressed his
longstanding belief that altered crops "have great
potential."
The company has successfully moved away from a dependence
on chemicals, and biotech profits are growing, top
executives say. Indeed, this year, for the first time,
Monsanto predicts that over half of its agricultural
profits will come from something other than chemicals.
Biotech genes, one of Monsanto's newest businesses, are
expected to produce about $600 million in gross profits
this year, analysts say.
Chemicals - a mainstay since the company's founding in 1901
- are in sharp decline.
"Fifteen years ago, we were digging holes in the ground,
extracting oil," Mr. Grant said in a recent interview at
company headquarters in St. Louis, before his elevation to
chief executive. "We were making nylon. We were a fibers
company. Then we were a fine-chemicals company. Now we're a
seeds and biotechnology company."
This is what Monsanto wanted to become, not an aging
chemical concern but a new-age biotech company that would
use the tools of genetic engineering to help transform the
world of food and agriculture.
But Monsanto spent dearly to get here, investing billions
in the last decade to acquire huge seed companies and to
develop genetically altered crops.
The new Monsanto essentially has two main products:
genetically altered seeds and Roundup, the herbicide that
works in tandem with some of the company's most popular
biotech crops. Roundup now commands a remarkable 90 percent
of the world's herbicide market. And because Monsanto was a
pioneer in genetically manipulating plants, it controls
over 90 percent of the market for biotech "traits," the
genes that transform ordinary seeds into new types of
crops.
Still, profits have been lackluster for two years, analysts
say, partly because of weakness in Latin America, where
inventory and management problems have taken a toll.
Investors say Monsanto has also been weighed down by its
heavy cost structure. Return on equity is weak, analysts
say, because of the roughly $10 billion the company spent
in the last decade to acquire seed companies and market
about a dozen varieties of genetically altered crops.
"They don't even make their cost of capital, so that means
every quarter they're actually destroying value," Mr. Cash,
the analyst, said. "They introduced biotech traits in '95,
and now there are 140 million acres. That's astounding. So
it must be costs; it can't be sales."
Weak profits have sent Monsanto shares down, to $20.05 at
the close of business yesterday from a peak of $38 in June
2001.
Still, most analysts agree that Monsanto has no real peer
in biotech crops. "There's nobody else in the input traits
that's competitive," Mr. Ravitz of Morgan Stanley said.
"They are way ahead there."
Monsanto's biggest rivals - DuPont, Syngenta and Bayer -
are working to develop their own biotech crops, but only a
handful of products have reached the market. Some of the
best prospects are two to seven years away, the companies
say.
"Part of it was our late entry into the biotech arena,"
said Richard L. McConnell, the president of Pioneer
Hi-Bred, DuPont's seed unit.
DuPont and Syngenta, however, are about to release products
that go head-to-head with some of Monsanto's best-selling
biotech traits. And some analysts predict that those two
companies will capture a significant share of the market -
and perhaps pressure Monsanto to lower its prices.
In the meantime, the competitors are content to profit from
Monsanto's biotech traits, which are licensed to most of
the world's major seed companies.
Sales of soybeans are growing because of Monsanto's biotech
traits, said John Sorenson, the president of Syngenta Seeds
North America, referring to the growth of Monsanto's
popular Roundup Ready soybeans, which are genetically
altered to withstand being sprayed by Roundup. "It's been a
very profitable segment for us."
When biotech crops were first planted commercially in the
United States, in 1996, Monsanto was not the first to
market them, but it was the most aggressive.
That year, about 2 million acres of biotech crops were
planted nationwide; today over 100 million acres are.
Roundup has been one of the biggest beneficiaries of this
boom. Although it was already a blockbuster product, sales
soared to over $2.4 billion in 2001, making it the
best-selling agricultural chemical ever.
More than 80 percent of the soybeans in the United States
and Argentina, the world's biggest exporters, are now
genetically altered. And much of the land they are grown on
is sprayed with Roundup.
To compete, other seed companies plan to introduce a series
of "output" traits, or genes that could improve the quality
or taste of crops like corn, soybeans, canola and tomatoes.
Competitors say output traits will be even more profitable,
and experts say that contest will inaugurate the real
biotech race.
"It's like a game of Monopoly," said Tray Thomas, the
president of the Context Network, an agribusiness
consulting group in West Des Moines, Iowa. "Monsanto has
hotels on Boardwalk and Park Place. But a lot of the game
is yet to be played."
Monsanto says it plans to maintain its lead by devoting
nearly 80 percent of its more than $500 million in annual
research and development spending to biotech traits. Its
rivals, by their own estimates, devote closer to 20
percent.
But therein lies a problem, analysts say: Monsanto's
research spending has held down profitability. "They're
generating gross profits, but they invest it back into the
business," Mr. Ravitz said.
Monsanto also faces problems abroad, where genetically
altered crops are sometimes scorned. Europe is showing no
signs of easing its restrictions, and is in fact
considering tightening some of them, which would make it
more difficult to export biotech crops there. "Europe has
been a major problem," Mr. Thomas said. "A lot of farmers
are worried that they'll plant things they won't be able to
sell in Europe."
Problems like that have inflated the cost of
commercializing biotech crops, not just in Europe, but in
other nations that follow Europe's lead.
In the United States, the biotech industry abandoned
altered potatoes and delayed the marketing of altered wheat
because of consumer health concerns. Monsanto says the
crops have been properly tested and pose no threat to
humans or the environment.
Monsanto has also drawn government scrutiny. According to a
regulatory filing in March, the Justice Department was
investigating whether the company engaged in
anticompetitive conduct in the herbicide market. And
lawyers are pressing forward with a class-action lawsuit
that accuses Monsanto of conspiring with competitors to
control the world's biotech seed market.
Monsanto said yesterday that it was cooperating with the
Justice Department investigation. The company said it acted
properly and denied that it engaged in any conspiracy to
control the seed market.
Monsanto executives say they gained dominance with
pioneering research and by getting some of the first
products to market. "The bets we made really started in the
1980's," said Mr. Grant, the chief executive. "We really
stopped on chemical R&D, and we focused on biotechnology."
Having proved that biotech traits can be profitable,
Monsanto said it was moving into another phase: stacking
genetically altered traits in seeds, one on top of another.
The company is also preparing to introduce consumer traits,
like a biotech seed that will be fortified with omega-3, a
fatty acid considered beneficial to human health.
"We're starting to populate our pipeline with consumer
traits," said Robert T. Fraley, Monsanto's chief technology
officer. "Now, we'll have oil, corn and canola with
omega-3."
The problem is that competitors are coming out with new
products that will challenge Monsanto's dominance of
biotech corn and cotton. And Monsanto also faces declining
profits from Roundup; its patent expired in 2000, and its
price continues to drop.
"There are a lot of risks," Mr. Cash, at UBS, said. "The
market is worried about competition. The market is worried
about costs. The market is worried about them getting paid
for their traits. They've got a big hill to climb."
http://www.nytimes.com/2003/05/31/business/31SEED.html?ex=1055385470&ei=1&en=5689bb7ef7ec4940 | |
