CONTINUED LOSSES PUT PRESSURE ON MONSANTO PRODUCT LAUNCH
Anastasia L Thatcher
November, 2004

On Oct 6, 2004, Monsanto posted a net loss of $42M for the fourth quarter, spurring a 3.2% single day drop in share price1. Continued erosion of sales, down 3% from a year earlier, has increased expectations for the agrochemical giant’s newest product: low linolenic VISTIVE™ soybeans.

A Troubled Horizon
Since 2000 when U.S. patent protection expired for its flagship product, Round-Up®, Monsanto has been struggling to keep market share and stay in the black2. Despite increased sales in its growing trait business, which partially offset losses in the herbicide arena, a year ago the company posted significant losses—$188M, or $0.72 per share. This year, despite near perfect global farming weather, Monsanto has been unable to stem the tide of falling sales and prices for its Round-Up brand herbicide, a situation exacerbated by global glyphosate (active ingredient in Round-Up) dumping by Chinese manufacturers. U.S. prices for Round-Up are now predicted to hit $11-$13 per gallon, well below Monsanto’s expectations, and market share to fall near 65%, similar to what Monsanto sees in countries where generic glyphosate has been available for years.

Monsanto has been further hit by the inability to collect royalties on pirated soy seeds in Brazil, Paraguay, and Argentina—globally the top three soybean exporters after the United States. Until very recently, genetically modified crops were illegal in Brazil and are still illegal in Paraguay, although farmers are thought to have been planting genetically modified soy for the last six years3. Monsanto’s Round-Up Ready® soy seeds, genetically modified to withstand Round-Up herbicide, are especially popular because of the reduced time and expense required for their cultivation. Monsanto, as well as producers subject to patent laws who must pay licensing fees to access the technology, believe strongly that everyone who benefits from proprietary technology should have an obligation to pay for it. Licensed producers bear that burden but unlicensed producers do not. Progress was made earlier this year when farmers in Brazil’s Rio Grande do Sul region—where experts estimate close to 90% of the soy is genetically modified—finally agreed to pay a technology fee of $3.50 a ton to Monsanto for use of its seeds. More importantly, the company’s aggressive lobbying paid off when the Brazilian government passed an executive order allowing farmers to plant genetically modified soybeans. Although the bill will give Monsanto legal standing to enforce collection of royalties on unlicensed use of its seeds in the entire country, it will not, however, sanction the sale of genetically modified soybeans

Monsanto faces a more difficult situation in Paraguay. Although 40 – 50% of soy is believed to be genetically modified, Rosa Oviedo, member of Paraguay’s biosafety commission, comments that, "Monsanto has no right to charge royalties. As of now, none of its varieties is legally sanctioned." A bill has been introduced that would legalize biotech crops, but continued peasant and farmer protests against the bill have delayed its passage indefinitely.

Unlike its neighbors, Argentina’s government has allowed Monsanto to build royalties into the price of its seeds. However, the country has been unable to collect these royalties effectively, because pirated Monsanto seeds are widely traded on the black market. In response, Monsanto stopped selling soy seeds in Argentina in 2003. It is also threatening to collect royalties on soy shipments from Argentina to countries where its seeds are patented, if they are found to carry unlicensed Monsanto products.

Other risks to Monsanto include rising oil prices, which could affect its chemical business, and a limited supply of its Posilac™ bovine growth hormone, where unresolved quality control issues are now expected to extend well into 2005. Syngenta’s pending anti-trust lawsuit, filed in July, 2004, which challenges that Monsanto has illegally monopolized key corn traits in the United States, poses another risk to the company.

Promises of Growth
Despite depressed earnings, losses to share price, and a troubled horizon, Monsanto has promised investors a share price growth of 10 – 18% in 2005 and another 10% in 20061—to be driven primarily by its growing genomics business and higher prices for soybean traits. However, stock analysts give mixed reviews of the firm’s prospects, many citing concerns that the company is overvalued by Wall Street, and that long-term growth will be below average. Overall, recommendations to investors range from strong sell to strong buy. According to eight independent equity research firms consulted, opinion on Monsanto is split evenly between three recommendations to buy, two to hold, and three to sell. Yet, there is consensus among analysts that makes one point clear: Monsanto’s future will be critically dependent on the success of developing its genetically modified seeds and traits business.

Increasing global sales of cotton, corn, and soybean products is the cornerstone of Monsanto’s growth plan. Sales potential has been boosted by the recent decision of the U.S. Patent and Trademark office that Monsanto was the first company to develop Agrobacterium transformation in dicot plants such as cotton4. The decision ends a twelve-year patent dispute between Monsanto and the Max Planck Institute (The Netherlands) and will allow Monsanto to collect fees from companies using the technology to introduce characteristics into dicot plants as well as providing patent protection for its Bollgard® brand insect-protected cotton.

While the win on Agrobacterium transformation is a boon, achieving growth targets will still be an arduous challenge, because existing Monsanto products are quickly reaching market saturation, particularly in the United States. Robert T. Farley, Ph.D., Monsanto’s Chief Technology Officer, sites the company’s belief that the average number of Monsanto traits per acre of crop is 1.5 for cotton and 1.2 for corn in the United States. Round-Up Ready Soybeans are also near full market penetration in the United States. Monsanto will fall short of its growth targets without successful new product launches. Not surprisingly, the company’s less than stellar results recently have raised the stakes and further heightened the pressure to develop and bring to market new agbiotech products.

VISTIVE™ Soybeans May Close the Gap
In the search for new products, Monsanto reports positive progress on various R&D pipeline projects, such as second-generation Round-Up Ready Flex™ cotton, vitamin-enriched corn, and drought-tolerant crop varieties5. Yet, these products are still in development; the headline news for the 2005 growing season is the launch of VISTIVE™ low-linolenic soybeans.

VISTIVE soybeans, developed through conventional breeding, were designed to reduce the need for partial-hydrogenation when processing soybean oil. VISTIVE soybeans contain less than half the amount of linolenic acid normally present—3% as opposed to 8%—yielding a more stable oil with less need for hydrogenation6. Hydrogenated vegetable fat is favored by food processors because it is solid at room temperature and has a longer shelf life. However, the trans fatty acids produced by the hydrogenation process have prompted increased scrutiny as health concerns mount—research has suggested that trans fatty acids raise LDL (bad) cholesterol levels, leading to heart disease.

VISTIVE is posed to be an important new product that, if successful, will be critical to closing the gap between Monsanto’s current poor performance and future growth expectations. The new soybeans spell success for several reasons. First, the global market for soybean oil is large and growing. Currently soybean oil, together with palm oil, accounts for over half of all oil consumed in the world—and this proportion is on the rise. Consumers are increasingly switching to soybean oil as more studies suggest that soy not only lowers cholesterol, but may have other health benefits (for instance, see http://www.soyfoodsillinois.uiuc.edu/). To accommodate this growing demand, U.S. production of major crude vegetable oils is predicted to reach 8.6M metric tons in 2008, with soybean oil accounting for nearly 87%.

Second, beginning January 1, 2006, the U.S. Food and Drug Administration will require that all foods and dietary supplements it regulates list trans fat content on the nutritional facts panel. Such labeling will promote consumer awareness of the health hazards associated with trans fatty acids, which will certainly fuel a growing demand for foods with lower trans fat content. (Europe has yet to impose such rules, but pressure is building from consumer organizations.) As food producers search for ways to satisfy an increasing preference for healthier, lower trans fat foods, it is likely that VISTIVE will be able to command premium pricing and a booming market. "VISTIVE not only supports growing consumer demand for healthier food, but also represents an important investment in the future success of the soybean industry," said Kerry Preete, Vice President of U.S. Crop Production for Monsanto6. The development of VISTIVE soybeans indicates an important shift for Monsanto—by becoming more focused on consumer benefits, its bottom line may reap the benefits.

To bring the product to market, Monsanto has partnered with Cargill, Inc., a provider of food, agricultural, and risk-management products and services to 59 countries worldwide6. Monsanto will be relying on Cargill to contract with growers, process the VISTIVE soybeans at its facilities, and then market the VISTIVE oil to the food industry. Cargill announced that, for the 2005 growing season, it plans to contract 50,000 acres of VISTIVE soybean production in Iowa, close to its processing facilities in Iowa Falls, Cedar Rapids, and Des Moines, Iowa. Cargill has said it will pay a premium to producers who choose to grow VISTIVE soybeans. The new product will be stacked with the Round-Up Ready trait and will maintain performance parity with leading soybean varieties. It will be marketed under Monsanto’s Asgrow® brand in 2005.

Selected References

1. "Slumping Roundup sales hit Monsanto." Oct 6, 2004. CNNmoney. http://money.cnn.com/2004/10/06/news/fortune500/monsanto.reut

2. Melcher, Rachel. Oct 6, 2004. "Monsanto Raises Bar for Fiscal ’05 Earnings." St. Louis Post-Dispatch.

3. Burke, Hillary. (Reuters.) Sept 28, 2004. "Monsanto prods South American nations on soy royalties." http://www.checkbiotech.org

4. "Monsanto Wins Key Patent Dispute Regarding Dicot Plant Transformation." Oct 5, 2004. (PRNewswire-Firstcall.) http://prnewswire.com/news/index_mail.shtml?ACCT=104&STORY=/www/story/10-05-2004/0002266187&EDATE=

5. "Monsanto Chief Technology Officer Previews Advancing Pipeline of Next-Generation Biotech Traits." Sept 29 2004. (PRNewswire-Firstcall.) http://prnewswire.com/news/index_mail.shtml?ACCT=104&STORY=/www/story/09-29-2004/0002261189&EDATE=

6. "Cargill to Process Monsanto’s VISTIVE™ Low Linolenic Soybeans." Oct 4, 2004. (PRNewswire-Firstcall.) http://prnewswire.com/news/index_mail.shtml?ACCT=104&STORY=/www/story/10-04-2004/0002265237&EDATE=

Anastasia L Thatcher
Senior Business Analyst, UHG
New York, NY
alt232@stern.nyu.edu