COMMENT: Here's the world according to Monsanto, but read in between all the hubris and you discover that Monsanto's abandoned GM 'food' crops, just as it has had to beat a tactical retreat - or remains almost completely excluded - from many parts of the globe. And it's betting its shirt entirely on its animal feed/food processing/agrofuel crops.
That strategy is working fine financially for the moment, particularly given the ethanol boom. But how sustainable is an agrofuel boom that threatens both food sovereignty and environmental devastation? And where does Monsanto go when even in its American heartland, its GM product - rBGH - is already in serious trouble, while a whole series of US presidential candidates are starting to commit to GM food labelling?
EXTRACTS: Managers at the company display a near-religious conviction about the GMO cause... But if the fears of GMO opponents ever do come true, Monsanto will take a far bigger fall than any of its more diversified rivals. Today, Monsanto gets 60% of its revenue from biotech seeds, in contrast to about 20% at Syngenta, for example, and less than 10% at diverse chemicals company Dow (DOW). The company's confident leaders are essentially making an enormous unhedged bet on their technology.
While Monsanto executives don't believe they are gambling, there are still plenty of doubters. In August, Kroger (KR) became the latest U.S. grocery chain to stop selling milk with a GMO bovine growth hormone that increases production, which Monsanto first started selling in 1994. All summer, activists in France trampled fields of biotech crops. Hostility toward GMO foods continues to be widespread in Africa and parts of Asia and Western Europe. This type of persistent opposition is one reason why the investment research firm Innovest Strategic Value Advisors, which gives companies a type of credit rating based on their strategic risk profile, assigns Monsanto a 'CCC' grade-its lowest possible mark. 'Monsanto is basically saying that its products are very well regulated and therefore safe,' says Heather Langsner, director of research for Innovest. 'It's a lot more murky than that.'
NOTE: Join Business Week's debate about GMO-crop safety [Monsanto's got its folkj in there quickly so it's pretty pro-GMO!] http://www.businessweek.com/debateroom/archives/2007/12/gmo_crops_a_gro.html
Monsanto: Winning the Ground War
How the company turned the tide in the battle over genetically modified crops
by Brian Hindo Business Week, December 6 2007 http://www.businessweek.com/magazine/content/07_51/b4063034300400.htm?campaign_id=rss_topStories
When Hugh Grant took the top job at Monsanto (MON) in May, 2003, the company's nickname in some quarters was 'Mutanto.' A growing chorus of critics warned that Monsanto's genetically modified plant seeds would wipe out the monarch butterfly, give people virulent new allergies, and reduce the planet's agricultural diversity. Author Jeremy Rifkin predicted that genetically modified organisms (GMOs) would turn out to be 'the single greatest failure in the history of capitalism.' Paul McCartney urged the world to 'say no to GMO.' Prince Charles wrote an editorial arguing that genetic engineering takes 'mankind into realms that belong to God and to God alone.'
During the 12 months preceding Grant's elevation, Monsanto's stock price fell nearly 50% to $8 a share. In 2002, the prior fiscal year, the company lost $1.7 billion. 'We were pretty financially fragile,' recalls Grant, 49, who speaks with the lilt of his native Scotland.
Fewer than five years later, Monsanto is thriving. The St. Louis company's net income leaped 44% last year, to $993 million, on $8.5 billion in revenue. Monsanto shares, which closed at $104.81 on Dec. 5, have risen more than 1,000% during Grant's tenure. At 58.6, the company's price-to-earnings ratio is about two points higher than Google's (GOOG). These numbers reflect a broader story: that Monsanto has quietly turned the tide in the war over genetically modified foods.
While a vocal band of opponents is still protesting biotech crops, a growing multitude of farmers around the world is planting them. The reason is no mystery: Monsanto seeds contain genes that kill bugs and tolerate weed-killing pesticides. So they are much easier and cheaper to grow than traditional seeds. More than half the crops grown in the U.S., including nearly all the soybeans and 70% of the corn, are genetically modified. Just five years ago, China, India, and Brazil planted virtually no genetically engineered crops. Now Brazil can barely build roads fast enough to get all of its biotech soybeans from the fertile interior Mato Grosso state out to ports. Farmers in China and India, meanwhile, planted more than 17 million acres of biotech crops last year. These three countries are now three of the six largest GMO-planting nations in the world, as measured by area planted. At a time when organic food is more popular than ever, about 7% of the world's entire farmland acreage is now planted with genetically modified crops—the ultimate anti-organic food. 'When you're more than 1 billion acres planted,' says Grant, 'I think the conversation moves from what if' to what is.''
The battle over genetically modified food is being won not in scientific journals but on the ground. Global demand for food and fuel have made farmers ever eager to squeeze more yield from an acre of dirt. And the undeniable fact is that during the 12 years since the first biotech seeds were planted, the most dire predictions of Monsanto's opponents have so far failed to come true. That's prompted some swaggering at company headquarters. In interviews with BusinessWeek, Monsanto executives variously described the safety objections of adversaries as 'scare tactics,' 'Chicken Little theatrics, 'mischief,' and 'misinformation.'
Managers at the company display a near-religious conviction about the GMO cause. In the days when fear of so-called Frankenfoods was at its peak, Grant and his team made a risky decision to stand firm. They insisted on holding research and development spending to 10% of sales. Grant also made a crucial strategic decision to pare down the products Monsanto sold. No longer would Monsanto sell seeds for produce destined directly for the dinner plate. Instead Grant focused exclusively on seeds for agribusiness, ones that produced such goods as animal feed, ethanol, and corn syrup. That has helped deflate the opposition.
But if the fears of GMO opponents ever do come true, Monsanto will take a far bigger fall than any of its more diversified rivals. Today, Monsanto gets 60% of its revenue from biotech seeds, in contrast to about 20% at Syngenta, for example, and less than 10% at diverse chemicals company Dow (DOW). The company's confident leaders are essentially making an enormous unhedged bet on their technology.
While Monsanto executives don't believe they are gambling, there are still plenty of doubters. In August, Kroger (KR) became the latest U.S. grocery chain to stop selling milk with a GMO bovine growth hormone that increases production, which Monsanto first started selling in 1994. All summer, activists in France trampled fields of biotech crops. Hostility toward GMO foods continues to be widespread in Africa and parts of Asia and Western Europe. This type of persistent opposition is one reason why the investment research firm Innovest Strategic Value Advisors, which gives companies a type of credit rating based on their strategic risk profile, assigns Monsanto a 'CCC' grade—its lowest possible mark. 'Monsanto is basically saying that its products are very well regulated and therefore safe,' says Heather Langsner, director of research for Innovest. 'It's a lot more murky than that.'
On Wall Street, however, such skeptics are hard to find. Monsanto is minting money, its business vision is clear, and shares are on a tear. But that was far from the case in 2000, when the latest chapter in the 106-year-old company's history began. That's the year Monsanto, then a large chemicals conglomerate with a relatively small agriculture division, was bought by Pharmacia & Upjohn. During the acquisition, some analysts valued the biotech business at less than zero.
Pharmacia certainly did not have much interest in the future of genetically modified seeds. It snatched up Monsanto for the drug compound that would eventually become Celebrex. In 2002, Pharmacia spun off Monsanto as an independent company focused totally on agriculture. But the move came at the height of the GMO debate and at a time when farmers in Latin America, a key market, were having one of their worst years ever. Moreover, Roundup, Monsanto's chemical herbicide and at the time the source of 65% of its sales, had just come off patent. By the end of 2002, total sales had dropped 14%, and operating income fell by half. Then-CEO Hendrik A. Verfaillie was shown the door in December.
Verfaillie's successor, Grant, came up through Monsanto's ranks as a salesman. In contrast to previous CEOs, who had been more aloof, say analysts and Monsanto managers, he presented a friendlier face to the outside world. While chief operating officer, Grant was the go-to company spokesman for a 2000 PBS Frontline special titled 'Harvest of Fear,' which described the debate about GMOs.
When Grant took the helm, there was bad news in every direction. Despite billions of dollars of investment over two decades, Monsanto's genetically engineered seed business still hadn't earned a penny. All of these challenges seemed particularly daunting to the newly independent company because 'no parent [was] going to bail you out,' recalls Carl Casale, executive vice-president for strategy and operations. There was 'no other division you could rely on.'
To create a sense of urgency, Grant relocated the members of the leadership team, who had been scattered across the company's campus, to the same floor of the 'A' building as his office. They all reported directly to Grant, who was by then the president, CEO, and chairman of the board. And Grant turned the group's traditional 8 a.m. Monday meeting from a casual session into an intense three-hour operational review. Managers came away from each meeting with a to-do list in hand. Grant says that his goal at the time was 'building a team that was completely, no-kidding accountable.' He also ditched the traditional annual strategic planning meeting—'death by PowerPoints,' Grant says—and replace it with offsite, half-day strategy reviews every six weeks.
At these sessions, over a period of months, Grant and Co. implemented a new strategy for Monsanto. Grant's plan revolved around three big decisions. The first was to cut costs aggressively in the herbicide business. The second was to maintain Monsanto's overall investment in biotechnology. And the third—the most important one, in retrospect—was to focus that investment largely on just four commodity crops: corn, soybeans, cotton, and canola.
All of these crops are harvested mostly for industrial uses, going from the farmer to a processing plant where they become animal feed or biodiesel fuel. The consumer never directly encounters them at the store. Diners, in fact, would spit out Monsanto corn, which, unlike sweet corn, is inedible off the cob. Grant's decision caught many of Monsanto's scientists off guard: Several research programs aimed at producing things people eat were axed over the course of the year, among them biotech wheat, an extra-durable tomato, blight-resistant potatoes, and bananas bred with an innate defense against virus. He acknowledges the pain: 'The science was brilliant,' Grant says. 'The technology we had in wheat was probably amongst our best.'
Now, Monsanto GMOs still enter the human food supply, but only indirectly, in the form of processed grain products such as cornstarch, corn syrup, or cooking oil. In fact, in the U.S., about 60% to 70% of all 'formulated foods'—processed food with more than one ingredient—contain GMOs, according to the Grocery Manufacturers Assn. That means, essentially, if you see it in a box or a can at a U.S. grocery store, there's a strong likelihood that it has at least a small quantity of biotech ingredients. The lone table-ready GMO food Monsanto sells is virus-resistant squash, a product it inherited in 2005 with its acquisition of vegetable seed company Seminis. The company says it has no plans at the moment to make more GMO veggies.
In recounting this chapter of the company's history, Monsanto executives emphasize that they were investing in the part of the market they thought would grow; they deny bowing to activist pressure. But managers were clearly mindful of consumer fears. In a speech at Washington University in St. Louis just a week before his December, 2002, departure, Verfaillie acknowledged that the company had underestimated the effectiveness of the opposition groups like Greenpeace. David Stark, who directs global industry partnerships for Monsanto, recalls that some food industry executives wouldn't schedule a meeting with him. 'They didn't even want to be seen talking with me,' he says. 'I felt like I was contagious.' Last year, by contrast, Stark spoke at a food conference in Britain, an anti-GMO bastion. 'Four or five years ago, I probably would not have been invited,' says Stark.
So Monsanto basically became a business-to-business technology company, producing raw materials to supply the industrial food giants. This move is one of the key reasons consumer opposition to biotech seeds has died down. It's much easier, after all, to get the average grocery shopper riled up about a mutant tomato than an herbicide-tolerant soybean he'll never see. The GMO debate 'is clearly not as high up on the radar screen,' says Gregory Jaffe, a lawyer at the Center for Science in the Public Interest, an advocacy group that has been critical of Monsanto. 'There haven't been a lot of new things to fight.' Some activists, in fact, consider Monsanto's retreat from consumer biotech a significant victory.
SOFTENING ITS STANCE
Even if ordinary food buyers lost interest in the issue, of course, Monsanto's critics did not forget about it. But the company has tried to soften the opposition by taking a less defensive stance toward critics. Where the company had once protected its internal research papers like state secrets, it began publishing some of them in refereed scientific journals. 'What you see with Hugh, I think, is a more conciliatory tone toward the opponents of GMOs,' says Robert Koort, a Goldman Sachs (GS) analyst who has followed Monsanto since the late 1990s. 'It wasn't so much, The science is right, and we're going to just shove it through.''
Grant's stance took shape, he says, when he was still COO. An executive from Royal Dutch Shell spoke to a handful of Monsanto executives about his experience on the receiving end of heated criticism from Greenpeace over the fate of a decommissioned offshore oil rig. Shell ended up following Greenpeace's advice about how to deconstruct the rig. The Shell executive 'talked about societal shift,' says Grant. The message was clear: 'Trust me' doesn't work anymore.'
The change hasn't gone unnoticed. At academic conferences in the early '90s, 'Anyone who talked about risks would get really hostile questions...from industry people,' says Allison A. Snow, a botanist at Ohio State University who has sparred with other biotech companies over her research, which shows that transgenic plants can spread in the wild and end up promoting the growth of stronger weeds. These days, she says, Monsanto and other companies in the industry are much 'more respectful and interested in what we are doing.'
These types of conciliatory words were once rarely uttered by company critics. Over the years, Monsanto has been involved in a series of controversies that have given it a hard-nosed reputation. In 2005, for instance, the Justice Dept. fined the company $1.5 million for bribing an Indonesian official (the company says the bribes were contrary to corporate policy). The company has a long history of suing farmers for unauthorized use of its seeds, a strategy that has prompted adversaries to label it a corporate bully.
But the initial wave of seeds has not yet created any immunological or ecological disasters, and that has assuaged some skeptics. Margaret Mellon, of the Union of Concerned Scientists, like many of her peers, has come to the conclusion that currently available GMO seeds are probably safe to eat. But she points out that researchers often spot risks for potential allergies and for environmental contamination. She argues that seeds must receive more rigorous testing. 'There are many things about the technology that are reassuring,' says Mellon. '[But] we don't really have a good way of testing whether there are going to be human allergies.'
As the debate quiets down, demand for genetically modified crops has exploded. The economic emergence of China and India lifted income levels for billions, who, like their wealthier middle-class counterparts in the West, are now eating meat several times a day. That has driven a surge in demand for animal feed. Although Monsanto seeds cost several dollars more per bag than conventional ones, farmers buy them because they are much easier to cultivate. Monsanto's latest corn seed, for instance, has three special genetic traits: pesticide to kill the European corn borer, a caterpillar that eats through the top of a stalk; pesticide to kill the rootworm, a beetle that eats the roots of a cornstalk; and resistance to Roundup weed killer. A farmer spends, on average, up to $36 more per acre for Monsanto's three-trait corn seed. But the company says he can save twice that on chemical insecticides and herbicide.
These types of productivity improvements are a big reason farmers in Brazil seem to have fallen in love with Monsanto soybeans. It's quite a reversal: During President Luiz Inácio Lula da Silva's 2002 run for office, his agriculture policy adviser told reporters, 'We want to establish a reputation as GM-free. We get premium prices that our competitors—the U.S. and Argentina—don't because they plant GM.' At the time, however, biotech soy seeds were already being spirited across the border from Argentina into southern Brazil. Usage exploded, and the government, which had no policy on GMO seeds, had no choice but to legalize them because the country was going to lose its biotech-free status in any event. 'The amount of [GM] crops being planted was so big that they couldn't stop GM's expansion,' says Marcelo Duarte, the executive director of Aprosoja, a soy growers' association in Mato Grosso. 'It wasn't really even a choice.' Monsanto said that it was upset about the smuggling, which it considers piracy. But the company also began taking legislators on 'fact-finding trips' to learn more about GMO products, says David Fleischer, a professor in Brasilia. By 2005, Brazil's legislature opened the country to GMO adoption.
Monsanto has remained an effective lobbyist in Brazil. This February, Greenpeace fought a proposal that would allow new GM technologies to be approved by a simple majority of Brazil's biotech advisory board, rather than two-thirds. After a long battle to be heard by high-ranking officials, activists won an audience with the powerful Casa Civil, or Executive Office. Gabriela Vuolo, who heads Greenpeace's GMO campaign in Brazil, says Greenpeacers 'almost literally' crossed in the hallway with Monsanto reps who, minutes before, had their own meeting with the same officials. Vuolo says the meeting was marred by the sensation that the pro-GM camp 'got there first,' and that they seemed to have swayed Executive Office officials in favor of easing restrictions on GM. The new Biosecurity Law passed with President Lula's approval the next month.
Today, Monsanto executives consider universal adoption of GMO seeds simply a matter of time. Even in hostile climes like Germany, France, and Portugal, Monsanto seeds have started to be planted after a moratorium on GMO plantings was lifted by the EU in 2004. As for the organic movement, it is 'not going to replace how the vast majority of food and produce is grown,' says Monsanto strategist Casale. 'Quite frankly, it can't. There are not enough cities to tear down to bring the extra land into production that we would need to farm with those practices to feed this country and this planet.'
Today, more than 90% of the genetically modified seeds in the world are sold either by Monsanto or by competitors that license Monsanto genes in their own seeds. And Monsanto has no intention of giving up its lead. Around the world, 3,000 company research scientists are coming out with the next generation of genetically modified seeds. Much of the fruits of their labor was on display at the annual Farm Progress Show, held in August in Decatur, Ill. Squared off by a barbed-wire fence, Monsanto showed off what it auspiciously called its 'Golden Acre'—a panoply of experimental crops, from soybeans that produce omega-3 fatty acids to drought-tolerant corn. It was the company's research pipeline in plant form.
In a speech during the show, chief technologist Robb Fraley described the coming 'step change in yield.' In 1970, the average corn harvest yielded 70 bushels an acre. In 2006 the average yield was 150 bushels an acre. And by 2030, Fraley predicts, yields will push 300 bushels an acre. Monsanto is now working on a super-seed that will have eight specific biological traits baked into it, set to hit the market in 2010. Although the debate over genetically modified foods still has plenty of years to run, Grant is confident this little grain will be his best weapon in it. 'Once farmers see this stuff,' he says, 'they don't want to go back.'
GMO and Hunger
Friends of the Earth International, an environmental organization, released a report in January titled 'Who Benefits from GM Crops?' In a critique of GMOs, FOEI argues that, despite promises from the biotech industry, 'GM crops have done nothing to tackle hunger.'
Burden of Proof
In a Sept. 24 research note, analyst Mark Gulley of Soleil-Gulley & Associates argues that 'given 12 years of ag biotech cultivation...we think the burden of proof is beginning to shift to the critics.' Gulley, who rates Monsanto (MON) shares a buy, contends GM crops support renewable fuel production. 'Think of U.S. corn fields as a giant solar energy collection device,' he writes.
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