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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."