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By
David Barboza
Monsanto jumped headfirst into the future five years ago, when
it spun off its old-line chemicals business and rechristened itself
a "life sciences" company that used biotechnology to develop
genetically altered crops.
After investing billions in that vision - some of it to create
bioengineered corn, soybeans and other crops, and some to buy large
seed companies - Monsanto is prospering. But not because of any
proliferation of genetically modified supercrops, which have been
widely accepted in the United States but have come under fire in
Europe and Japan.
What keeps Monsanto healthy is Roundup, a chemical herbicide developed
more than two decades ago. It is the best-selling
agricultural chemical product ever, with $2.8 billion
in sales last year; it outsells other chemicals five to one.
The growth of Roundup, which accounts for about half
of Monsanto's revenue, is the primary reason that the
company reported a solid profit in the second quarter, despite the
resistance overseas to bioengineered crops and a depressed agriculture
economy that has battered other companies.
Monsanto Monsanto makes 160 million gallons of Roundup herbicide
a year. A tillage method, below, involving no weeding or tilling
before planting has increased its use.
Monsanto still faces challenges. Roundup's lower price and global
dominance mean that it faces difficult growth prospects. And if
consumers and regulators here and abroad reject biotech crops, Monsanto
and its multi-billion dollar investments would be devastated.
But analysts say the company seems to be positioning Roundup as
a hedge against that possibility. And if biotechnology is not dealt
a significant blow, Monsanto could become the world's
most profitable agriculture company because it would
then command 80 percent to 90 percent
of its two primary markets - nonselective herbicides and biotechnology
seeds.
The combination, analysts say, could lead both product lines to
reinforce each other, helping Monsanto's seeds dominate certain
crops in the same way Roundup does in herbicides.
Even competitors marvel at the growth and size of Roundup. "This
is a blockbuster in an industry where a blockbuster is a $200 million
product," said Jerome Peribere, vice president for herbicides
at Dow AgroSciences. "In pharmaceuticals, a blockbuster is
$1 billion; this is like imagining a $10 to $15 billion product."
That is why analysts project double-digit
growth for Monsanto over the next few years. It would
be a remarkable turnaround for a company whose profits had been
weighed down by huge research costs and by the debt that came with
buying seed companies in the 1990's. That debt, about $6 billion,
helped push Monsanto into a merger with the Pharmacia Corporation
(news/quote) in 1999.
Pharmacia swallowed up Monsanto's drug unit, Searle, and its Celebrex
arthritis drug - then spun off Monsanto as a separate company after
investors complained that Monsanto would weigh down Pharmacia's
profits.
Monsanto's biotechnology seeds are now planted on about 80
million acres worldwide. And Roundup commands 80 percent
of the world market in herbicides that do not target specific weeds.
Even more, few competitors are willing to produce a generic version
of Roundup, a glyphosate herbicide that kills just about anything
green, because Monsanto has protected its market dominance by cutting
the price while finding new uses. This built loyalty while reducing
the profit that potential competitors could reap by trying to lure
away customers.
For example, in 1996 Monsanto began marketing genetically modified
crops that were immune to Roundup. The crops, called "Roundup
Ready," allow farmers to spray the
herbicide on the fields, killing weeds but not the crops.
The company also lowered the retail price of Roundup years before
its patent expired in 2000 - dropping it from about $44 a gallon
in 1997 to $34 in 1999 to about $28 today. This drove up demand
and may have also deterred competitors. At the same time, profits
did not suffer; volume gains made up for the price cuts.
"If you look at the period 1994 to 2000, the price decreased
45 percent but our gross profit was up 90 percent," said Hugh
Grant, the chief operating officer at Monsanto, which is based here.
Roundup also helped speed the adoption of conservation tillage,
a system where farmers do not weed and till the soil before planting;
they simply spray weed killer and then plant. Con-till, as it is
known, reduces soil erosion, saves fuel and eases wear and tear
on farm equipment, not to mention lowering labor costs.
The tillage method is used on about 300 million acres worldwide,
and Roundup is used on about two-thirds
of those acres.
Monsanto also decided that once its United States patent expired,
it would supply its glyphosate molecule to competitors. The drop
in the price of Roundup and the size of Monsanto's volume - it produces
close to 160 million gallons a year - seemed to deter competitors
from building plants because the economics make it difficult to
compete.
"They said, `We'll license you the molecule, and you can buy
it, repackage it, do whatever you want. Or you can build your own
plant.' " said Jeffrey Peck, an analyst at Bear Stearns (news/quote).
"Just about every company they offered it to took the deal."
Monsanto extended its advantage by sharing its regulatory clearances
with companies that buy the ingredient from Monsanto rather than
make it themselves. That sped up government approval.
The world's biggest agricultural seed and chemical company, Syngenta
which was formed last year when Novartis) and AstraZeneca combined
their agrochemical businesses, has begun to make a glyphosate molecule,
but its market share is small. Another competitor, Dow AgroSciences,
has set the modest goal of being No. 2 in the market, with 10 percent
of glyphosate sales.
Though costly to research and bring to market, biotech seeds generate
large profits once they are licensed. This year, Monsanto is expected
to bring in about $400 million
from its biotech traits - the technology implanted in seeds to make
a plant release an insecticide or resist weed killer.
New York Times, August 2, 2001
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