- If executives at Monsanto Co. had understood investors
the way they know farmers, the agrochemical and biotechnology giant's stock
might not be so low as it is today.
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- "You can't fool a farmer," said Hugh Grant,
chief operating officer. "You have to continue to deliver value, and
you have to do that every year."
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- Monsanto consistently has brought to market seeds bred
to increase yield and genetically modified to ward off crop-killing pests.
Its star product, Roundup herbicide, has been an industry standard for
28 years.
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- The company, with $5.46 billion of net sales in 2002,
prides itself on working with farmers and delivering what they need, when
they need it.
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- "Monsanto is doing a good job," said Ken McCauley,
a corn and soybean farmer from White Cloud, Kan., and a board member of
the St. Louis-based National Corn Growers Association.
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- "A company makes money by bringing new products
to market. And that's how a farmer makes money, by adopting new technology
and getting higher yields," he said. "If it works, everybody's
happy."
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- Monsanto's products have kept U.S. farmers content and
have made strides abroad, most notably in Canada, Australia, Argentina,
Brazil and Japan. More than 130 million acres worldwide were planted with
its soybean, corn, cotton and canola seed last year, up 12 percent from
2001.
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- Company scientists - including Hendrik Verfaillie, who
resigned as chief executive under pressure in December - knew better than
to promise farmers more than they could deliver. But its executives, Verfaillie
among them, overreached when it came to Wall Street.
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- Monsanto, based in Creve Coeur, was beset with problems,
mostly beyond its control. Yet it played down concerns and issued overly
optimistic earnings forecasts, only to revise them downward twice last
year.
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- "This is a company that has been optimistic on the
borderline of lying," said Sergey Vasnetsov, senior analyst with Lehman
Brothers in New York. "Monsanto has been feeding us these fantasies
for two years, and when we saw they weren't real," its stock price
fell.
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- Monsanto shares traded above $30 in early 2001 but plummeted
over the summer. The stock closed Friday at $17.07 a share.
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- "It's not an issue that the company is financially
in trouble. It's strategically in trouble," Vasnetsov said.
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- Since Verfaillie's departure, Grant and Chairman Frank
AtLee have said they remain committed to the vision of developing genetically
modified crops and better-performing seeds. This year, they expect that
sales of seeds and genetically modified trait licenses will surpass sales
of Roundup and its generic version, glyphosate, which have supported the
company for years.
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- But Grant, who worked closely with Verfaillie and was
named this month as a possible successor, said he knows that execution
is key.
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- "I looked back . . . and we didn't deliver. It was
naive," he told a group of chemical analysts Feb. 13, referring to
promises that Monsanto would have met two of three goals by now: Brazilian
regulatory approval of genetically modified cotton and soybeans, a restarted
European genetically modified approval process and Indian approval of genetically
modified cotton. It met only the latter.
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- "The key for us as a company, in the next two to
three years, is execution . . . and making sure what we say will happen
is going to happen," Grant said.
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- Riding the best horse
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- Many of Monsanto's problems are out of its hands:
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- Poor weather, which affects planting and herbicide use.
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- Political unrest in Latin America, which disrupted the
economy there and hurt sales.
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- European stonewalling on genetically modified crop approval,
which cuts off a huge market for direct sales and hinders U.S. growers
who export.
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- Other issues might have come as a surprise, but analysts
say Monsanto should have been prepared better to deal with them.
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- Roundup, which lost U.S. patent protection two years
ago, is facing fierce competition. Prices fell 11 percent last year, more
than the 8 percent to 9 percent Monsanto had expected. Though it cut production
costs and sold generic glyphosate to some competitors, analysts say Monsanto
hasn't had the "soft landing" executives touted.
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- Glyphosate made headlines this year with its failure
to kill certain species of weeds that have developed resistance. Four weeds
have proved resistant, and a fifth, waterhemp, is suspected. Scientists
say that it's natural and that those weeds can be controlled with other
herbicides.
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- But a Swiss company, Syngenta AG, one of Monsanto's fiercest
competitors, is pushing the issue. Its marketing materials are designed
to spread doubt about the effectiveness of Roundup and its companion Roundup
Ready crops - those seeds that aren't killed by glyphosate, allowing farmers
to spray the weed-killer after planting.
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- "Since Monsanto came onto the market and is really
dominating . . . Syngenta is taking potshots at them. But those are the
two big, bad bullies in the market, so they're going to slug it out,"
said Bill Johnson, a weed scientist with Purdue University.
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- Syngenta did not respond to a request to comment.
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- Johnson said weed resistance is nothing to worry about,
but in the long term, Monsanto's glyphosate-dependent business strategy
could come back to haunt it.
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- Farmers are rotating crops, planting Roundup Ready corn
one year and Roundup Ready soybeans the next, using the herbicide over
and over again. The total number of Roundup Ready acres is growing.
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- The more glyphosate is used, the quicker other weeds
will become resistant, scientists say.
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- Farmers have been warned to limit applications. But they
are under economic pressure to do the most expedient and cost-effective
thing, in this case, using Roundup Ready technology, which is cheaper and
less labor-intensive than other weed-control methods, Johnson said.
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- "The knee-jerk reaction of 80 percent of these farmers
is trying to survive this year," Johnson said. "And these companies
are so concerned about earnings from quarter to quarter . . . they tend
to think short term. If I were to think like a businessman, I would take
my best product and ride that horse as long as I could. And, quite frankly,
that's what Monsanto is doing."
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- Monsanto's cash cow
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- Monsanto's strategy of the moment is to continue developing
genetically modified traits that can be stacked in a single seed product,
along with Roundup Ready protection. And it's creating premium Roundup
products, such as WeatherMax, that don't wash away immediately in the rain.
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- If Monsanto can't penetrate new markets in Europe or
rely on revenue from countries like Brazil, then it must get the most from
the farmers it has won over.
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- The company isn't anticipating any new European genetically
modified product approvals in its 2003 forecasts. Despite growing consensus
among U.S. government officials that they could bring a successful World
Trade Organization complaint against the European Union, political reality
is likely to stop such action.
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- America doesn't want to alienate the countries it would
need for support in an Iraq war, industry watchers say. Besides, a WTO
ruling might have a negative effect, if European consumers are put off
by what they see as bullying by the United States.
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- It would be "the surest way to guarantee a European
boycott of (genetically modified crops) and a hardening of irrational European
fears and positions," said Clyde Prestowitz, president of the Economic
Strategy Institute, at a forum this month held by the Pew Initiative on
Food and Biotechnology in Washington.
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- But Monsanto seeds make up nearly the entire U.S. soybean
crop, and its share of corn fields is increasing. Its new YieldGard Rootworm
Corn could be approved in time for as many as 1 million acres to be planted
in the spring.
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- Monsanto hopes that the seed will cover as many as 6
million acres in 2005.
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- Farmers have said they are anticipating the new product
and others to come, such as genetically modified wheat. They don't mind
being seen as Monsanto's cash cow, so long as their profits grow, as well.
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- "We've got to have new products. If the industry
decides that they don't want to bring them to us, that pretty much stops
our business. It stops the yield increases. And if you start going backwards
and that's because of industry, then that tells you they're not supporting
us," McCauley said.
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- Monsanto also is intent on supporting its investors,
starting with issuing realistic earnings guidance.
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- The company said it expects 2003 earnings per share in
the range of $1.20 to $1.40, giving a broader range than usual to allow
for further market instability. The ultimate earnings will depend on successful
Roundup price management in the United States, an increase in stability
and business in Latin America and good weather, said Chief Financial Officer
Terrell Crews in an earnings call Feb. 5.
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- In the long term, Monsanto's fate will rest with foreign
regulators and consumer opinion. Once it has exhausted room for growth
in the United States, it will have to be able to exploit foreign markets,
said AtLee, chairman and acting chief executive.
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- The company is continuing to invest heavily in research
and development, with plans for building on its stable of patented biotech
traits and intellectual property. Genetically modified wheat approval applications
are pending with U.S. and Canadian regulators. Depending on consumer acceptance,
the future promises crops that could contain vitamins and nutrients that
could help to solve health problems in the developing world.
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- "We have a tremendous future in biotechnology and
genomics. But until this thing breaks open with acceptance," it won't
happen, AtLee said. "We have patience. But we have an urgency to execute,
too."
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- Reporter Rachel Melcer: E-mail: rmelcer@post-dispatch.com
Phone: 314-340-8394
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- Challenges
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- * The European Union continues to resist genetically
modified foods, and organizations such as Greenpeace are spreading distrust
to nations in Africa and Asia.
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- * Because of competition, the price of Monsanto's Roundup
and generic glyphosate herbicide is falling fast. Syngenta AG, a Swiss
competitor, is promoting the message that weeds are becoming glyphosate-resistant.
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- * Brazil, a key market, is in turmoil. The economy is
disrupted, and approval of Monsanto's genetically modified soybeans has
stalled.
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- * Monsanto is without a chief executive. Hendrik Verfaillie
left under pressure in December.
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- Strategies
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- * Monsanto is developing new products for the United
States, including genetically modified wheat, and is counting on good sales
of YieldGard Rootworm Corn if it wins regulatory approval in the spring.
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- * Premium glyphosate formulas, such as Roundup WeatherMax,
are still under patent, and the company is promoting its service and distribution
expertise to maintain sales of original Roundup.
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- * "Stacked" seed products, combining Roundup
Ready traits with the ability to ward off pests, are being sold at a premium
to boost profit.
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- * The company said it will hire a new chief executive
within six months and named Hugh Grant, chief operating officer, a candidate.
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