Biotech giants battle over corn seed
Biotech giants battle over corn seed
The News Journal, August 9 2009
Even in these lean times, people need to eat. And as the world grows larger and wealthier, the seed business is poised for growth of its own.
The industry has seen technological advances in recent decades, as companies have used the tools of biotechnology to tinker with the genetic makeup of seeds, giving crops tolerance to weed killers and resistance to insects.
It's a business marked by cooperation among the major players, as companies license one another's technologies and collaborate on new products.
But there's also bruising competition -- none fiercer than that between DuPont Co., whose Pioneer Hi-Bred business boasts a proud, 83-year history, and Monsanto Co., a one-time upstart whose early embrace of agricultural biotechnology has helped cement its position as the world's top-selling seed company. The two companies are locked in a legal dispute over a critical DuPont product in development.
"It's a very heated rivalry, and in recent years, the thermostat has been turned up a few degrees," said Ben Johnson, an investment analyst with Morningstar. "And DuPont's starting to claw back ground."
Through the first half of the year, DuPont's agriculture and nutrition division -- which includes Pioneer, the world's No. 2 seed producer, along with the company's crop protection and nutrition businesses -- buoyed the company in a dismal business environment, posting pre-tax profits of $1.43 billion, up 11 percent from 2008. DuPont expects the division to grow its earnings 15 percent each year through 2013.
Pioneer's first-half sales were up 17 percent. Perhaps most notably, the seed company gained an estimated two points of market share in the all-important corn seed market in North America, as well as three points in the North American soybean seed market.
Paul Schickler, Pioneer's president and a DuPont vice president, credited the market share gains to Pioneer's efforts to beef up its sales organization, including its network of independent agents.
"We're really seeing this differentiated strength setting us apart to a greater extent from the competition," Schickler said.
The gains in North American corn seed reversed a steady decline for Pioneer, which saw its market share decline from 45 percent in 1998 to 30 percent in 2008, according to figures from Deutsche Bank.
Monsanto, meanwhile, saw its market share for corn seed rise from less than 10 percent to an estimated 38 percent this year.
The reason for Monsanto's rise was, in a word, biotechnology. The company was the first to commercialize a genetically modified trait -- a plant characteristic created by inserting foreign genetic material into the seed -- with Roundup Ready soybeans in 1996. The plants were engineered to tolerate Monsanto's Roundup herbicide, allowing farmers to apply the weed killer without harming their crops. The altered soybeans were followed by an insect-resistant corn in 1997 and Roundup Ready corn in 1998.
Biotech crops have exploded in the years since they were introduced, especially in the United States. This year, 85 percent of all corn planted in the U.S. was genetically modified. For soybeans, it was 91 percent.
As Monsanto was pouring resources into biotechnology in the 1980s, the more-conservative Pioneer was relying on its leading position in plant genetics. The Iowa company was founded in 1926 by one-time Vice President Henry A. Wallace to capitalize on that era's major agricultural advance -- hybrid corn seeds, those bred by crossing different strains to produce higher-yielding plants. Through the decades, Pioneer expanded into new crops, improved its genetics through generations of breeding and grew the business, reaching the No. 1 position in corn market share in North America in 1981, and the top spot in soybeans in 1991.
In the early 1990s, Monsanto, then a newcomer to the seed business, tried to interest Pioneer in its Roundup Ready genes. Pioneer bought nonexclusive rights to the altered soybeans seeds in 1992 for $450,000. A year later, it paid Monsanto $38 million for nonexclusive rights to Roundup Ready corn.
Those deals, which included no royalty payments, led to a series of legal disputes between the two companies. DuPont, which acquired 20 percent of Pioneer in 1997 and the remainder in 1999, and Monsanto settled 11 lawsuits in 2002, reaching an agreement that gave Pioneer a license to use Roundup Ready and other traits.
Monsanto licenses its traits to about 200 seed companies, a major source of revenue for the company. DuPont has the largest deal with the company -- its license for corn herbicide tolerance and insect-control technologies is worth $725 million over 8 years, according to a Monsanto financial filing from last year.
For several years, DuPont has worked to develop its own trait for herbicide tolerance. The company said its trait, known as Optimum GAT, would give soybeans and corn tolerance to both glyphosate -- the chemical name for Roundup -- and another class of weed killers known as ALS herbicides.
Earlier this year, DuPont revealed that it was planning to "stack," or combine, its Optimum GAT trait with the Roundup Ready trait in soybeans. Schickler said the company had seen a response from crops when high doses of glyphosate were applied to Optimum GAT soybeans in field tests.
"We solved a number of issues with the combination of these two technologies and got a better product than either one of them by themselves," Schickler said. He said the company does not intend to stack Optimum GAT with Roundup Ready in corn seeds.
Monsanto, arguing that stacking the two traits violates the terms of DuPont's license, sued DuPont in May. The use of the Roundup Ready technology was "an apparent attempt to remedy unacceptable risk posed by DuPont's product," the company argued.
DuPont fired back in June with a countersuit that accuses Monsanto of "a new anticompetitive campaign to extend monopolies into stacked products."
"Monsanto has abused its unlawfully acquired monopoly power to block competition, thwart innovation and extract from farmers unjustified price increases of over 100 percent in recent years," DuPont alleges in the lawsuit.
In a statement, Monsanto called DuPont's allegations a "smoke screen" to obscure problems with Optimum GAT. But although Monsanto said it does not believe two forms of glyphosate tolerance would benefit farmers, the company suggested it would be open to negotiations if yield and stewardship concerns were addressed.
Neither company would benefit from a protracted legal war, said analyst Dan Ortwerth of Edward Jones. He said he expects the dueling lawsuits to lead to an out-of-court settlement with minor adjustments to the current license agreement.
"Monsanto makes a lot of money licensing to DuPont," Ortwerth said. "Why would they want to cut that off?"
Meanwhile, the companies continue to square off in the marketplace. Monsanto and development partner Dow AgroSciences, a unit of Dow Chemical, said last month that they have received U.S. and Canadian regulatory approval for a new corn trait combination called SmartStax.
The corn seeds combine eight different genes to protect against above- and below-ground insects, as well as weed killers. The companies, which plan to launch SmartStax on 3 million to 4 million acres next year, said the product will allow farmer to plant a significantly smaller "refuge" -- an area planted with conventional corn to help prevent pests from developing resistance to the traits designed to repel them.
Pioneer is waiting for approval for Optimum AcreMax, the company's own system for refuge reduction that it says will be an "in the bag" solution, alleviating the need for farmers to plant a separate refuge plot.
Schickler said Pioneer is working closely with the Environmental Protection Agency to get regulatory approval and is confident it will be able to launch the product next year. The company originally planned to launch Optimum AcreMax this year.
Pioneer intends to introduce Optimum AcreMax in two phases, offering protection for above-ground pests in the second phase. Morningstar's Johnson said the slower introduction may benefit SmartStax.
"I think at the onset, Monsanto's obviously got a head start," he said.
More legal problems
As for Optimum GAT, DuPont faces difficulties beyond the Monsanto lawsuit. The company is also involved in competing lawsuits with rival BASF, each side accusing the other of infringing patents for the ALS herbicide-tolerance trait.
And DuPont announced disappointing news last month -- the company said it was limiting the introduction of Optimum GAT corn to "controlled releases" in 2010 and 2011 because regulatory approvals were taking longer than expected in important export markets like Japan. The company had originally hoped for a wide launch of Optimum GAT corn next year.
DuPont had hoped to mostly convert its herbicide-resistant corn seeds from Roundup Ready technology to Optimum GAT by 2015 -- and end its licensing payments to Monsanto. In the announcement, the company said the conversion was unlikely to happen by then.
Ortwerth, the Edward Jones analyst, said the revelation was a mild surprise, but it fit the pattern of a company that faces an uphill battle to claim the top spot in the seed industry.
Ortwerth said DuPont has made "impressive strides" in recent years to improve its business and become more competitive. But, he said, "Between the two, we view Monsanto as the clear leader, and we don't think that's going to change."