Monsanto harvesting bad publicity
Farmer's case a rallying point for activists: Profits falling
Jason Chow Financial Post [May 12, 2003]
The Supreme Court of Canada yesterday agreed to hear an appeal
from Percy Schmeiser, a farmer in Bruno, Sask., who is in a legal
battle with Monsanto over genetically modified seed. Agricultural
giant Monsanto Co. attracts a lot of attention. Trouble is it always
seems to be the wrong kind. The latest public relations debacle
centres around Saskatchewan farmer Percy Schmeiser, who Monsanto
alleges used its genetically modified canola seeds without its permission.
Yesterday, the Supreme Court of Canada agreed to hear Mr. Schmeiser's
appeal of a lower court decision last fall that found in favour
of Monsanto. And so begins another round in a legal case that has
become a rallying point for activists who oppose the company's push
to market and create genetically modified foods. The optics aren't
good: A small-time farmer pitted against one of the world's largest
agricultural companies. Even if Monsanto wins the lawsuit, it could
hinder its earnings.
According to Merrill Lynch analyst Donald Carson, the public's
reluctance to accept genetically modified foods weighs heavily on
the company's future. "The primary obstacles to Monsanto's long-term
earnings growth are related to the perceived risks associated with
agricultural biotechnology," he wrote in a recent research report.
Aside from legal wranglings, Monsanto still has to contend with
several major regulatory hurdles for its products, as profits continue
to fall. The company's shares (MON/NYSE) have reflected the troubles,
and they are still trading at 45% below its April, 2002, high of
US$33.72. While earnings from continuing operations in the first
quarter beat analyst estimates by US4¢ per share at US28¢ per share,
profits are still down 15% from the same period a year ago.
Profits have been sliding steadily since 2002 as sales of Roundup,
Monsanto's biggest product, fell 24% last year. The decline is significant,
considering that Roundup sales contribute 39% to overall profit.
Last year, total annual revenue fell 14% and the company posted
a net loss of US$1.7-billion, down from the US$295-million profit
it made the year before. The dropoff was somewhat expected, as competition
from rival chemical firms has heated up since the company lost U.S.
patent protection in 2000 over the production of glyphosate, the
active ingredient in Roundup.
Not only have cheaper generic versions of Roundup been eating into
Monsanto's market share, rival Dow Chemical Co. is competing on
the high-end of the market. Dow reported a 40% increase in sales
volume of its premium Glyphomax Plus during the first quarter, much
better than Monsanto's 11% dip in Roundup sales. To make matters
worse, the company disclosed in March that it is being investigated
by the United States for possible antitrust violations. In a regulatory
filing, the St. Louis- based farm chemicals maker said the Justice
Department requested information as part of an inquiry into the
glyphosate, the active ingredient in Roundup. Monsanto is the world's
largest producer of glyphosate.
But Monsanto has long known it can't rely on Roundup forever and
has been looking to diversify through the development of its genetically
modified seed business. Interim chief executive Frank Atlee said
he's hoping to boost genetically modified seed sales so that by
the end of the year seed sales may contribute 45% to 55% of gross
profit, up from the 39% share it contributed last year. "Monsanto
is currently transforming itself from a chemistry portfolio to a
company based on seeds," said John Moten, an analyst at Deutsche
Bank in New York, who has a "buy" rating on the stock. "Longer term,
we believe that market acceptance of Monsanto's seeds and traits
will be the catalyst" for a high stock price, he said. But market
acceptance of Monsanto's seeds is tenuous.
Over the past five years, Monsanto has risen to rival tobacco manufacturers
and oil producers as a prime target of environmental activists and
consumer groups. They argue that genetically modified organisms
could wreck havoc with the earth's ecosystem if the plants start
mixing genes with conventional crops. Currently, Monsanto is seeking
approval from U.S. and Canadian authorities for its Roundup-resistant
wheat, which is designed to allow farmers to control weeds by spraying
the herbicide directly over entire fields, killing weeds without
harming the crops.
While genetically modified corn and soybeans has been grown for
years, acceptance of Monsanto's grain seeds has been much slower,
partly because corn and soybeans are mostly used for livestock feed,
while wheat goes straight to consumer products and thus, fuels consumer
fears. Public outcry is particularly fierce in Europe and Monsanto
said it would wait until at least 2005 to apply for regulatory approval
in Europe for its genetically modified products. Monsanto hopes
consumer opposition will have died by then and that the current
moratorium on new genetically modified crop approvals will have
Because of the regulatory and consumer hurdles over genetically
modified foods and the slumping sales of Roundup, analysts have
been tentative about the stock. Only two analysts out of the 10
surveyed by Bloomberg rate the shares a "buy." In the short term,
the widely anticipated regulatory approval for its Roundup-resistant
soybeans in Brazil could be a catalyst for the shares and raise
sales, but the longer-term story about genetically modified foods
and the rest of the company's products is still unknown. Moreover,
the Supreme Court appeal and the antitrust suits could attract more
of what some analysts call "headline risk"-- bad press that could
hurt the stock.