Analysts for Deutsche Bank--World's Largest--Predict That the Public
and Investors Will Reject Agricultural Biotechnology

Subject: Is Genetic Engineering in Agriculture Dead? - a report by
Deutsche Bank
Date: Sat, 21 Aug 1999 04:48:55 -0500

On July 12, 1999 Financial Analysts for Deutsche Bank, a German Bank which
is the largest in the World (they bought Bank of America for example)
issued a report predicting that Agricultural Biotechnology is dommed to
economic failure. The following excerpts were posted on the internet:

"Ag Biotech: Thanks But No Thanks?"

We see a two-tier grain market developing with GMO (genetically modified
organisms) corn and soybeans at a discount to non-GMO. Very bad news for
farmers. If a two-tier market takes hold, we see price premiums for
high-value-added GMO seeds collapsing. Very bad news for seed companies.
If GMO seeds become a liability rather than a driver of growth, we see
growth rates and valuations coming down. Very bad news for seed stocks.
Despite the fact that the science and logic in support of GMOs is very
strong, GMOs are being demonized by their opponents. What food
manufacturer will "take a bullet" for GMO corn in the face of such
We are reducing our rating on Pioneer Hi-Bred to SELL from HOLD. And
we're calling into question the valuations of the other seed-related
companies. Is this a sector one should be invested in?


Perhaps we don't yet fully realize it, but genetically modified organisms
(GMOs) have just crossed the line. Thirty days ago, the investment
community accorded only positive attributes, such as innovation,
productivity and progress, to GMO corn and soybeans. The success of GMOs
was, to a great degree, the basis for the strong growth rates and the huge
public and private market valuations accorded this sector. Today, the term
GMO has become a liability. We predict that GMOs, once perceived as the
driver of the bull case for this sector, will now be perceived as a pariah.

We are reducing our rating on Pioneer Hi-Bred to SELL from HOLD, and we
would broadly recommend a sale of the seed sector.
Biotech crops are ubiquitous, yet few consumers realize it. Here are a few
examples of where you can find GMO products: soft drinks (GMO corn to make
corn syrup), salad (GMO tomato, soy oil in dressing), hamburgers
(engineered yeast in bun, rennet, soy isolates in cheese, delayed-softening
tomato in ketchup, soybeans in mayonnaise, genetically altered tomato).
The perception has been getting worseÖ
What happened? On May 6, 1999, we published a warning piece entitled "The
Trouble with GMOs." We spelled out the positive case for transgenic seed
and outlined what we believed to be the illogical, but persistent,
arguments advanced by GMOs' opponents.

We recently returned from an important industry conference (Deutsche Bank
was the only Street presence), where we heard from representatives of the
major seed companies (Monsanto, Stauffer Biotech, Demegen, and Seminis),
major food processors such as Campbell Soup and Nestle, the corn growers'
associations, and representatives of the biotech community.

What to do when GMO's trade at a discount?
The message is a scary one - increasingly, GMOs are, or in our opinion,
becoming a liability to farmers. A two-tier market for grain may develop,
where the GMO "improved" grains will trade at a discount to non-GMO
product. This is, in fact, already happening with European processors
paying premiums of up to $1 per bushel for "non-GMO" product. Archer
Daniels Midland recently announced that it would pay an $0.18-per-bushel
premium for DuPont's STS soybeans - a non-GMO variety.
Regarding the move, ADM said: "Our goal is to contract acreage reasonably
near our Decatur processing plants. Under this program, the farmer has a
definite home for his high-yielding bean crop; he's locked in a premium of
18 cents per bushel over the Decatur price, and he stays out of the
political fray that surrounds the genetically modified issue."
For ADM, the program assures the company a supply of non-genetic beans.
When it buys beans on the open market, it can't be sure they'll all be

Dozens of Biotech Products have been Approved Around the World
United States 34+ USDA, EPA, FDA
Japan 20+ MAFF, MHW
Canada 30+ AG Canada, Health Canada
EU 9
Argentina 3
Australia 1
Mexico 3
Brazil 1
South Africa 1

Who has the liability if GMO pollen corrupts a non-GMO crop?
Take that to the next logical step. If you plant GMO corn, and your
neighbor plants non-GMO hybrids and pollen from your GMO crop drifts into
his field, making his grain test positive for GMOs (even though he planted
non-GMO hybrids), will your neighbor sue you? Will you be suing the seed
company? Imagine the legal mess that could ensue if GMO = value destruction.
Don't expect the food manufacturers and retailers to "take a bullet for GMOs."
"Don't expect us to take a bullet for your GMO products." So said a
representative of Nestle, the world's largest food company at the
aforementioned conference. We predict the food processors will line up
quickly in the "No-GMO" camp. The message is clear: GMO foodstuffs such as
tomatoes, tomato paste, cooking oil, fructose-based sweeteners, etc. are
just ingredients. They have costs and benefits. GMOs just became too

In order for GMO crops to be viable they must be sold at a price that is as
good, or better than, non-GMO options. While the dollar cost is the same
(as long as the market views these products as "substantially equivalent"),
it cannot be argued that there is not a real PR cost. Already, Unilever
and Nestle have tried to duck the controversy by publicly insisting that
their products will be made without GMOs. Expect virtually all others to
follow, because the anti-GMO crowd will threaten to stigmatize, demonize
and boycott those that don't fall into line.

Archer Daniels Midland has taken a different approach. It has said it
won't buy any GMOs that are not approved by the EU. That has caused
customers of Pioneer Hi-Bred to worry over its Liberty-Link corn and
customers of Monsanto to reject Roundup Ready corn, two newer, thus
unapproved, GMO classes. Monsanto's response to farmers? Keep the Roundup
Ready seed and the company will provide free Roundup as an inducement to stay.
What is the logical outcome?
What if "value-added" is really value detracted?

In the past five years, we - and virtually all analysts of the sector -
have focused intently on the value-added that biotech would provide. Bt
corn was introduced in the 1996 crop and was a smashing success. Roundup
Ready soybeans hit the market at about the same time and the estimates are
that close to 50% of the soybean acreage, and 40% of the corn acreage, will
be planted to these two GMO innovations. The best Bt-corn hybrids sell for
$120 per bag, while the non-Bt analog might sell for $75. Similarly,
Roundup Ready soybeans sell at a $5-$7-per-unit premium to the
non-transformed varieties. The pickup in yield, primarily, and the cost
savings on inputs drove these advanced products to premium prices and wide

The value chain topples.
The way that we learned to visualize the value chain for biotech traits may
be turned upside down. In theory (and in practice for the past several
years), the seed companies can sell their genetically modified seed at a
premium to the growers who can sell their crops at a premium to the market,
because there is a premium value to the end user. The resistance by food
companies and grain processors alike has nullified the idea that end users
will pay a premium for genetically modified crops. This lack of value will
have to work itself back down the value chain in the form of
reduced-to-zero premiums.

Roundup Ready soybeans were adopted much faster than envisioned in the
original time frame. But with the negative psychology surrounding it, the
market may be in for a negative surprise. Expectations for total GMO
acreage for 1999 is about 84 million acres, up from just 14 million acres
in 1997. If our concerns about GMOs are valid, the expectation of more
than 140 million acres in 2001 is clearly at risk.

An earnings hit from the GMO-seed- premium collapsing.

But all of those positive attributes are meaningless if the crops produced
with GMO seeds are discounted in price. The best Bt hybrids would show a
5% improvement in yield versus non-Bt hybrids. On the current price of
corn that would be negated by a $0.10-per-bushel discount. If GMOs trade
to a discount, the price premium for the seed may collapse, and they could
actually trade at a discount to traditional varieties and hybrids. That
would be an earnings nightmare for Pioneer Hi-Bred and, we would guess, for
Monsanto as well.

Two hits: earnings and valuation
We likely would see an earnings hit in the two companies mentioned above,
but we foresee a valuation hit for virtually all companies connected with
GMOs. The huge prices paid for seed companies in both the private market
and the public arena depend on the value-added and rapid rate of technology
development that GMOs promise. Would DuPont complete the acquisition of
Pioneer for $40 per share (five times sales) if GMOs were a liability? We
have strong concerns. Why hasn't Monsanto's purchase of Delta & Pine Land
closed? Will it? Monsanto trades at more than 45 times the $0.96 calendar
1999 EPS estimate carried by First Call. Can that be sustained? How much
of the 35% earnings growth that the Street envisions for Monsanto's Y2K
earnings are dependent on GMOs remaining viable?

Other concerns that came out of the conference
The real focus of the conference was "output traits," those genetic traits
that are engineered to make crops more valuable. Output traits focus on
adding more of something good or suppressing something bad. Very few
output genes are in the marketplace yet, but output traits are thought to
be the next big wave of product development. Key traits under development
are improving the starch content of corn, raising oil content (which is in
the market) of corn, improving the amino-acid content, etc.
Will anyone pay for product improvements?

By definition, output traits create value, not on the farm but to the
end-user. Thus, for output traits to be financially successful, the food
manufacturer, swine feeder, poultry feeder, or grain processor must be
willing to pay a premium price for the enhanced value of the grain. There
was significant concern raised over this mechanism. Some participants
reported that their customers expected product improvement to occur with no
increase in prices paid. The example of Wendy's $0.99 hamburger was
raised. The company has been at that price point for more than a decade,
and can stay there only through tight control on supplier costs and further
improvements in productivity.

We noted earlier that DuPont won some new business selling STS soybeans
because of their "non-GMO" status. But before one ascribes a positive for
DuPont's good fortune due to the demand for STS product, consider the
negative outlook for output traits. Frank Mitsch, Deutsche Bank's Major
Chemicals analyst is concerned about the uncertainty of when and if
ag-biotech will pay off for DuPont.

Production Estimates, Planted Acres
1997 1998 1999 Growth Projection Premiums per Bushel
White 550 725 775 6%-7% $0.35-$0.60
Waxy 420 500 525 3%-4% $0.20-$0.45
hard endo./
food grade 600-1,000 800-1,200 800-1,200 Very Low
high oil 700 900 1250 High >25% $0.15-$0.30
nutrient dense 140 140 240 High >50% $0.10-$0.20
high amylose 30-40 30-40 40-50 Potentially High >10% $1.20-$1.90

1999 Value Enhanced Corn Projections
Open Market Contract On Farm
White 50% 50% 0%
Waxy 25% 65% 10%
hard endo./food grade 70% 30% 0%
high oil 10% 40% 50%
nutrient dense 0% 25% 75%
high amylose 0% 100% 0%

Quick and cheap tests for GMOs are on the way.
Strategic Diagnostics, Inc. presented its technology for quick and easy
testing of grains for GMO content. Test tools are now available for
farmers, grain buyers and regulators to quickly analyze the GMO status of
grain. The company noted that no standards exist in the various regulatory
areas, so the possibility exists that a load of corn could leave port in
the United States as non-GMO, only to be turned away by a grain buyer in
Europe who is using a different threshold to determine GMO content. These
test kits will take away the argument that it is impossible to know the GMO
status of grain.

We were disturbed by a presentation made by the Executive director of the
U.S. Grains Council, an export-oriented industry advocate. He, too,
focused on "value-enhanced" product, and one of his definitions of
"value-enhanced" was non-GMO. What more evidence of a two-tier market do
we need? GMOs are good science but bad politicsÖ
GMOs are good science but bad politicsÖ
Are GMOs safe, good for the environment, and necessary to support the
inevitable growth in the world's population? Yes, but the same arguments
can be made for advancing nuclear power. Despite the support of the
scientific community, it is unlikely that we will add any new nuclear power
plants any time soon.

>From a 25-year perspective, the world will be hard-pressed to feed itself
without GMOs. The supply of arable land will continue to shrink and the
only way to keep up with growing food demands will be by increasing
productivity. Without GMOs, it won't be possible. Without GMOs, it's
clear that we will use a lot more agricultural chemicals.
However, from a three-year perspective, GMOs are a policy liability. GMOs
increase productivity in a world that is currently drowning in too much
grain. As we discussed in great detail in our above-mentioned May 6
warning piece, a fair bit of the European resistance to GMOs stems from
Europeans' desire to keep their agriculture as people-intensive as it
currently is. They view GMOs as a threat to their agrarian lifestyle.
In the United States, low crop prices have farmers asking Congress for $6
billion-$8 billion in aid, just a day after the House of Representatives
approved a $574-million farm bailout. We believe that GMOs, with their
better yields, will only further depress prices this year. Thus, from a
government perspective, one needs to take a very long view to see the

We believe the downside to Pioneer is limited, but is it worth holding the
stock given the risk?
We have downgraded Pioneer to SELL from HOLD. The GMO problem is not going
away anytime soon, which calls into question the future earnings potential
of Pioneer. Our SELL rating on Pioneer does not imply that we believe
there is major downside to the stock - DuPont has announced its intention
to acquire Pioneer at $40 per share. We are not saying that the deal will
not close -- DuPont may already be locked into the deal. But the GMO
problem does add an additional element of risk. Remember that the
Monsanto/Delta & Pineland acquisition has yet to close and it was announced
on May 11, 1998. A news story that coincidentally hit the wires just after
we downgraded Pioneer informed that the closing of the Delta & Pineland
deal has been pushed back to December 31, 1999, from June 30, 1999. If the
deal closes then, it will be 19 months after it was originally announced.
Is it worth keeping your money tied up in a stock for the extra 7% return
when there is this much risk involved? We don't think so. Hence, our SELL
rating on PHB.

ABTX has little GMO risk
AgroBiotech produces forage and turfgrass seed. By definition, turfgrass
seed, whether it's GMO or not, will face less scrutiny than row crops.
Unlike row crops, turfgrass is neither used directly or indirectly in human
food. The concerns, if any, about turfgrass will relate to environmental
issues rather than health and safety issues. In the end, we think it
likely that consumers will still prefer to have grass varieties that can
grow with fewer chemicals; thus, GMO turfgrass should face little

The other half of ABTX's sales is forage seed. Forage is typically grown
and used within the same vicinity and is not a product that the United
States exports. Forage is also not directly consumed by humans. So,
again, most of the concerns about GMOs should not impact forage sales.
We are getting more bearish on the seed sector in general as a result of
the looming problems with GMOs. This is less a problem for AgriBioTech
than for the other seed companies. Seed-company valuations have been
pushed higher, based on expectations for sales of higher-priced,
higher-margin, value-added seed (mainly GMOs). There is a built-in
assumption in many seed-company valuations that the seed companies will be
able to sell increasing numbers of GMOs at significant premiums. We are
calling that assumption into question.

Among the major seed companies, AgriBioTech is the furthest from
commercialization of GMO products, and clearly no premium for valued-added
seed is built into its current valuation. GMOs are four-to-five years out
for ABTX. Since most of the trouble with GMOs is political, and near-term
in nature, the clouds may have cleared on the GMO story by the time ABTX
has introduced genetically modified seeds.
So, while we have turned more bearish on the row-crop-seed sector, we are
not changing our investment opinion, or our $15 price target, on AgriBioTech.
Companies mentioned:

AgriBioTech (OTC-ABTX-$-6 5/8-Buy)
Archer Daniels Midland (NYSE-ADM-$15 3/4-Hold)
ConAgra (NYSE-CAG-$26 5/8-Buy)
Corn Products International (NYSE-CPO-$29 7/8-Buy)
Delta & Pine Land (NYSE-DLP-$33 ‡)
DuPont (NYSE-DD-$69 1/16-Hold)
Monsanto (NYSE-MTC-$44 1/2)
Pioneer Hi-Bred (NYSE-PHB-$37 3/16-SELL)
Wendy's International (NYSE-WEN-$26 9/16)

Deutsche Banc Analysts:
Timothy S. Ramey, CFA
Marla J. Wimmer
Rachel M. Rocker
Stocks priced May 20, 1999.