Hot Stocks: Monsanto Focused on Long-Term Growth, but DuPont Dustup Draws Attention From Regulators

Monsanto Corp. (NYSE: MON), the world’s largest seed maker, says it’s on track to more than double its 2007 profit by the year 2012 and is expecting a “technology explosion” to provide even stronger products going forward. But while Monsanto continues to build on its reputation as a cutting edge agricultural business, it is also under siege by competitors and advocacy groups who claim the company is a monopoly.

The St. Louis-based Monsanto said in June that its fiscal third-quarter earnings fell to $694 million, or $1.25 a share, from $811 million, or $1.45 a share, in the same period a year ago. Sales slipped to $3.16 billion from $3.54 billion last year. The company also said its annual earnings would likely be at the low end of its $4.40 to $4.50 a share forecast range.

That’s not very impressive for a company that last year posted record net sales of $11.4 billion for fiscal 2008, a 36% jump from fiscal 2007. But there’s also good news for Monsanto investors. Chairman and Chief Executive Officer Hugh Grant said last week that his company is poised to achieve its long-term goals by producing more efficient products and streamlining production.

"We have committed to using our technology to double yields in our three core crops - corn, soybeans and cotton - by 2030, while reducing our use of key resources by one-third per unit produced,” Grant said. “Innovation has us well on our way to achieving this, with our most robust pipeline ever. We're on the verge of an unprecedented technology explosion that will deliver the types of products growers want most - those that offer greater yield and value."

By 2012, Monsanto expects its gross profit from its core seeds and traits business to be between $7.3 billion and $7.5 billion – about 2.5 times its 2007 level. Grant said this increase will be facilitated by the development of seven new “high impact technologies” that by 2020 will boost revenue by $3 billion.

"These projects came to be through a disciplined investment in seed and biotech that is unmatched in the industry," Grant said. "We consistently invest 14% to 15% of our total net sales for seeds and genomics in research and development for breeding and biotechnology.”

It’s true that Monsanto’s commitment to research and development have made it the dominant player in the market for genetically modified seeds. But Monsanto has become a victim of its own success.  It is currently locked in an ugly legal spat with its chief rival in the biotechnology E.I. du Pont de Nemours & Co. (NYSE: DD), which has led to accusations that Monsanto is a monopoly – an accusation that has drawn the attention of the federal government.

DuPont Gets Dirty

Conflict between the agribusiness arch-nemeses erupted earlier this year when Monsanto sued DuPont, and its subsidiary Pioneer Hi-Bred International Inc., for unlawful use of its proprietary “Roundup Ready” herbicide tolerant technologies in soybeans and corn.

DuPont doesn’t deny “stacking” soybeans with the Roundup Ready trait with its own Optimum GAT trait, but instead argues it is not violating Monsanto’s patent by doing so. 

"We fundamentally disagree with Monsanto's position that they can use their current trait monopoly to prevent the introduction of competitive seed products for U.S. growers,” DuPont spokesman Dan Turner told Reuters. "This is yet another example of Monsanto trying to flex its anti-competitive muscle in the market, by stifling healthy competition among seed producers that are looking to grow yields for those that matter most -- the farmers," he added.

The conflict escalated Monday, when Monsanto CEO Grant sent a letter to DuPont Chairman Charles O. Holliday Jr. accusing the company of a “serious breach of business ethics.”

“Your lobbying and communications that paint your company as a victim of limiting technology licenses is dishonest, disingenuous and downright deceitful," Grant told Holliday in the letter.

Furthermore, Grant decried the use of “masked third parties” to “attack” Monsanto as
“misleading to the public and a serious breach of business ethics far beyond honest competitor behavior."

It’s likely that by “masked third parties” Grant meant the Organization for Competitive (OCM) Markets, a nonprofit group that claims Monsanto controls 90% of the market for genetically modified seed. The Lincoln, NE-based organization claims to take on big agricultural companies in defense of small farmers and consumers, but it was recently revealed DuPont gives the group financial support.

“We've supported OCM for a number of years as we have dozens of organizations that are aligned with our belief around what's in the best interest of our farmer customers," DuPont spokesman Dan Turner told St. Louis Today. "However, we don't disclose the amount that we give to OCM or any other organization."

Turner couldn't name any of the other organizations that DuPont supports, the paper said.

Is Monsanto Being Thrown Under the Anti-Trust Bus?

In July 2008, the OCM started the Crop Seed Concentration Project an initiative target specifically at Monsanto, which the group says controls 90% of the market for genetically modified seed, a figure Monsanto disputes.

“Monsanto’s effort to enforce licensing agreements and protect its patent rights has dramatically altered American agriculture,” the OCM says on its Web site. “Monsanto has filed more than 100 patent infringement lawsuits against U.S. farmers.”

The OCD’s crop concentration campaign coincides with U.S. President Barack Obama’s vow to enforce antitrust laws that were neglected by the Bush administration, and its national convention attracted the representatives from the Federal Trade Commission, the Department of Justice, and the Commodity Futures Trading Commission.

“For many farmers and consumer advocates, we understand that there are concerns regarding the levels of concentration in the seed industry--particularly for corn and soybeans,” Philip Weiser, the new Deputy Assistant Attorney General, said at the OCM gathering, which took place in Monsanto’s hometown of St. Louis, Mo.

Weiser said federal regulators are “committed to examining” the level of competition in several agribusiness sectors

The Department of Justice and the Department of Agriculture will have a series of “workshops” to “openly discuss legal and economic issues associated with competition in the agriculture industry,” said Christine Varney, the assistant attorney general in charge of antitrust issues at the Justice Department.

“Monsanto welcomes the opportunity to be an active participant in the discussion and looks forward to these workshops,” the company said on its Web site. “There have been unsubstantiated allegations of a lack of competition in the seed market for several years now. We’re confident an objective review will reveal competition is alive and flourishing in the seed market.”

The workshops are scheduled to begin in January.

News and Related Story Links:

• PR Newswire:
  Monsanto Is on the Verge of a Technology Explosion, Executives Tell Investors at Annual Field Event
• Reuters:
  Monsanto-DuPont bicker over herbicide tolerant tech
• Money Morning:
  Buy, Sell or Hold: Monsanto Will Reap Big Rewards as Demand for Agricultural Products Accelerates
• Money Morning:
  Monsanto Sells Off Controversial Milk-Hormone Unit to Focus on Seed Product Lines
• St. Louis Today:
  DuPont backs Monsanto critic