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Corn+Soybean Digest

Biotech Will Tell Farming's Fortune

The sounds you hear coming from the biotechnology world are no longer hype. It's a revolution about to be unleashed, according to Sano Shimoda, an investment guru in ag biotechnology.

Be ready, he cautions, for changes in farming that make Precision Ag look like a small bump in the road.

"Historically, technological innovation has largely focused on improving how farmers farm their land, not what they produce. It has been evolutionary in nature," Shimoda says.

"We put biotechnology in a unique category. Biotechnology has the potential to completely revolutionize agriculture by changing what is produced."

Shimoda is founder and president of BioScience Securities, Inc., a brokerage and investment banking company headquartered in Orinda, CA. The firm focuses on companies applying new technologies, with an emphasis on biotechnology, to agriculture, agribusiness and related "downstream" industries.

"A quiet revolution is taking place on the farm that will dramatically change what farmers produce, redefine what markets demand, re-engineer the agriculture and distribution infrastructure to meet the new demand and redefine the linkage between the farmer and the end user," Shimoda says.

The dollars involved in restructuring the industry are truly staggering. Multibillion- dollar deals have become almost commonplace as biotech companies acquire the assets they need to link the industry from genetics all the way to the consumer.

"There are a limited number of quality seed and agricultural assets. That has resulted in a corporate gold rush," Shimoda says. "The landscape of the seed, bio-tech and crop protection industries has changed almost overnight.

"Most notable among the strategic players are AgrEvo, Dekalb Genetics, Delta and Pine Land, Dow AgroSciences, Dupont, Monsanto, Mycogen, Novartis and Pioneer Hi-Bred."

When the biotech dust has settled, Shimoda predicts there could be as few as three or four companies left standing - possibly only a couple.

Shimoda sees a number of major impacts that biotechnology will have on agriculture. One of the biggest is that value-added crops created through bioengineering will become a fundamental driver of the industry. For farmers, that will mean improved eco-nomics through lower costs and value-added production.

"Value-added products and product differentiation also will generate premium prices," he says. "And products will broaden the commercial market potential of agriculture."

Another major impact of biotechnology that Shimoda sees is a shift from a production-driven market to one that is demand-driven by the end user.

"Historically, production agriculture has focused on undifferentiated commodities and has been supply driven. Biotechnology will place more emphasis on customized, value-added, trait-enhanced products tailored for specific end users.

"Crop output decisions will shift from the farmer to the end user. More value-added crops will lead to more stringent product specifications and quality standards and greater contract production mandated by the end user."

That will cause profound changes at the farm level, says Shimoda.

"Food processors and industrial end users will want to link themselves directly with production at the farm level to ensure the supply and quality of their products. End users will become more demanding from a product specification, food safety and quality standpoint. That will require farmers to change some of their cultural practices. Growing emphasis will be placed on quality, rather than on maximizing production.

"The farmer's value will not be determined by size, but rather by his quality and efficiency. The farmers who can meet the challenge will be winners, while those who are unable will be non-competitive," he says.

"Farmers will have to give up some of their independence, but they will be rewarded with premiums for quality and efficient production."

Crop farmers likely will end up working in a vertically integrated industry, not unlike that of hog producers, as the industry is restructured to cash in on the added value of bioengineered crops.

"We envision vertically integrated consortiums formed through strategic alliances, joint ventures and partnerships, as well as outright mergers. Ultimately, strategic competitive advantage will be based on a new level of highly efficient, vertically integrated research-production-distribution and marketing operations."

Obviously, farmers will have to change the way they do business, as well.

"We expect to see the formation of farmer alliances to negotiate with end users. Farmers will compete for the opportunity to produce more profitable, value-added crops. In addition, some grain co-ops will play an increasing role as direct suppliers to end users."

In the longer view of agriculture, Shimoda sees an industry with much broader horizons.

"The expansion of agriculture as a production base, stemming from bioengineered traits, will expand the commercial market potential of agriculture.

"Stretching the time horizon, biotechnology has the potential to create production factories in major crops to expand agricultural products into new markets," Shimoda says.

"Crops will be genetically engineered to produce qualities that have use in nutraceutical, pharmaceutical, animal health, materials and a wide range of industrial applications."

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