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What's up with seed?

For a few days in December, the American Seed Trade Association brings the who's who of the seed industry together in Chicago for its annual Seed Expo. This last December, the talk on the trade show floor and the meeting rooms often focused on the volatile marketplace of 2008. With significantly higher commodity prices throughout the summer, the entire market had felt optimistic; then came the collapse of the general economy, tight credit and a free fall of those once sky-high commodity prices. Breakevens or even negative returns are now possible for some producers in 2009. And that means closer scrutiny of seed prices.

“Through the beginning of December, we saw a slowing of seed orders,” says Tom Strachota, general manager for Dairyland Seed. “I think that was in part due to a longer harvest, the roller coaster ride for commodity prices, and the generally high prices of inputs.”

“Farmers are delaying some seed-buying decisions, but seed historically is a big item to prepay for tax purposes,” adds Doug Vail, general manager of Mycogen Seeds.

Last year was a challenging one for the seed industry. Faced with the same market forces faced by their customers — high commodity prices, rising fuel prices, increased rents — seed companies had to aggressively compete for seed acreage.

“What can sometimes be difficult to understand is that in seed production we have the same costs,” Vail explains. “When fuel prices are higher, we also have to pay. And we have to increase our premiums paid in order to secure seed corn acreage. Those premiums were significantly higher in 2008.”

An increase in trait-licensing fees, as well as increases in germplasm fees, also boosted the underlying cost of a bag of seed.

Value-capture model

Trait suppliers use what they call a value-capture model to set trait-licensing fees for the year. That is done early, usually around March. Seed companies then determine the trait fees and the costs associated with planting the number of seed acres. Then they set their prices.

“Our value-capture model includes using a three-year average of commodity prices, among other factors,” says Ernesto Farjardo, U.S. commercial lead for Monsanto. In addition to the commodity price average, the value-capture model includes tangible and intangible values. Farjardo and other company officials admit that it is difficult to predict what commodity prices will do during the growing season, especially during the extreme volatility seen during 2008. “It is a balance between understanding the yield benefits, the traits and the genetics contained in that seed,” Farjardo says.

Brian Humphries, vice president of sales and marketing for Wyffels Hybrids, says his company's pricing strategy is to put its best foot forward with its pricing model and offer aggressive early pay discounts. “We don't agree with making deals in February,” he says.

Humphries admits it can be difficult competing against other companies making late-season pricing deals. “We show growers that those deals might not be the most profitable for them in the long run,” he says. “We work with customers to determine the right products, including the right traits, that are needed. The price of seed does play a part, but it is not the most important factor.”

Despite all the rumblings over seed prices, for the most part producers are still buying traited products. “Our own seed orders show that 75% of our hybrids are being sold with one or more of the biotech traits,” Humphries says. Sales of conventional corn hybrids are shrinking. For Wyffels, about half of the company's corn portfolio was non-traited in 2000. Today, it's about 5%. “The demand is for traited products,” Humphries says. “If there were a seismic shift and producers wanted non-traited products, you can be sure that seed companies would grow them.”

Changing landscape

Some dramatic changes have occurred within the seed industry over the past few years. More and more independent, regional seed companies have banded together, have been acquired by the large industry players, or have aligned with the larger companies. For example, Ag Venture is a network of nearly 40 independently owned regional seed companies. Greenleaf Genetics, a joint venture between DuPont and Syngenta, allows the companies to have market access to each other's library of genetics and traits. And ASI, a wholly owned subsidiary of Monsanto, is a holding company established to support regional seed businesses.

“There is definite pressure on independents,” says Bruce Howison, vice president, marketing seeds and traits for Syngenta Seeds. “Before biotech was a large part of the seed portfolio, smaller companies would rely on germplasm from other larger seed companies, take that germplasm back and cross it with their own, and develop hybrids for their product line. Traits are now a significant portion of the cost of doing business, and that is putting pressure on margins.”

Other industry executives claim that, if tech fees continue to increase, especially at the rate they have been the past couple of years, what little margin is left in seed production will disappear.

And then there is the complexity of managing the traits. “Handshake agreements are now backed up with a very detailed contract,” Howison says. “That's a reflection of the inherent value of that intellectual property.”

Frank Ross, vice president of North American operations for Pioneer Hi-Bred, says more partnerships and consolidation are likely in the industry as relationships are forged to maintain access to traits and genetics.

“It's a high-priced market today,” Ross says. “In 1987, 5 to 6% of our company's revenues were put into research and development. Today, that number is 12%. To take advantage of the tools available to us today, research and development is much more expensive. For an industry, it is likely regional players will work with larger companies in order to have access to that research and development.”

Although all seed companies must keep up with new traits to remain profitable, the main focus for ASTA, and its members, is still high-quality germplasm. “Maybe biotech has taken the lead, but germplasm is the delivery method,” says Andy LaVigne, president and CEO of ASTA. “If we don't have viable germplasm, it doesn't matter what biotech traits we develop. This is the area that ultimately benefits producers.”

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