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Seeds of change

Little did anyone know 20-some years ago that the birth of plant-based genetic engineering would downsize the seed-chemical agribusiness complex by billions of dollars. Its impact goes far beyond the companies involved. The entire supply chain — from co-ops and dealerships to distributors, along with related agribusinesses — is feeling margin-draining heat. Meanwhile farmers benefit from reduced input costs but despair about limited choices.

The confluence of seed-based herbicide/insecticide resistance and the patent loss of glyphosate not only changed the crop protection business forever, it short-circuited revenue sources that funded some biotech seed businesses. All major players were forced to drop prices and concede great value in their crop protection portfolio in order to compete.

The biotech profit race, to be first and own the most and best patents, has seemingly been won more by lawyers than by biotech giants conducting expensive and laborious research and development (R&D). Yes, there are success stories where valuable technology has been created for farmers, such as Roundup Ready soybeans, Bt corn, Bt cotton and the coming rootworm-resistant corn. And some biotech products have truly aided the bottom lines of companies. But the picture is bleaker when it comes to recouping total biotech R&D expenditures, especially when some companies are at the mercy of current stock prices and quarterly reports.

Add to this the huge challenge of educating consumers around the world about the safety of these products in order to gain global market access for U.S. producers.

“From a big seed company perspective, especially those tied to chemical industry money, things are pretty negative right now,” says Tray Thomas, president of The Context Network, a management consulting firm specializing in agribusiness. “There was a lot of money spent on developing seed trait technology and getting it through an increasingly rigorous regulatory system, and very few products have paid off. Herbicide product margins have dropped dramatically due to glyphosate tolerance technology and generic herbicides, which depletes R&D efforts. It's simply hard to see things getting better for some companies.”

Many industry executives believe the six big players in agriculture — BASF, Bayer, Dow AgroSciences (Mycogen), DuPont (Pioneer), Monsanto (DeKalb, Asgrow), and Syngenta (Northrup King) — will be reduced to three or four major players within the next one to three years.

“Consolidation will continue, whether it's among the largest six or 206 companies, because the cost of technology and customer choices drive this,” says former Syngenta Seeds President Ed Shonsey. “Management teams and shareholders are more closely scrutinizing biotech investments, and all companies involved are asking themselves if the investment [in biotech] is worth it.”

Costly legal battles

As predicted in a 1999 series in Farm Industry News titled “Who Owns Nature?” the fight for patent ownership often has overshadowed the development of the products themselves.

Take Bt corn, for instance. Five companies attempted to claim this prized trait patent. An amazing 33 lawsuits were filed and, in the end, there was no real winner, Shonsey says. All five companies and many more ended up cross-licensing the trait. Although lawsuits didn't overtake development of this product, it did drain millions of dollars from companies (some from your wallet, too) and no doubt changed company philosophy on the risks of fighting to obtain patents. It also forced companies to reconsider or even resist researching traits where patent protection was deemed a long shot.

Have patent challenges stopped? No, and rightly so if companies are to protect their products developed from costly research. But expensive lessons have been learned, many lengthy suits have finally been settled, and the number of litigants and disputes has greatly diminished.

Optimism at the top

Top industry executives continue to remain positive, despite the fact that agricultural biotechnology cannot deliver quick profits.

Tom Wiltrout, general manager of North American Seeds for Dow AgroSciences, believes this year will be better than the last one for his company. “Our completion of melding Cargill Seeds into Mycogen, combined with the excitement of launching the next generation of Bt corn, Herculex I, shows our investment in biotech has been a good deal, and that we have the technology to compete,” he says.

At Syngenta Seeds, Marketing Vice President Jack Bernens is optimistic about his company's biotech future. “Our seed market share has been fairly stable, and now we're looking to take it to the next level by working more closely with our crop protection sister company,” he says.

Although Syngenta was the first company to introduce Bt corn in 1996 (back in the Ciba-Geigy/Novartis, Northrup King days), Bernens admits that the company's biotech efforts were slowed by regulations that increased the costs of bringing products to market and concerns about consumer acceptance of biotechnology. “In fact some traits we were working on never saw commercialization due to increased regulation,” he says.

DuPont-owned Pioneer Hi-Bred International remains optimistic about its efforts to be self-sufficient in producing biotech traits for its own use, as well as licensing some traits from others. “Over the past several years we've introduced an ever-increasing number of new products with new traits, where the overall goal is that these traits protect the yield potential of our genetics,” says Greg Wandrey, Pioneer product stewardship director. “And we feel this effort has led to our biotech seed sales and market share dramatically exceeding industry averages.”

Professionalism in sales also is driving Pioneer's success. “In order to provide the best service and help customers work through a field-by-field decision process, we require a lot from our sales force,” Wandrey says. “Due to this commitment, 70 to 80% of our sales reps are now certified crop advisors, which is a dramatic change for us, and one which we feel will truly benefit the grower.”

Monsanto's DeKalb and Asgrow seed brands have generated significant growth in the past two years, according to Doug Dorsey, head of the branded seed divisions for the company. “We've seen our U.S. sales of biotech corn seed go from 50% of our business to 65%, and this past year we saw almost a doubling of total acres planted to Roundup Ready corn [all brands] — from 4.6 million in 2001 to over 8 million acres in 2002 in the U.S.,” he says.

Dorsey says the company's efforts to sell traits in good-performing hybrids and varieties are paying off with great performance across the Corn Belt. “And after a strong sales year in 2001 for Asgrow soybeans, we held our own in 2002. Our new class of varieties with strong defensive trait packages against the toughest diseases has shown excellent performance and is generating very strong grower demand,” he adds. “And to begin 2003, we're hoping to get final EPA approval on our YieldGard rootworm-resistant corn.”

Garst Seed Company increased its corn sales and market share in 2002, especially in Bt corn and Roundup Ready corn. “Since 1995, we have doubled our corn sales, tripled our soybean sales and have achieved good increases in sorghum and alfalfa,” says David Witherspoon, president of the company.

“Our success at Garst is due in large part to an ability to stay focused on our strengths of corn breeding, soybean breeding and gene stacking technology,” Witherspoon says. “We carefully analyze each trait as it comes to market, then work with strategic partners if the trait will protect our quality genetics. We made a solid reputation in the early biotech days of stacking IT and Bt traits, which is why companies want to work with us…but our focus has always been making sure we deliver yield and performance to the grower.”

Regionals on a roll

Five or six years ago, many experts predicted the demise of the regional seed companies, as well as the hundreds of “mom and pop” seed businesses, because they wouldn't have access to the best traits needed to compete.

They were wrong.

Why? Because some of the majors, such as Monsanto, chose to license their valuable traits to other seed companies. Monsanto sees the trait-licensing business as a big growth and profit opportunity, even though it sells to the competitors of its own branded DeKalb and Asgrow products through the foundation seed companies it owns, Corn States and Holden's.

U.S. corn trait acres
(all numbers in thousands)
1997 1998 1999 2000 2001(est)
Total acres 79,537 80,187 77,400 79,600 79,600
Single trait Bt 6,080 12,750 12,125 11,100 13,000
YieldGard/Liberty Link 2,280 3,250 4,200 3,280 2,700
Liberty Link 760 1,750 300 225 200
Roundup Ready 0 400 2,700 2,880 3,050
Roundup Ready/Bt 0 100 300 320 750
IMI (non-transgenic) 2,700 3,000 3,750 4,650 5,000
Liberty Link/IMI 0 0 50 195 100
YieldGard/IMI 0 0 125 200 350
High Oil Corn (non-transgenic) 750 900 1,050 800 850
Nutritionally Enhanced (non-transgenic) 0 5 40 80 175
Total GMO acres 9,120 18,250 20,050 18,500 20,150
Total non-GMO acres 70,417 61,937 57,350 61,100 59,450
Source: The Context Network's BTC Lite 2001 Report

“Monsanto's vision is driven by biotech, which has led to huge innovations in the trait development area,” says Ken Rinkenberger, president of Corn States/Holden's. “Our customers have achieved consistent market share growth over the past four years as our seed company partners see real value in licensing not only our advanced traits but also quality genetics. We're investing heavily in both genetics and biotech traits so our seed partners can be confident they can not only compete in the marketplace, but share in the new revenue opportunities created.”

Rinkenberger agrees the regional and smaller seed companies will compete in this industry. “By having access to biotech traits and great genetics, these seed partners can and will flourish because there are things they can do better than the large seed companies if they have access to a competitive product offering,” he says. “They have very strong customer relationships, and their cost management and logistics are extremely efficient.”

New business models

Increased partnering on trait genetics is just another step in an era where it seems everything is shared to some degree, given the sea of mergers, joint ventures and cross-licensing.

A more unique model is one of shared resources for mutual and/or individual benefit. For example, Dow AgroSciences and Pioneer recently joined forces to research, develop and seek regulatory approval for the new Bt corn called Herculex I. Both companies will independently market and sell the product on a competitive basis.

Pioneering this trend almost three decades ago was a handful of fiercely independent seed companies that formed a business alliance that led to Golden Harvest branded seed. Today, five companies (JC Robinson Seeds, Garwood Seed, Golden Seed, Sommer Bros. Seed and Thorp Seed) share research and marketing resources nationally and internationally — yet market and sell locally — which has grown Golden Harvest into the nation's fourth largest seed brand.

“Due to our market strength, we pride ourselves in our ability to work with a wide variety of companies offering trait licenses, and successfully incorporate them into our own proprietary genetic lines, then test hybrids and varieties locally to give customers the best genetic package available to fit their operation and profit needs,” says Lyn Ramsey, executive director of industry relations with JC Robinson Seeds.

A new version of this model is a company called CHS Marketing LLC, formed in 2001 by the owners of Curry Seed, Hoegemeyer Hybrids and Bo-Jac Seed with the intent to bring new traits and new genetics to market. In 2002, CHS became a Dow AgroSciences preferred partner to launch Herculex I under its new brand name, Triton Genetics.

“Our three companies have worked together over the past three to four years, but it was this great opportunity with Dow that launched our joint effort into the market,” says Erik Hoegemeyer, director of media for CHS. “Now, CHS and Triton Genetics give us a vehicle to launch future traits and genetics, and our combined size has broader appeal with biotech companies looking for seed partners.”

Hoegemeyer sees a bright future for CHS, judging by the success of regional seed companies that have blazed the trail before it. “One advantage we do enjoy over the major seed companies in that we're not judged by stock price or pressured over the next quarterly report,” Hoegemeyer says. “Our bottom line is focused on genetics first, and putting new traits in the right genetics, because these products must yield or astute farmers will go elsewhere.”

Component philosophy

In a slightly different company twist, enter Channel Bio, started by third-generation seedsman Don Funk and his wife and business partner Aline. Channel Bio is a combination of four companies (their own DEF Seeds, Crow's Hybrid Corn Company, Midwest Seed Genetics and Wilson Seeds) owned by Funk's Channel Bio, yet the companies' products remain as independent brands.

U.S. soybean trait acres
(all numbers in thousands)
1997 1998 1999 2000 2001(est)
Total acres 70,005 72,375 73,780 74,500 74,500
Roundup Ready 9,000 25,000 41,600 40,230 43,000
STS (non-transgenic) 7,000 5,400 4,800 4,400 4,500
Total GMO acres 9,000 25,000 41,600 40,230 43,000
Total non-GMO acres 61,005 47,306 32,100 34,270 30,700
Source: The Context Network's BTC Lite 2001 Report

“We view our business model similar to the computer industry,” Aline Funk says. “Dell and Gateway are at the forefront of a component industry — sourcing the best components from various companies and building computers to fit each customer's needs. Channel Bio's emphasis is on being an independent preferred buyer of the best components from numerous sources, then combining them into products that really work for the farmer.”

The combined force of these companies offers critical mass that attracts trait sellers and provides efficiencies in purchasing, research and development, finance, administration and inventory management. “Then the individual seed entities can do what they do best…product selection and local testing, account management and personalized sales and service,” Don Funk explains.

“We're definitely seeing the industry changing the way we thought it would, and our business model is working, as we're now the second largest independent seed company next to Golden Harvest,” Aline adds. “We're selectively looking to acquire more companies as well as grow existing business.”

Customer focus

The independent seed companies admit they cannot offer their customers seed and crop protection packaged together. But they like it that way.

Nebraska-based regional company NC+ combats this big company advantage by stressing its customer focus. “Our emphasis is on selling seed on a local neighbor-to-neighbor basis where we strive to deliver our best, unique genetics with the best traits,” says Ken Anderson, marketing manager for the company. “The seed industry is a different animal than selling crop protection. A successful seed business is built on individual relationships, local relationships, trust. Our integrity and credibility with customers is key, and maintaining this by delivering seed that yields and stands — that is the customer's bottom line.”

Just one tool

Where will genetics and biotechnology take us in the future? Projections are difficult to make because so many variables affect this industry — from government regulation and the uncertainty of global acceptance, to food, environmental, and investment and profit concerns.

“Five or six years ago, we thought biotech would change the world. It's definitely made an impact, but it's just a tool, not the tool,” Shonsey says. “The science is sound, the regulations are sound, and we've made excellent progress educating people on the value of biotechnology. But there's much more work ahead. Everyone involved in biotech, from the companies to universities to trade associations, must inform the ill informed. The greatest threat to this technology is ourselves, and we must take a responsible approach, not a too aggressive approach.

“We, as an industry, must do a better job at creating more new markets and maintaining current markets for our customers,” Shonsey continues. “Help figure out who the customer is, whether it be General Mills or a small baker, and give them what they need. Growers know production, we just need to help them find buyers.”

At the end of the day, Shonsey states, profitability per customer acre will rule. “Shift your way of thinking,” he advises. “How does everyone help create more profit per acre?”

Good food for thought.

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