Betting the Farm
By Erick Schonfeld

(Business 2.0) – Deep in the bowels of Monsanto's sprawling headquarters' research complex, in a room protected by a heavy steel door, 672 corn seedlings repose in plastic trays. The temperature in the room, known as a plant growth chamber, is 75 degrees. The humidity is 80 percent. Harsh metal halide light beats down on the seedlings. We're a long way from the cornfield--but then, this is not ordinary corn. Each bar-coded plant contains an inserted gene designed to resist drought, potentially expanding the regions where corn can be grown.

Nearby are 121 more growth chambers, each housing different bioengineered seed projects, ranging from nitrogen-absorbing corn to soybeans modified to produce heart-healthy omega-3 fatty acids. Each room has its own air circulation system and can replicate the temperature and humidity of almost any place on earth. St. Louis-based Monsanto's researchers may grow 10,000 plants to find one with the right genes in the right place. From the chambers, plants go to one of the 26 greenhouses on the roof. The electricity bill for the building runs $4 million a year. "We operate this process as a single machine, from lab to field," says Tim Conner, one of Monsanto's food technologists.

Not so long ago, that machine and its test-tube plants--Frankenfoods, the critics still call them--seemed to threaten Monsanto's very existence. The company was under ferocious attack from critics worried that the genetically engineered crops Monsanto was developing and evangelizing as a source of limitless environmentally friendly food supplies--not to mention bumper profits--menaced nature itself. The controversy drained morale and hammered Monsanto's stock. Operational missteps compounded the problem, and in 2002 the company lost $1.7 billion. Monsanto, a powerful presence on the American corporate scene since 1901, was in danger of withering away in the heat generated by its gamble on genetically modified, or GM, crops.

But a curious thing has happened since Monsanto teetered on the brink. The firestorm over genetically modified food hasn't cooled much; in Europe especially, the concept remains widely reviled. Elsewhere in the world, however, farmers are coming to appreciate crops with genetic protection against diseases and bugs. A billion acres of GM corn, soybeans, and other crops have been planted in the decade since bioengineered seeds appeared. The Brazilian government, once dead set against bioengineered crops, recently authorized the sale of GM soybean seeds. GM cotton is taking off in India, and biotech rice shows promise in China. Sales of GM crops are expected to top $5 billion globally this year.

The steady advance of GM crops has fueled a remarkable turnaround at Monsanto. Its seeds and genomics division this year will earn an estimated $580 million (before taxes and interest) on sales of $2.7 billion. The company now makes more money from its biotech products than from its traditional mainstay, Roundup herbicide. For the most recent three quarters ending in May, the company's total sales grew 20 percent to $5 billion, and net income rose slightly faster, to $380 million. The company's share price has doubled in the past 12 months.

Monsanto's regeneration is a tale of nervy corporate decision-making, perseverance, and dazzling scientific achievement--but the real gut check may be yet to come. While competitors like DuPont and Germany's Bayer still spend most of their R&D budgets on chemicals, Monsanto is spending 80 percent of its research dollars on its biotech seeds. It's a risky strategy: A single case of a genetically modified plant wiping out butterflies in the wild or otherwise running amok could freeze the advance of GM agriculture in its tracks. Yet Monsanto's vision is of a world where biology trumps chemistry and helps farmers grow more crops while using less fertilizer, pesticides, and even water. Its ambition is to fundamentally alter the very way we grow our food--and to collect a royalty every time a farmer plants a seed. As GM crops spread, Monsanto is setting itself up to become the Microsoft of agriculture, with all the dominance, and quite likely all the loathing, that implies.

For nearly a century, Monsanto was a chemical company. It gave the world NutraSweet and AstroTurf--and Agent Orange. The roots of Monsanto's biotech identity date to 1981, when a few young company researchers became the first people to successfully splice a foreign gene into a plant. (It was a petunia; one of the researchers, Robert Fraley, is now Monsanto's chief scientist.) But it was not until 1996 that Monsanto commercialized its first biotech crops: soybeans that were resistant to Monsanto's popular Roundup herbicide and pest-resistant cotton. A pest-proof corn soon followed. They showed instant promise. The corn and cotton allowed farmers to forgo dousing their crop with chemicals. The soybeans allowed farmers to spray more Roundup without killing the crop; that powered sales of both Roundup and the resistant soybeans. The combined effect was to drive down prices of rival herbicides by more than a third.

But soon the backlash against GM food kicked in. Even the caterer at Monsanto's British office announced that it would no longer serve food grown from Monsanto's modified seeds. Monsanto had taken on some $6 billion in debt under then-CEO Robert Shapiro, the architect of the push into biotech, to buy seed companies; now its stock was collapsing. In 2000, Monsanto sold itself to Pharmacia and Shapiro lost his job. Roundup came off patent, and revenue plunged. Monsanto's main agricultural business was spun off in 2002, but the company seemed adrift.

At that point, as a former executive puts it, "the immune system restored the old order." Under Shapiro, Monsanto's executives were split between the hard-nosed, operational line managers who dated from the company's chemical days and the staff managers at headquarters, who tended to be former management consultants. In 2003 the company's chief operating officer, a no-nonsense Scotsman named Hugh Grant who had once headed up the Roundup unit, was promoted to CEO. He quickly went about reasserting some discipline in the organization.

More significantly, Grant picked his fights. He pared down the company's focus from half a dozen crops to its three most promising moneymakers: corn, soybeans, and cotton. He concentrated Monsanto's biotech sales push on the United States, where consumers have remained largely unruffled about bioengineered food (perhaps because, surveys show, few have any idea how widespread GM ingredients are). Today 90 percent of the U.S. soybean crop, 80 percent of the cotton crop, and 50 percent of the corn crop grow from GM seeds. Grant also redoubled the focus on Latin America, lobbying governments in countries where GM seeds were banned. In some countries, Monsanto's seeds had already gained a foothold among farmers who simply bought them on the black market.

Seed theft remains an obvious problem for Monsanto, but piracy has also made its seeds more popular and has helped lead to legitimate sales. Despite Brazil's concerns over GM, pirated seeds are widely used in that country and have had no proven ill effects, a major reason the government earlier this year fully authorized sales of Monsanto soybeans. That's a huge win for the company; Brazil is the world's second-largest soybean grower--after the United States--and this year is expected to grow 12 million acres of biotech beans.

One of Grant's major initiatives is to counter seed piracy; he talks as frequently about protecting his company's intellectual property as any piracy-obsessed software executive. Indeed, Monsanto in some striking ways resembles a software firm. Like software, Monsanto's patented genes are a set of instructions--biological rather than digital. The company makes farmers sign a contract, much like a software end-user license, forbidding them to replant any of Monsanto's seeds without paying a new annual fee. If it finds a farmer in violation of that requirement, it sues. (Monsanto has brought about 100 cases in the United States alone, most of which were settled; it has won the 10 or so cases that went to court.)

Monsanto also increasingly bundles multiple genes together into the same plant and charges a premium for the combined traits, the same way Microsoft commands a premium for its Office suite of software programs. About half of the company's corn seeds in the United States are now sold with more than one trait, such as resistance to pests and to Roundup. These so-called stacked seeds, Grant says, mean "farmers don't have to choose between dead weeds and dead bugs." Farmers pay $214 for a bag of triple-trait corn and $99 for a bag with just one trait; the cost to produce each is about the same. Carl Casale, head of Monsanto's North American sales, sees stacked seeds as "one of the single biggest growth opportunities we have."

Grant's tighter controls and other initiatives are central to Monsanto's rebirth, but the real driver--and the key to the company's future--comes from the labs of Robert Fraley, the onetime petunia splicer. Named chief scientist in 2001, Fraley is known as brilliant, brusque, and totally committed, inside the lab and out. "He is a maniac on the ski slopes, a rocket man, just goes straight down," says David Summa, the CEO of biotech startup Acumen Pharmaceuticals, who worked for Fraley at Monsanto in the 1990s and later as an outside research partner. Fraley has built one of the world's most driven and effective scientific juggernauts.

Genetically engineering plants to develop a single, specific, and inheritable trait is a phenomenally arduous task. It takes years of hit-or-miss testing to create a single plant with a desired trait. Increasingly, Fraley is using Monsanto's knowledge of plant genomics in a new technique called molecular breeding; long story short, it speeds up conventional breeding, reducing the time it typically takes to create a seed with a new trait from 10 years to three. Fraley's scientists have employed molecular breeding to develop a new line of healthier soybeans marketed under the Vistive name; the genetic modifications create a bean that, when used as an oil in processed foods, produces no artery-clogging trans fatty acids.

Greater potential may lurk in some of Fraley's more experimental projects--drought-resistant corn among them. In 1997, Fraley's in-house researchers teamed with Mendel Biotechnology, where Monsanto alum Summa would soon become CEO. Fraley gave Mendel a wish list of commercially interesting traits he wanted to know how to control. Using arabidopsis, a relative of the mustard plant whose genes closely mirror those of many commercial crops, Mendel screened nearly 2,000 genes in hundreds of thousands of seedlings, altering one gene at a time. Over five years, it identified many of the key genes that control the genetic circuitry of the plant.

Among them was a set of related genes for tolerance of salt, drought, and frost that Monsanto believes could lead to monumental breakthroughs--commercial, social, and environmental. The drought-tolerant trait could cut irrigation needs in the arid Texas panhandle or bring the staple to barren corners of the Third World where corn currently can't thrive. "Agriculture consumes 70 percent of the freshwater on the planet, and it's getting scarcer," Casale points out. And imagine the impact of perfecting frost-tolerant seeds, which are also growing in Monsanto's labs. Suddenly farmers in Canada, who tend to alternate canola and wheat, would be able to grow corn and soybeans, which are far more profitable crops. "What happens to your seed business?" Summa asks. His answer: "It goes through the roof."

So Grant, Fraley, and their teams seem to have Monsanto back in hearty bloom--for now. Analysts expect the company to earn $550 million (before one-time charges) for all of fiscal 2005 on revenue of $6 billion. They project that earnings will rise 18 percent next year on revenue growth of 10 percent. And GM crop acreage will expand 20 percent to 240 million acres worldwide by 2008, according to Cropnosis, a research firm in the United Kingdom. No company is better situated to cash in on that growth than Monsanto.

But there's also no company more vulnerable if something goes wrong with GM crops. And a backlash, even in places where GM crops are well established, is not out of the question. In the United States, for instance, a survey last year by the Rutgers Food Policy Institute showed that fewer than half of Americans even knew that GM ingredients are in many common foods, from crackers to ice cream. That's probably because no labeling is required. Once a GM crop is approved, the FDA considers it the equivalent of a conventional plant. In the Rutgers survey, once people were told of the prevalence of GM plants in the food supply, 89 percent said they want the food labeled. Many Americans might not buy bioengineered foods if they were labeled.

The scientific debate over the safety of GM crops also remains unsettled. There have been troubling instances of bioengineered traits escaping fields and taking hold in unmodified crops. Monsanto and its supporters say there has never been credible proof of the nightmare GM scenario: an inserted gene mutating or spreading in unexpected ways and, say, crowding out other plants, poisoning animals, or creating an uncontrollable human disease. "Lots of data supports the safety of these crops," says Harvey Glick, Monsanto's scientific affairs director.

But that data "doesn't prove anything," counters David Schubert, a cell biologist at the Salk Institute. He and other critics worry about dangerous effects that might not show up for years. "Transferring genes creates many side effects," he says. "The gross ones are sorted out, but there could be subtle ones that aren't, like the making of toxins or carcinogens." He doesn't have evidence that GM plants create such effects but adds that nobody really tests for them either. Schubert says that given the uncertainty, GM crops should be treated more like drugs than foods--closely regulated. In response to such issues, Casale just raises his arms. "How do you prove a negative?" he asks.

The GM debate will roll on, but Monsanto can take comfort in growing support from at least one constituency: farmers like Jay Dey, who plants Roundup Ready soybeans and insect-resistant corn on 225 acres near the Finger Lakes in upstate New York. Looking across his fields, he says he can't help thinking that the biotech products he's now using are doing less harm to his farm and health than the chemicals and pesticides he still pours on other crops. It costs him just $20 an acre to spray with Roundup, less than half of what it costs to treat his conventional crop. He's happy his GM corn targets only damaging pests and leaves alone beneficial spiders and ladybugs. To him, Monsanto's seeds are a bounty. As long as that's the view down on the farm, Monsanto could be rolling in clover for a good long while.


Monsanto is reaping the payoff from its huge gamble on biotech.

Genetically modified crops are spreading ...

...rejuvenating Monsanto's profits and stock price.

[Source: ISAAA]

[Profit, by business unit]

Before interest and taxes. Source: Credit Suisse First Boston

Stock performance

Source: Bloomberg