Biotech Values

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SmartMoney Interviews Monsanto CEO, Hugh Grant

[This is a fluff interview, but I like MON as a core holding in ag biotech. MON derives about 2/3 of its revenue from seeds/genomics, and this proportion will move even higher with continued growth in the segment while sales in the older herbicide segment decline. MON’s share price was hit this past week when the company lowered guidance by a tiny amount and investors overreacted (IMO). I think the stock is cheap relative its likely EPS growth rate during the next 5-10 years.]

http://www.smartmoney.com/Investing/Stocks/Monsantos-CEO-On-Growing-in-a-Recession

›May 29, 2009
by Reshma Kapadia

It almost sounds like science fiction: Amid the furious discounting among retailers, one firm has been able to raise prices as much as 25 percent on some products. Its stock has managed to climb this year, despite a volatile market. What’s more, the company has supporters claiming it can cure world hunger and critics accusing it of endangering the global food supply and environment.

Controversial but profitable, the firm is Monsanto (MON), and its CEO through all this has been Hugh Grant, a plainspoken 51-year-old who was raised in a coal and steel town in central Scotland. Grant started with the firm in 1981 and took over the top office in 2003, when Monsanto was facing some fierce and well-publicized U.S. and European protests against its genetically modified crops. He took on critics by explaining that biotech crops were heavily regulated, focused the company on crops more for animal feed than the grocery store and proceeded to devote even more resources to seed development. Monsanto spends $2.6 million a day (more than 8 percent of its $11.4 billion in revenue) primarily on seed research.

Monsanto started as a chemical firm, and its Roundup herbicide still brings in about 30 percent of its profits. But today’s research is focused on how breeding and genetic engineering could develop corn, cotton and soybean seeds that yield more bountiful and nutritious crops and protect against bugs and weeds. Indeed, Monsanto’s sprawling campus in St. Louis is filled with lab-coat-clad researchers monitoring an array of test tubes, not to mention the robots (yes, robots) busy chipping off minuscule pieces of seeds to identify genetic markers. The spending has paid off: Monsanto generated $2 billion in profit last year, more than twice its take from the year before.

Grant’s current goal—doubling crop yields by 2030 while using a third less water and energy—has analysts skeptical. That means Monsanto’s crop yields need to increase 5 percent a year; historically, they have grown 1 percent in developed countries. “That’s probably not achievable” under any circumstances, says Maarten Chrispeels, director of the Center for Molecular Agriculture at the University of California, San Diego. Even if it is achievable, Bill Freese, science policy analyst at the Center for Food Safety, is among those calling for more testing. He says the technology is still new and can cause unintended effects in plants, like increasing natural toxins or creating new ones that have yet to be fully studied. Monsanto is also facing broader economic headwinds, lowering its earnings outlook for fiscal 2009 in part due to a faster than expected slowdown for its roundup herbicide. With commodity prices down sharply and a price war brewing, analysts question if Monsanto can keep growth on track.

Grant’s modern office is cluttered with mementos honoring Norman Borlaug, the Nobel Prize–winning scientist heralded for his work on feeding the world’s hungry. Inspiring? Presumptuous? We weren’t sure either—read on for your own assessment.

SmartMoney: Monsanto has had phenomenal growth in recent years, but can you keep it up through the recession?

Hugh Grant: I’m very optimistic. By 2012 we think we can expand profits 2.25 times our 2007 base by doubling crop yields and the continued increase in demand.

But won’t demand fall given the global downturn?

It continues to rise, but noise around it fluctuates. Poultry production in India has risen to the point it’s exporting it. Recession notwithstanding, the Chinese are eating more wheat and less rice. That romantic first date now is more likely an Italian meal than Chinese.

But Chinese workers are getting laid off as growth slows. Are they still going out for Italian on their second date?

Time will tell, but I think yes. We talk about China as one country, but you have to dissect it. It’s urban China, not rural China. And within urban China, there is an emergence of fast food and the westernization of diets. It might slow down, but I don’t think we are going backward. When dietary habits shift, it’s hard to change back.

Rivals like DuPont are deeply discounting their seeds to take market share. How do you compete?

Farmers are literally harvesting profits on every square foot. So the conversation around the kitchen table is less about cost of seed and more about its performance.

Prices for glyphosate, your popular Roundup herbicide, are falling after a steady run-up in recent years. Doesn’t that cut into profitability?

When we made our 2012 profit target, we anticipated that business decreasing. But our seeds-and-traits business will continue to grow through that period. Our growth comes from continuing to deliver for farmers. The equation is that simple. When we launch a drought-tolerant seed that drinks less water and yields more corn, the grower will be happy to pay for that.

You’ve said biotech crops are a way to ease the growing demand for food. Do you see global food demand reaching crisis proportions?

Grain stocks are sitting at 20- to 25-year lows in part because of a drought in Australia, global warming and changing diets. Demand for ethanol is also part of it. We will need twice as much food—as much produced in the past 10,000 years—over the next 30 to 40. There are arguments on the slope of the curve, not the trend.

You can’t talk about the food crisis without talking about Africa.

I was in Malawi a couple of years ago, and a 70-year-old grandmother, raising four grandsons, was eager to show me her corn. She was benefiting from “new” technology—technology that farmers in the U.S. used in the 1940s. African farmers are just using old tools, things that would be familiar if you stepped out of the Bible. It’s going to take time. But if there is a way to get technology down to this local level, you make a big difference. And it’s the germ of a future business.

Some scientists are skeptical about Monsanto’s 2030 targets of doubling yield while using a third less water and fertilizer. Isn’t that a bit ambitious?

Ambitious is good. I’d be worried if you’d said it’s humdrum. This is not a moon shot. In December our researchers around the world spent a week laying out milestones. Our product cycle is seven to 10 years, so everything we do is long term. But the key is describing, step by step, the milestones.

What do you say to those concerned about the safety of biotech crops?

You have to look at what’s happened historically: Over the past 13 years, more than 2 billion acres in 25 countries have been growing these crops. There’s been more scientific evaluation of biotech crops than any other food technology. Each country has an independent regulatory agency grinding through the data. We supply the data, but the regulators evaluate it—and they’ve vouched for the safety.

Some crop scientists complain they can’t perform the comprehensive research on biotech seeds that they can with conventional seeds.

We’re sharing lots of data. We donated all of our biotech and know-how for white corn to Mexico and sub-Saharan Africa. In the next decade, for companies driving yields as significantly as we are, that becomes a prerequisite. If you are involved in something as basic as food production, the argument “you can’t afford this; you have to wait” is not acceptable.

Are you worried about piracy?

It’s in the places you would expect. We have some copying of our technology in India but still have a great business there. If you farm an acre, you want the best possible yield, and people who are copying are generally behind.

Is Monsanto recession-proof?

Food is one of the last things to suffer in a recession. Plus, we’re in good financial shape with a spotless balance sheet. The cash we generate means we don’t have to compromise our pipeline. And the pipeline is at the heart of what we do.‹