Pioneer and Monsanto: A Biotech Tug-of-War (DesMoinesRegister)
Date Posted: October 5, 2009
(DesMoinesRegister) By Dan Piller
The once folksy seed business has taken on a harder edge.
Lawsuits. Accusations of dirty tricks and illegal acts. An impending federal antitrust investigation.
The battle is over biotechnology in seed traits. Altered genetic traits in seed germplasm have helped farmers double their yields in the last third of a century by producing corn and soybeans that can stand up better to wind, excessive moisture, plant diseases, herbicides and insects.
"Biotech has done a lot for the farmers," Iowa Secretary of Agriculture Bill Northey said. "But the need for traits has made the seed business a lot more competitive."
Iowa is at the center of the fight. The state accounts for about one-sixth of the $12 billion U.S. seed business, and about 5,000 workers here are employed in the industry. Most work for Pioneer Hi-Bred of Johnston and its chief rival, Monsanto.
The two companies have traded lawsuits and name-calling, and the battle has reached Washington.
U.S. Secretary of Agriculture Tom Vilsack said he warned Monsanto Chairman Hugh Grant this year of the growing perception that the company unfairly controls the biotech corn and soybean seed industry.
"I expressed my concern, and Monsanto definitely has a sensitivity to the issue," Vilsack said during a recent visit to Des Moines.
Vilsack and U.S. Attorney General Eric Holder announced a general investigation of competitive practices in agriculture beginning early next year.
The investigation will examine "issues relating to patent and intellectual property affecting agricultural marketing or production," according to a news release - an indication that Washington wants a clearer picture of how biotech may have changed the competitive landscape in agriculture.
Monsanto has sued Pioneer, claiming infringement on patents for Monsanto's "Roundup Ready" traits in Pioneer's new "Optimum" seeds the company hopes to introduce by 2011 or 2012. The seeds resist Monsanto's popular Roundup herbicide, which has dominated farm fields for two decades.
Pioneer and its parent company, DuPont, countersued, accusing Monsanto of antitrust violations. Monsanto is using the herbicide's popularity to compel seed companies to use the Monsanto-licensed technology in their seeds, Pioneer's lawyers say.
"It's a good parallel to suggest that Monsanto has used Roundup seed traits the same way Microsoft used its Windows operating system, to lock out competitors," said Don Flexner, a managing partner in a Washington, D.C., law firm headed by David Boies that is representing DuPont and Pioneer.
Boies prosecuted Microsoft a decade ago when he was chief of the U.S. Justice Department's antitrust division. A court ruled that Microsoft used the licensing of its Windows operating systems, widely installed in new computers, to lock out rival software for Internet access and other functions.
Microsoft, as part of the settlement, was obligated to open Windows to other applications.
Monsanto spokesman Lee Quarles rejects the parallel to Microsoft.
"If you look at our history since we entered the biotech and seed businesses, you can see that we have actively licensed our genetic traits with a large number of seed companies," Quarles said.
The largest seller of seed with Monsanto's genetic traits? Pioneer, notes Quarles.
Since 2002, competitive pressures have forced Pioneer to license Roundup Ready traits from Monsanto for Pioneer seed. The amount Pioneer paid to Monsanto from 2002 to 2007 was on a per-unit basis and has not been reported.
But beginning in 2007, Pioneer was obligated to pay Monsanto $725 million in license fees through 2015. The latest annual report filed with the Securities and Exchange Commission by Pioneer's parent DuPont shows a balance of $590 million remaining.
Executives Launch War of Words
Monsanto's executives hit the roof last summer when it was inadvertently revealed that Pioneer was helping to fund an anti-Monsanto advocacy group.
DuPont acknowledged its funding of the Organization for Competitive Markets, which held a conference last summer under Monsanto's nose in its hometown of St. Louis.
Grant, in a letter to DuPont Chairman Charles Holliday, said the funding of the organization went "far beyond honest competitive behavior."
DuPont executive James Borel said Monsanto's anti-competitive behavior was "more of what we have come to expect from them."
Pioneer's products try to cut Monsanto lead
Pioneer has learned the hard way what happens when a company falls behind in the new biotech world. St. Louis-based Monsanto has used its lead in biotechnology to displace Pioneer as the nation's No. 1 seed seller.
Since the early 1990s, Pioneer has seen its market share slip from just under 50 percent to about 30 percent. Monsanto, whose seed stable includes DeKalb, Asgrow, Kruger, Fontanelle, Crow's and Corn States, now holds 36 percent of the seed business, according to widely used figures compiled by Deutsche Bank.
Pioneer made development of an alternative to Roundup Ready traits a major corporate goal, and in 2006 announced the introduction of a new Optimum line of seeds that mix Monsanto's Roundup Ready with other Pioneer traits in what is known in the seed business as "stacking." The Optimum lines originally were to be introduced next year but have been delayed, Pioneer says, in getting regulatory approval in foreign countries.
Flexner, Pioneer's lawyer, said the company intends to honor its licensing payment commitment through 2015. The company has not discussed its attitude toward licensing beyond that date.
Monsanto contends that use of its trait in stacking violates the Roundup Ready licensing agreement.
"We don't want Roundup Ready to be mixed with other traits because then we have no control over the quality or results, even though we could potentially have some liability if the performance of those Pioneer seeds wasn't satisfactory," said Ted Crosbie, who heads Monsanto's global breeding operations from Ankeny.
Crosbie says that rather than pointing fingers, Pioneer should look in the mirror.
"Pioneer's problem is that their seed technology is defective," Crosbie said. "That's what has hurt them in the marketplace."
Pioneer Gains Ground as Seed Sales Rise
Pioneer, urged on by parent DuPont, is fighting back.
In the last year Pioneer has reclaimed three percentage points of market share in soybean sales and two percentage points for corn, Pioneer president Paul Schickler told an investment conference in September.
Neither company is hurting financially.
Pioneer is the star in the DuPont firmament. While DuPont doesn't break out Pioneer's specific numbers, its ag and nutrition segment contributed $580 million of DuPont's $872 million in segment operating profits in the latest quarter ending June 30.
DuPont boasted a 21 percent increase in seed sales from the same quarter a year earlier.
Monsanto is now justified in calling itself "an agricultural company." Its latest quarterly report shows that of its $1.8 billion in pretax profit, $1.4 billion came from seeds and genetics.
The numbers demonstrate that there is room enough in the seed and genetics business for both Monsanto and DuPont to profit, which raises the question of what causes the companies to fight each other so savagely.
But history suggests that biotechnology can have the same radical effect on a company's market share and bottom line as it does on the genetic lines of seed germplasm.
Some Recall a Simpler Time
John Latham worked for a while at Pioneer a decade ago before returning to his family's seed company.
"The seed business has always been friendly, even among competitors. You'd go to the ag shows, and afterwards everybody would go out together and have a good time," he said.
"But lately there's has been more animosity than anybody can remember," Latham said.
"A smaller company like ours actually may be helped, because a lot of people are put off by all the name-calling, the bad blood. But it's sad anyway."
Licensing Deals Very Secretive
Licensing fees are secret, but tales abound in the Iowa countryside of the large shadow Monsanto exerts.
Myron Stine’s family is one of many smaller independent seed companies that dot the Iowa countryside. He said Stine Seeds, based in Adel, is a Monsanto licensee and has no dispute with the company.
“But you have a company that’s dominating on the trait side,” Stine said. “Smaller companies need the traits in their seeds. Those companies are less likely to be able to afford not only all the research, but the expense of licensing in two dozen foreign countries where the seeds will be sold.”
Stine adds: “Licensing hasn’t been presented to brands on a level playing field. A federal investigation is probably needed.”
How much of the genetic trait market Monsanto controls is unknown, but spokesman Lee Quarles denies reports that it has 90percent of seed trait licensing. He said Monsanto has about one-third of the licensed seed traits in the market.
John Latham of Alexander, whose family has been in the seed business for more than six decades and also is a Monsanto licensee, said: “We have to get along with everybody. But you hear talk that not all licensing deals are equal.”
Clash of Cultures
Given Monsanto’s history, any controversy dogging the company should be of little surprise.
Monsanto’s numerous critics include environmentalists riled up about its manufacture of 2,4D and DDT, and remnants of the Vietnam anti-war movement angered by Monsanto’s production of the controversial chemical defoliant Agent Orange.
Monsanto and Pioneer stayed out of each other’s way until the mid-1990s. Until then, Monsanto dominated agriculture on the herbicide end of the business with its Lasso and Roundup weed sprays, and Pioneer dominated the corn and soybean seed markets.
The biotech revolution leapfrogged the slow evolution of hybrid breeding by adding and substituting genetic DNA into seed germplasm.
For an old-line seed company like Pioneer Hi-Bred, Monsanto’s splicing of genes in the sacred germplasm of seeds was the equivalent of a rapper invading a classical symphony concert.
In “Lords of the Harvest,” published in 2001, author Daniel Charles depicted the Monsanto/Pioneer rivalry as “the ultimate clash of corporate cultures.”
“Monsanto flaunted its success,” Charles wrote. “Pioneer tried to hide it. Monsanto was from the city. Pioneer was from the country.”
Charles told how Pioneer’s plant breeders, carrying the tradition of Henry Wallace, simply couldn’t believe that Monsanto and its genetic alterations could change the industry.
In 1997 and 1998, Monsanto entered the seed side of the business when it bought the DeKalb and Asgrow corn and soybean seed companies. Monsanto promptly added its “Roundup Ready” genetic traits to those companies’ seeds.
Since Roundup was used by up to 90 percent of farmers, Monsanto had laid down a clear challenge to the long-dominant Pioneer.
How Much Will Farmers Pay?
Farmers have endured the tripling of average seed prices to as much as $300 per bag for the newest highest-tech lines of corn seed. One bag covers about 2.5 acres.
U.S. Department of Agriculture surveys show up to 90 percent of Iowa’s fields are planted with biotech seeds.
“I know that you get more for the seed today than before,” said Randy VanKooten, who farms near Pella and is president-elect of the Iowa Soybean Association. “The new seeds have been worth it considering the yields and the protection we get. Now, if a bag of corn seed gets to $400 per bag, would I pay it? I really doubt it.”
The road to confrontation
Sweeteners, pesticides and hybrid corn have marked the histories of Monsanto and Pioneer Hi-Bred.
1901 - John F. Queeny of St. Louis founds Monsanto, named after his wealthy wife's maiden name, to make saccharine sweetener.
1926 - Henry A. Wallace founds Hi-Bred Corn Company in Des Moines to develop and market hybrid seed corn. The "Pioneer" part of the name was added a decade later.
1930 - Coon Rapids friends Roswell Garst and Charles Thomas become the Midwest marketers of Pioneer Hi-Bred brand corn.
1944 - Monsanto and 14 other companies begin manufacturing DDT pesticide.
1945 - Monsanto produces and markets agricultural chemicals.
1960 - Monsanto establishes agricultural division.
1961 - Monsanto becomes one of several U.S. companies to produce defoliant Agent Orange for the U.S. military.
1968 - Monsanto introduces Lasso agricultural herbicide.
1970 - Pioneer establishes an international department and changes name to Pioneer Hi-Bred International Inc.
1973 - Pioneer begins soybean seed operation.
1975 - Monsanto introduces glyphosate Roundup herbicide to eventually succeed Lasso.
1976 - Monsanto establishes molecular biology group to focus on biotechnology.
1981 - Monsanto buys first seed company, soybean producer Jacob Hartz Soybean Seed Co.
1982 - Pioneer's annual worldwide sales surpass 10 million units, takes No. 1 position in U.S. corn market over longtime rival Dekalb.
1982 - Monsanto claims first genetically modified plant cell.
1987 - Monsanto conducts its first field trials of plants with corn borer resistant biotechnology traits.
1991 - Pioneer takes No. 1 soybean seed market share in North America.
1995 - Monsanto and Pioneer agree to combine Pioneer's corn germplasm with Monsanto's corn borer resistance traits.
1996 - Monsanto introduces Roundup Ready soybeans.
1997 - Pioneer introduces its first biotech corn and soybean seeds. DuPont buys 20 percent of Pioneer. Monsanto buys soybean seed company Asgrow.
1998 - Monsanto buys Dekalb corn seed company, introduces Roundup Ready corn and YieldGard corn borer protection.
1999 - DuPont buys Pioneer for $7.7 billion.
2001 - Monsanto introduces Roundup Ready Corn 2, sparks lawsuits with Pioneer over use of Roundup Ready traits.
2001 - Pioneer agrees to pay $56 million in licensing to use Monsanto's anti-corn borer YieldGard traits.
2002 - After suing each other over use of Roundup Ready traits, Monsanto and Pioneer agree to a licensing agreement giving Pioneer the right to use Roundup Ready genetics.
2003 - Monsanto begins gene trait "stacking" by putting both Roundup Ready and YieldGard protection in one seed.
2004 - Monsanto introduces YieldGard Plus corn, which stacks two YieldGard products in one seed product, buys Crow's Hybrid Corn, Midwest Seed Genetics and Wilson Seeds.
2005 - One billionth acre of biotech crops planted worldwide.
2006 - Pioneer announces Optimum GAT seed traits in 2010 to replace its licensed Roundup Ready lines.
2007 - Monsanto and Pioneer modify the existing per-unit Roundup Ready license to provide for specified annual royalty payments by Pioneer to Monsanto totaling $725 million through 2015.
2008 - Pioneer and Monsanto begin mediation over Monsanto's objection to Pioneer's planned use of Roundup Ready traits in Optimum GAT seeds.
2009 - Monsanto sues Pioneer over Roundup Ready patent infringement in Optimum GAT, Pioneer countersues alleging restraint of trade. Pioneer funding of anti-Monsanto activist group becomes known, U.S. Secretary of Agriculture Tom Vilsack and Attorney General Eric Holder announce plans to investigate competition in seed industry.
Sources: Company documents and SEC filings