Monsanto and GE – Risks to Investors

Innovest Strategic Value Advisors – Monsanto Investor Risk Report –
April 2003
(The full report can be downloaded from


Innovest Strategic Value Advisors, a financial services firm based in New
York, London, Paris and Toronto, analyzed investor risks related to Monsanto’s
genetic engineering (GE) strategy. Partly owned by State Street Global
Advisors and the Dutch pension fund ABP, Innovest is a leader in
analyzing the financial impacts of environmental and social issues.
Investors use Innovest’s best-in-class ratings, ranging from AAA to CCC,
to minimize risk and maximize return potential. In nearly every industry
sector, companies with above average environmental scores, taken as a
group, outperformed below average firms by 300 to 3000 basis points per
year in the stock market.

Monsanto received a CCC EcoValue’21T rating from Innovest, the lowest
environmental rating. This implies the firm has above average risk
exposure and less sophisticated management than peers. As a result, it
will likely underperform in the stock market over the mid to long-term.
Monsanto is the global leader in developing and marketing GE seeds (in
2002, 91% of GE hectares world-wide were planted with Monsanto seeds).
The company also makes the world’s largest selling herbicide,
Roundup/Glyphosate. Its strategy includes selling GE seeds intended to
be used with Roundup (71% of GE seeds planted worldwide in 2002 were
designed to be herbicide resistant) and developing new seeds which
produce food and pharmaceutical products.

Monsanto claims its GE products will provide economic benefits to
farmers, feed hungry people around the world and improve environmental
conditions. However, it appears actual benefits may be substantially
less than claimed. For example, a recent study by the US Department of
Agriculture questioned the economic benefits of GE soya and corn, the
two largest GE crops. Also, most developing countries have strongly
opposed GE crops due to concerns about environmental contamination,
reduced genetic diversity and foreign firms holding patents on
traditional crops.

Environmentally, Monsanto warns investors in its 10K about substantial
losses that could result from unintended contamination of food crops by
its GE seeds. Given the tendency of pollen and seeds to spread in
nature, contamination is inevitable. As a result, the company is
lobbying for regulations that allow some GE contamination of non-GE food products.

Contamination of food crops by GE seeds designed to produce
pharmaceutical products (GE pharma crops) poses an even greater risk to
investors. While some consumers might accept limited contamination from
GE food crops, probably none would accept food contaminated with
pharmaceutical properties. Yet, as with GE food crops, contamination by
GE pharma crops will occur if they are cultivated. Indicating the
inevitability of such contamination, GE corn designed to produce pig
vaccine recently contaminated food crops in Nebraska and Iowa.
Contamination of food products by Monsanto’s GE pharma crops could
bankrupt the firm and cause substantial investor losses.

Monsanto faces significant market and financial risks. As a result, the
company’s stock is probably overvalued despite recent price declines.
The risks facing Monsanto investors include:


The inevitability of environmental contamination and concerns about human
health impacts have caused GE crops and food products containing GE
ingredients to be one of the most widely rejected product groups ever.
Many GE products have been removed from the market or developed but not
commercialized due to market rejection. Examples include GE tomatoes,
flax seed, rice and sugar beets. Monsanto withdrew its GE potatoes from
the market in 2001 after companies including McDonald’s, Burger King,
McCain’s and Pringles refused to buy them. At present, GE products
provide no nutritional benefits to consumers.

However, they do pose various environmental and human health risks. As a result,
many consumers refuse to buy GE products once labeling makes them aware
that GE ingredients are being used. Foreign markets, especially those
with labeling requirements, have seen strong market rejection. In the
US, where labeling is not required, outright rejection has been minimal
so far.

Foreign Market Rejection

Over 35 countries have enacted or announced laws that restrict GE imports
and/or require labeling of foods containing GE ingredients. Europe was
one of the first regions to restrict GE imports and require labeling.
More recently, major food importers such as China, Japan and Korea have
enacted GE restriction/labeling requirements. GE concerns have caused US
corn exports to Europe to fall from $305 million in 1996 to $2 million
in 2001. Exports to Korea have fallen from $300 million to $85 million.

The Cartagena Protocol on Biosafety will probably enter into force in
2004. This will impose substantially greater documentation and risk
assessment costs on GE exporters. The Protocol will also likely hold GE
seed manufacturers liable for contamination and other problems caused by
GE seed use. (In the wake of the $1 billion StarLink loss, it may be
difficult or impossible to get insurance for GE-related losses. NFU
mutual, the largest UK farm insurer, refuses to insure such losses.)

These restrictions will make it more difficult for GE products to
compete with non-GE varieties in the 103 countries that are signatories
to the Protocol. To avoid losing market share, food exporters will
likely demand non-GE crops from US farmers.

In Europe, moratoria on some GE crops may be lifted, but probably not in
the near future. Opposition to GE food remains high. Most European food
manufacturers and retailers have implemented policies to ensure that no GE
ingredients are used in their food products. Companies pursuing such
policies include Nestlé, Unilever, Heinz, ASDA (Wal-Mart), Carrefour,
Tesco and many others.

Beyond Europe, there has been strong opposition to GE crops in Asia,
Africa and other developing regions.

Domestic Market Rejection

GE supporters claim that the widespread use of GE ingredients in US food
products indicates acceptance by US consumers. In reality, the vast
majority of US consumers do not realize they are eating GE foods since
GE firms have aggressively and successfully lobbied to suppress labeling
requirements. Since 1997, over twenty US polls have shown strong support
for labeling. Examples include ABC News – 93% of Americans want GE food
labeled, Rutgers University – 90%, Harris Poll – 86%, USA Today – 79%,
MSNBC – 81%, Gallup Poll – 68%, Grocery Manufacturers of America – 92%,
Time Magazine – 81%, and Novartis – 93%. A 2001 poll by
Oxygen/Market-Pulse not only found that 85% of Americans want GE food
labeled, but also that only 37% of women would feed GE food to their children.

Several of these polls also found that a significant percentage of Americans
would not eat GE foods if they was labeled as such (the Time poll found
58% would not eat them). If labeling requirements were imposed in the
US, it appears highly likely that a significant number of consumers,
perhaps as high as 30% or more, would stop eating GE foods and demand
non-GE alternatives. As in Europe, many food manufacturers would
probably choose to carry only non-GE foods, rather than going to the
expense of pushing two separate lines through the same distribution channels.


Inevitable Environmental Contamination

GE contamination is inevitable because it is impossible to completely
prevent GE pollen and seeds from being carried by wind and other vectors
to non-GE fields and natural areas. The inevitability of GE
contamination is evidenced by StarLink and other GE contamination cases.
In 2000, Aventis’ StarLink corn, a GE product not approved for human
consumption, was found in many different food
products. Following recalls of over 300 corn products, Aventis spun off its
CropScience division.

In another contamination case, GE corn designed by ProdiGene to produce
pig vaccine recently contaminated corn and soya food crops in Iowa and Nebraska.
Regulatory leniency limited ProdiGene contamination costs to $3 million and
allowed the firm to stay in business. However, further contamination
could occur and costs to the firm could rise since GE material from pig
vaccine corn may still be in nature. In another case, GE corn
contamination has been found in Mexico, where GE corn growing is not
allowed. Investigations are being conducted to determine the source of
the contamination. Significant costs could be imposed on the polluters.

The StarLink, ProdiGene, Mexican and many other cases reflect the essential
problem of GE crops – release into nature is inevitable and once
released, GE materials cannot be recalled. So far, the StarLink disaster
has cost Aventis nearly $1 billion. Yet, StarLink contamination is still
occurring and could occur indefinitely. As a result, it is impossible to
predict the ultimate cost to Aventis.

Contamination costs could put Monsanto and other firms into bankruptcy,
leaving society to deal with GE contamination problems. Monsanto uses
the term ‘adventitious presence’ to describe unintended GE contamination.
This term is misleading to lay persons since it implies ‘advantageous or
beneficial presence’. As the shareholders of Aventis would readily agree,
the presence of StarLink corn in food products was anything but advantageous.
To enhance clarity, this paper refers to adventitious presence as contamination.

In its 10K, Monsanto notes that it is addressing the problem of
contamination by, “.continuing globally to seek regulations that
recognize and accept (contamination) and provide for approval and
acceptance of trace amounts of (GE contamination).” The company is
trying to convince governments, farmers, food manufacturers and
consumers that they should accept GE contamination (perhaps ranging from
0.5% to 5%) of many organic and conventional non-GE food products. The
contamination percentage would likely increase over time as GE crops
grow and spread.

Also in the 10K, Monsanto states that, “concerns have been expressed
about the potential for (GE contamination) in food, resulting from the
development and production of pharmaceutical proteins in food-crop
plants. Monsanto’s Protein Technologies business is one of several
businesses engaged in this research.” Monsanto did not say GE
contamination was inevitable when GE seeds for food crops were
introduced. Apparently acknowledging the inevitability of contamination
by GE food crops, the company is now seeking regulations that would
allow it. As Monsanto develops GE pharma crops, it is not saying
contamination is inevitable. But it is. Even if these crops were grown
indoors, an unlikely scenario, some contamination would eventually
occur. While some consumers may accept limited contamination of food
products with GE food traits, probably none would accept contamination
of food with pharmaceutical traits. Since contamination is inevitable,
companies developing GE pharma crops are likely to face large
contamination costs.

Human Health Risks

Creating GE products involves randomly inserting genetic material into an
organism’s DNA. It is virtually impossible to predict what interactions
this will cause among the billions of components of DNA, especially over
multiple generations. There are many scientific critics of the process,
including the US National Academy of Science. Those concerned about GE
safety point out that most research showing the safety of GE foods was
conducted or funded by GE firms. Since these firms have a large
financial stake in seeing GE crops commercialized, there is a risk that
safety testing done by them is biased.

Other safety concerns include the fact that safety testing is usually
not done over the long-term or over multiple generations. As a result, long-term
impacts on human health may not be discovered until people are made ill
by GE foods. Many scientists are concerned that the GE process can have
unintended consequences such as creating new toxins and proteins which
could cause allergic reactions and other human health problems.

An example of unintended consequences includes antibiotic resistant marker
genes which are used in the production of many GE seeds. Some medical
authorities have found that these genes may pass on antibiotic
resistance to bacteria in the gut, thus making the bacteria resistant to
clinically important antibiotics. As a result, the EU is phasing them
out in 2008. The United Nations CODEX Alimentarius Committee has also
recommended that they be phased out. In the US however, there appears to
be no plan to phase them out.

Ethical Concerns

Numerous ethical concerns, including safety, scientific hubris and disclosure,
largely explain the widespread opposition to GE foods. A nearly infinite
number of interactions could occur between GE materials released into
the environment and other life forms. From a statistical perspective, it
is a virtual certainty that, in at least a few cases, there will be
large negative impacts, such as damage to beneficial species. It is
effectively impossible to test for the nearly infinite number of
interactions that might occur in nature or in the human body. The
effective impossibility of adequately testing the safety of GE food and
pharma crops converts this to an ethical issue for many consumers. They
say, if these crops cannot be safely tested, they should not be used.

Those concerned about GE believe that the creations of nature are infinitely
more sophisticated than those of humanity. They argue that humanity
knows virtually nothing about genetics compared to all there is to know.
It is hubris on the part of the scientific community, they believe, to
think that humanity can create new life forms and release them into the
environment with impunity. Inserting genes into DNA in a way that could
not occur in nature creates life forms that are not subject to genetic
screens built up over millions of years. Once released into nature,
these unnatural life forms cannot be recalled if there is a problem.
Huge amounts of GE material have already been released into nature from
past crops. This material cannot be recalled.

There is no way to tell what impact it will have over the long-term. The
idea that business continues to put the Earth’s genetic wealth at risk
primarily for commercial purposes arouses the most passionate opposition
in many consumers.

As shown by the polls above, most consumers, whether opponents or
supporters of GE foods, believe GE content should be disclosed through labeling.

Given uncertainty about the environmental and human health impacts of GE foods,
the vast majority of consumers believe they have the right to know if
foods have GE content. In effect, not disclosing takes away their right
to chose whether or not to eat GE foods. It is unethical, they believe,
to take away their right to chose what food they will eat or feed their children.


Monsanto’s GE-focused strategy poses large risks to investors. With a 2002
loss of $1.7 billion on sales of $4.7 billion, several factors will
place ongoing downward pressure on earnings. These include increasing
competition for Roundup following patent expiration, growing resistance
among weeds Roundup is meant to control, difficulty in opening new
markets due to concerns about GE safety, and questions about the
economics of using GE products. A 2002 study by the US Department of
Agriculture found that GE soya provided no net benefit to farmers in
several cases. It also found that benefits from GE corn may have been
due to seed companies setting low prices to gain market share.

Other threats to future earnings include new product and reputation risks.
Several Monsanto products intended for human consumption have failed. The
company is now facing resistance from many US and Canadian farmers to GE wheat
which it plans to launch in 2004-2005. A report by Iowa University found
that over 50 percent of the US export wheat market could be lost if GE
wheat is introduced.

Monsanto continues to face reputation problems around the world due to factors
including the impression that GE foods are US products being forced on
the rest of the world by the US Government and World Trade Organization,
protests in
developing countries against Monsanto, and the company’s numerous lawsuits
against farmers.

However, the largest risks facing investors are US market rejection and
contamination. There is strong public support for labeling of GE foods
in the US (by far the largest market for GE foods). If this occurs, it
is highly likely that a significant percentage of the market for GE food
would disappear. To avoid losing market share, food manufacturers would
have to develop separate GE-free product lines or simply make all
products GE-free.

Regarding contamination, as materials from Monsanto’s GE food and pharma
crops escape into the environment, which is inevitable, there is
significant risk that human food crops could be contaminated. In its
10K, Monsanto states “Some growers of organic and conventional
nonbiotechnology crops have claimed that (GE contamination) will cause
them commercial harm.” Contamination also “could lead to more stringent
regulation, which may include: requirements for labeling and
traceability; financial protection such as surety bonds, liability or
insurance; and/or restrictions or moratoria on testing, planting or use
of biotechnology traits.”

The 10K also states GE contamination “can negatively affect our business or
results of operations.” And “.can result in the withdrawal of seed lots
from sale, or in governmental regulatory compliance actions such as crop
destruction or product recalls.” In summary, GE contamination could
cause StarLink-scale losses for Monsanto.


It is understandable that the US Government has essentially taken the
industry position on GE safety and labeling, but much less clear why
many in the financial community appear to have done so. US Government
support for GE crops appears to stem from the fact that the crops are
mostly US-developed and that GE companies have made substantial
financial contributions to US politicians and political parties. This is
not said as a criticism of politicians but rather of the campaign
finance system which allows politicians to accept money from the firms
they are supposed to regulate.

Money flowing from GE companies to politicians as well as the frequency
with which GE company employees take jobs with US regulatory agencies
(and vice versa) creates large bias potential and reduces the ability of
investors to rely on safety claims made by the US Government. It also
helps to clarify why the US Government has not taken a precautionary
approach to GE and continues to suppress GE labeling in the face of
overwhelming public support for it.

With Enron and other financial disasters, the financial community
apparently bought into company stories without looking much below the
surface. Since Monsanto’s stock price has fallen by more than 50 percent
over the past two years, it cannot be said that this is completely true
in this case. However, in light of the issues and risks noted above, the
firm may still be overvalued. Monsanto could be another disaster waiting
to happen for investors. If the firm does not take steps to mitigate its
substantial market risks, for example by diversifying its GE-focused
strategy, further investor losses seem likely. Given available knowledge
about company risks, financial analysts and asset managers may be hard
pressed to explain their current positions on Monsanto.

This report provides an overview of the GE crop market. It then provides
a detailed description of Monsanto’s GE-focused strategy and the large
risks it poses to consumers, the environment, food manufacturers and investors.

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