The View from Wall Street

by Charlie Cray

Last June, biotech industry analysts from Deutsche Bank Alex. Brown issued a report on DuPont's Ag Biotech division entitled "Thanks, But no Thanks?" The analysts concluded that "although we are willing to believe that GMO (genetically modified organisms) crops are safe and may provide a benefit for the environment, the perception wars are being lost by industry."

Then, in December, Credit Suisse First Boston issued its own report, which says that the biotech industry is suffering from "negative momentum," that food manufacturers are running scared of GMO crops and "if anyone is in control it appears to be environment and consumer groups." The bank compared GM technology with nuclear power -- the science might be sound, it said, "but no one is building new nuclear plants today."

Market analysts are very cautious about agricultural biotech's future, and some are downright skeptical of its near-time prospects. Agricultural biotech's big payoff, if it ever is to come, will be down the line -- five years or so -- they say.

Short-Term Futures: Split Markets

The June 1999 Deutsche Bank report forecast a split market, with a premium developing for GMO-free crops, especially soybeans. Six months later, Frank Mitsch, the principle author of the Deutsche Bank report, says little has changed.

"All the news since our report came out has been negative for genetic engineering, so the bearishness of the market has not shifted," Mitsch says. He sees a high likelihood that a bifurcated market for soybeans (with non-GMO beans gathering a premium) will continue well into 2000.

Although Deutsche Bank analyst Tim Ramey wrote in June 1999 that it was uncertain whether the premium market for non-GMO corn would develop, Mitsch says there is a small portion of the corn market that is already paying a premium for non-GMO corn, which may or may not be an indication of things to come.

"Nothing is final until the seed is in the ground," he says. "We haven't seen a huge groundswell, a huge premium market [for GMO-free corn], but there is something and it deserves scrutiny to see whether it will expand."

Nick Redfield, an industry analyst at Banc One who describes himself as one of the ag-biotech industry's biggest boosters, projects an overall flat trend for GMO crops in 2000, but he points out that there are foreign markets where GMO acreage may still expand. GMO soybeans are gaining acreage in Argentina and he believes GMO soybeans are about six to nine months away from approval in Brazil.

Nevertheless, most analysts agree that the ag-biotech industry's short-term prospects (as measured by acreage planted) fall far short of the continued increases in GMO acreage projected just over a year ago. Still, they say, it is too early to suss out U.S. farmers' intentions for 2000. "We're hearing contradictory information," A.G. Edwards' Alex Hittle told the Monitor. "Our best guess is that the market will be about the same in 2000 as 1999."

William Fiala of Edward Jones says that while Europe has clearly gone down the GMO-free track, it is too early to say where the United States will go. He agrees that next year's planting season will be pivotal because it will take another three to four years for consumer benefits to come along and give the GMO market another boost.

How Important Is Europe?

Most analysts agree that consumer pressure in Europe and brand name product pledges to avoid GMO ingredients have contributed to the "bearish" market for GMOs. The question is, how significant are these two factors?

Many analysts parrot the industry line that European resistance to GMOs is based upon irrational emotion and not "sound science." Hittle, for instance, says the failure of European regulators to adequately monitor the food supply has led to widespread distrust of the regulatory system and, by implication, biotechnology.

Others agree. European agencies "lost all credibility after mad cow and dioxin" showed up in chickens, according to Redfield. "People in the United States feel safe about the food supply because the FDA cracked down whenever problems arose; for instance, when there was a salmonella outbreak."

Redfield sees European regulators and industry "egging on doubters of the technology as a kind of protectionist move; GMO traits are held by U.S. companies, so resistance in the EU -- for example the French farmers, who are loud and militant -- is beneficial to their farming system."

"The second lesson from Europe is to keep your head down and don't call attention to yourself," Hittle says. "Monsanto made the mistake of going public with scientific information about biotech crops."

Fiala agrees that the industry has "been fighting a losing battle by fighting only a scientific battle. More resources need to be put towards science, but also on the emotional side. They need to broadcast the benefits more, because the other side has been effective in keeping the focus on risks and potential risks."

Fiala says that until now the U.S. ag-biotech industry has not been deeply impacted by the loss of European and Japanese markets. The coming planting season will determine what impacts there are. "No one will know which way it will go until the farmers make final planting decisions in March and April." Yet, he believes, "if Europe doesn't accept GMOs, especially soybeans, it will hurt biotech seed markets in the United States."

Industry Divisions

Mitsch believes that much of the premium garnered by GMO-free crops is due to pledges made by major brands to use only GMO-free ingredients. "Japanese beer companies, baby food companies, and health food companies" are all selecting GMO-free ingredients, he points out.

But Redfield doesn't see much significance in the announcements made to date. "Gerber is owned by a foreign company and succumbed to pressure in Europe, and Heinz doesn't use a lot of GM products to begin with," he says. "My belief is that given how little farmers make, if consumers want non-GMO ingredients they will have to pay for it because in order to give consumers what they want these companies will have to pay more versus a normal commodity price, especially with crops where 50 to 80 percent is used as animal feed."

Fiala adds that only a small percentage of U.S. food product manufacturers and retailers have stated they will not use genetically engineered ingredients. "It can grow significantly and still be a small percentage of the market."

Hittle adds that he doesn't think consumer activist campaigns will have much affect on the market because there is no real health threat. "People have been consuming them for years with no evidence of a public health problem. They should buy organic" food if they want GMO-free.

In the long term, "there will be a tougher definition of organic foods," Hittle says. "Conventional foods and genetically engineered foods will become a merged commodity."

Long Term Futures

Deutsche Bank reported on an ag-biotech gathering to construct future scenarios on "how it will all play out" in the long run.

"In one particular game-playing session, each of three potential stories or outcomes led to [a] possible downside from today's bull case being promulgated by the leading suppliers. One case suggested mass acceptance of ag-biotech leading to the commoditization of key biotechnology products, turning them into low-margin commodities."

A second scenario "drags the chaos theory into the mix, with a seemingly minor factor serving to kick off a massive push for new regulations that would stifle biotechnology applications."

A third story was characterized as "thanks but no thanks," as consumers decide that biotechnology derived foods are not as appealing as all-organic or current offerings.

Deutsche Bank concluded that "thanks, but no thanks" appears to be in the lead in Europe and could easily become the thought process in the United States as well.

Yet most analysts are banking that there will be a resuscitated and expanded market for GMO crops in the long-term, when output traits (e.g. vitamin or vaccine enhancements engineered into the crops) come onto the market.

Even Mitsch, who believes these products are three to five years away, says it is too early to make a definite call on which scenario is the most likely. "We are sure to see a lot more debate about the issues in the coming year."

Asked if the ag-biotech industry will overcome public anti-biotech sentiment in the United States in the long term, Redfield says, "I don't know for sure that that sentiment is growing. Also, people have overlooked how this [technology] is already beneficial to the environment. For instance, Bt crops reduce the spraying of insecticides." According to Redfield, when consumers finally come to understand the value of GMO products, the industry will prevail.

Hittle agrees with Redfield that although there is talk of a bifurcated market with a premium going for non-biotech foods, "it puts anti-biotech advocates in an awkward position because it requires them to man the ramparts of traditional chemistry, including the use of [pesticides such as] atrazine."

Fiala agrees with Hittle and Redfield that most of the benefits of GM technology now go to the farmers, and that the ag-biotech industry will overcome public anti-biotech sentiment in the United States when the next generation of products which benefit consumers hits the market. "That changes the equation and might be what it takes." He says "it's not uncommon to see a societal backlash to any new technology. But it will work out in the end. The real question is at what pace will acceptance come."

Redfield doubts that anti-biotech activists will succeed in the long run. "There are always going to be people raising alarms -- remember the landfill scares of 5 years ago. But there's no scientific evidence." He points to what he considers to be flaws in the infamous Cornell University study where investigators reported damage to monarch butterflies from Bt corn pollen. "The monarchs were force-fed in a lab. No tests have shown any harm in the real world."

As to whether or not GM crops can be proven safe, he says that "proving there's nothing wrong is impossible. There are even problems with unmodified crops. So absolute testing that the new crops are safe is impossible."

Regulatory Hurdles

Redfield believes that the FDA's approval process might serve everyone better if it were mandatory. But a new approval process "would have to be designed specifically for GMO crops. It would be different than a drug trial, which introduces something foreign into the body. GMOs for all intents and purposes are the same as conventional crops, so it doesn't require as much testing" as a new drug.

Nevertheless, even Redfield, the industry's staunchest advocate, says that "there probably need to be some safeguards" when the industry moves genes between orders of species.

Fiala says labeling of biotech products is inevitable. What kind of labeling -- whether voluntary or mandatory -- remains uncertain, however.

Although he believes the FDA is content with the current approval process, there may be more public disclosure of testing data in the future in order to forestall the agency's own critics.

Overall, however, he sees no major changes in the approval process.

Hittle agrees that labeling is likely to occur. He also believes that "current FDA policies will require more public disclosure" of information provided during reviews of new GMO products. The reviews will be "about the same [as the current voluntary FDA reviews], but mandatory." He believes the FDA will take this step to build confidence among consumers.

No Smooth Sailing

Asked about the biggest threat to the industry, Hittle replies, "The real question is what are you worried about?"

"If you come at the issue from a strictly financial standpoint to the companies, the biggest threat is that the farm economy will remain weak in the face of low commodity prices. From the industry's standpoint, they can sell both traditional products and the new GMOs, so from a financial standpoint a weak farm economy is what really hurts these companies."

"Genetically engineered crops are a higher margin business," Hittle says.

"Rather than making and selling a pesticide, they can engineer a crop with Bt and sell it in seed without having to manufacture and ship pesticides -- so that's high-margin revenue compared to what it costs to make pesticides," he says. "So the more successful the anti-biotech movement is, the more sales will shift to traditional agricultural chemical products. One way or another, the industry will sell its products. Thus the biotech fight is about parceling out who the winners and losers are and whether money will be made selling chemicals or selling seeds."

The most obvious loser so far appears to be Monsanto, at least prior to the December announcement of its proposed merger with Pharmacia. Because of the kinds of crops they are invested in and the fact that they have not been as bold as Monsanto in introducing GMO crops, other ag-biotech firms are not expected to suffer as much from the market's current skepticism about GMO crops.

For example, the Deutsche Bank analysts wrote that "within DuPont and others, there is more to biotechnology than just ag-biotechnology used for crops to feed humans and/or animals. We suspect that GMO cotton and other fiber crops, which will not enter the food chain, will not draw the attention or focus that corn and soybeans have."

Deutsche Bank's Mitsch cautions, however, that it is too early to tell if this prediction will pan out. DuPont, for example, aims to get 25 percent of its raw materials from biomaterials by 2010, a large portion through the next generation of GMO crops.

"There will be some resistance," Mitsch told the Monitor, "due to the potential impact on nature."

With GE technology, he says, "there is no smooth sailing."