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Monsanto 7-state probe threatens profit from 93% soybean

Bloomberg  |  Washington 

At least seven US state attorneys general are investigating whether Monsanto Co, the world’s largest seed producer, has abused its market power to lock out competitors and raise prices.

Iowa and Illinois, whose antitrust probes Monsanto disclosed previously, have joined with Ohio, Texas, Virginia and two other states in a working group coordinating the inquiries, according to investigators, farmers and seed dealers. They declined to identify the sixth and seventh states.

The state investigations add to pressure on Monsanto over allegations of abusive competitive tactics. The US Justice Department is probing the company’s marketing practices, and DuPont Co has accused its rival in licensing litigation of anti-competitive actions. At stake are the costs to farmers who produce $80.3 billion a year in corn and soybeans, used in products ranging from Coca-Cola to cattle feed to ethanol.

“Monsanto has become such a dominant player in the seed business that producers have real concerns that the price they pay for seed is going to be anywhere near reasonable,” said John Crabtree, a spokesman for the Center for Rural Affairs in Lyons, Nebraska, a nonprofit group that provides services to farm communities. “The fear is that the sky’s the limit.”

Monsanto rose to dominance via its genetically engineered Roundup Ready seed line, which was in 93 per cent of the soybeans and 82 per cent of the corn produced in the US last year. The gene Monsanto adds to the seeds allows crops to withstand use of its Roundup weed killer.

The states are probing whether Monsanto violated any laws by offering rebates to distributors for excluding rival seeds, imposing limits on combining the product with other genetic enhancements, or offering cash incentives to switch farmers to a more-expensive generation of seeds, according to one person involved in the probe who asked not to be named because he isn’t authorized to discuss it.

The five states known to be part of the inquiry accounted for almost 39%, or $31 billion, of US corn and soybeans last year, based on US Department of Agriculture data. A state- level investigation, on top of the federal one, “can lengthen the lawsuit and potential settlements, and it can increase uncertainty and costs for Monsanto,” said Daniel Sokol, a law professor at the University of Florida in Gainesville who edits a blog on antitrust and competition policy.

Monsanto Vice President Jim Tobin will address the concerns at a hearing March 12 in Ankeny, Iowa, where the US Justice and Agriculture departments are holding a workshop on seed- industry competition. It’s the first of a series of sessions the agencies are sponsoring to examine whether consolidation in agriculture is harming competition.

“There have been unsubstantiated allegations of a lack of competition in the seed market for several years now,” said Kelli Powers, a spokeswoman for St Louis-based Monsanto. “We’re confident an objective review will reveal competition is alive and flourishing in the seed market.” Monsanto has a “broad licensing approach that is “in fact pro-competitive,” she said.

“We produced millions of pages of documents” for the state working group, said Scott Partridge, a Monsanto attorney, in an interview. “For about a year now they haven’t had any more questions.” Seed producers and dealers say the state group has spoken to them as recently as December about their Monsanto licensing agreements.

The rebates investigators are exploring in the Monsanto case are similar to incentives that have figured in past antitrust inquiries that led to settlements, said Herb Hovenkamp a professor at the University of Iowa Law School in Iowa City and the author of “Antitrust Law,” a 23-volume text.

The Federal Trade Commission sued Intel Corp in December alleging it used “threats and rewards,” including rebates, to coerce companies not to buy rivals’ computer chips. In a separate civil dispute, Intel agreed in November, without admitting any liability or fault, to pay $1.25 billion to Advanced Micro Devices Inc. to settle allegations Intel gave discounts to customers that avoided AMD products.

Courts disagree on whether such financial incentives are anti-competitive, Hovenkamp said.

“These things have been so controversial and so heavily litigated that some firms have taken preventative steps and just gotten rid of them,” Hovenkamp said.

Monsanto phased out its market-share discounts as of last year, said Powers, the spokeswoman.

Of Monsanto’s $11.7 billion in revenue in the fiscal year ended August 31, 2009, $7.3 billion came from sales and licensing of seeds and seed genes. Revenue grew by an annual average of 17% from 2004 to 2009, as earnings expanded eight-fold to $2.11 billion, driven by genetically engineered products and acquisitions of other seed companies.

Revenue then declined as generic rivals to Roundup flooded into the US from China. In the fiscal first quarter ended November 30, Monsanto had a loss of $19 million as sales declined 36% to $1.70 billion.

Monsanto lost 74 cents, or 1 per cent, to close at $71.28 yesterday in New York Stock Exchange composite trading.

Showing that Monsanto engaged in anti-competitive behavior that harmed residents of their states could enable the attorneys general to demand civil monetary damages in addition to any penalties that the Justice Department may seek, Hovenkamp said.

In one soybean licensing agreement reviewed by Bloomberg, Monsanto offered the licensee financial incentives to favor Roundup Ready seeds and Roundup brand chemicals over those of competitors. The dealer’s agreement with Monsanto is confidential, and he asked that his name not be used.

Under the agreement, the licensee would earn a rebate of 7.5 per cent of the royalty it pays Monsanto if Roundup Ready accounts for 70 per cent of the dealer’s annual herbicide- resistant seed sales. The rebate is halved if the Roundup Ready share is between 50 per cent and 75 per cent, and isn’t paid at all below 50 per cent.

Similar terms were in Monsanto’s licensing agreements with Stine Seed Co until Monsanto phased them out in recent years, according to Harry Stine, president and founder of the largest closely held seed company in the US, based in Adel, Iowa.

“In order to get the large rebate they would give you, you had to minimize your sales of other companies’ seeds,” Stine said. “The rebates were so large that for all practical purposes you had to do it.” At one time, the requirement for earning the full rebate was as high as 90 per cent, he said. Stine has a collaborative agreement to develop seeds with Monsanto, he said.

The agreement reviewed by Bloomberg prohibited the dealer from combining the Roundup Ready trait with herbicide-tolerant traits that the licensee or other companies developed. It specifically bars the dealer from using any non-Monsanto genetic modification that makes crops tolerant to glyphosate, the herbicide found in Roundup. Such terms could be anti-competitive because Monsanto controls such a large share of the corn and soybean with its Roundup Ready gene, Hovenkamp said.

Monsanto’s Partridge said the company routinely negotiates agreements that allow seed companies to combine Roundup Ready with genetic modifications of its competitors.

“Monsanto has a demonstrated track record of both in- licensing and out-licensing trait technologies to support the development of stacked products,” he said in an interview. “We’ve done this more than any other company in this industry.”

Monsanto is also under scrutiny because the rising price of its seeds has been a sore point for farmers, said Peter Carstensen, a antitrust professor at the University of Wisconsin Law School in Madison.

“Buying seed used to be not terribly costly,” said Charles Benbrook, chief scientist at the Organic Center in Boulder, Colorado, who in December completed a study of 35 years of seed pricing. “Now farmers are locked into these high seed costs on an annual basis.”

The study showed that soybean farmers spent between 4 per cent and 8 per cent of their farm income on seeds from 1975 through 1997. Last year, farmers who planted genetically modified soybeans spent 16.4 per cent of their income on seeds, it found.

Monsanto’s licensing royalty on soybean seeds with the Roundup Ready trait climbed to $15.65 for each 140,000-seed bag last year from about $6.50 a decade ago, according to the owner of one seed company. A bag of Roundup Ready seed sells for about $35 and can plant three-quarters of an acre (0.3 hectare). He asked not to be named because the terms are confidential under his licensing agreement. Monsanto sells him seeds including the genetic trait, which he then reproduces and sells under his own brand, the person said.

Farmers who adopt Monsanto’s Roundup Ready 2 Yield technology, being introduced this year as a replacement for Roundup Ready, will have to pay a royalty of as much as $39.75 a bag, according to documents reviewed by Bloomberg.

Cal Dalton, a farmer in Pardeeville, Wisconsin, said he switched to a competitor last year when Monsanto sought a $30 price increase, to $210 a bag, for its “triple stack” corn seed, a line that resists glyphosate, rootworm, and corn borers. Monsanto still earned a royalty on the purchase because the seeds he bought carried the Roundup Ready trait, he said.

The list price for Monsanto’s “Yieldgard VT Triple” brand of triple-stack corn seed rose to about $277.50 a bag this year from $201.83 in 2008, based on seed prices per acre provided by Powers, the spokeswoman. She declined to discuss prices or royalties individual customers pay.

In the licensing agreement reviewed by Bloomberg, Monsanto agreed to rebate to the dealer as much as 4% of the dealer’s royalty if he developed a plan to move his customers from Roundup Ready to Roundup Ready 2. Monsanto says Roundup Ready 2 soybean seeds boost crop yields by 4.7 bushels an acre compared with traditional Roundup Ready. Soybeans yielded on average 44 bushels an acre last year, according to the USDA.

Stine, who said he’s been on conference calls with the state attorneys general group to discuss the Monsanto investigation, hasn’t made up his mind whether Monsanto’s dealings are anticompetitive.

“On the one hand,” Monsanto is “hard to get along with and very restrictive,” Stine said. “However, in general, their traits and products have been superior to other companies’.”

First Published: Thu, March 11 2010. 00:25 IST
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