Monsanto’s Battle for the Future of Farming
Monsanto's strategic investments demonstrate its commitment to slowing down, rather than profiting off of, climate change. But is a potential $66B merger with Bayer merely adding to their ongoing crisis of public credibility?
As the leading producer of seeds and agrochemicals globally, climate change is a crucial concern for agricultural giant Monsanto. First, reductions in the volume of arable land and the available water supply are projected to depress global food production, reducing the potential market for Monsanto’s products. In the U.S., crop yields and farm profits are expected to decline by the mid-twenty-first century due to heat and precipitation extremes1,2,3 and in India every one degree Celsius increase is expected to decrease yields of wheat by 5-10%.3 Second, fluctuating weather patterns – including droughts, floods, extreme heat, and severe weather events – are causing variability in crop yields and agricultural commodity prices for farmers using Monsanto products worldwide. In the U.S., recent evidence indicates that climate change increases volatility in year-to-year corn prices.5 This could drive uncertainty in customers’ demand for Monsanto’s seeds and agrochemicals.
Monsanto, which earned USD $13.5B in revenues in 2016,6 has attempted to help farmers adapt to decreasing water resources by introducing drought resistant seeds. Building on their capability to genetically modify plants to withstand pests, Monsanto introduced DroughtGuard seeds to farmers in the U.S. and China in 2013.7,8 However, although there may be long term potential for this biotechnology, scientists find that the seeds provide only modest improvement, if any, over classical breeding – a potential one percent increase in corn productivity in the U.S. – and do not provide benefits during severe or extreme droughts.9 Potentially more interesting is Monsanto’s 2013 acquisition of Climate Corp for $930M. Founded by an ex-Google employee to help farmers adapt to extreme weather patterns caused by climate change, Climate Corp uses analytics to predict acre-by-acre weather and its effects on crop yields across the U.S. Additionally, it offers direct-to-farmer, automated weather insurance policies: when the weather exceeds the policy guardrails, farmers get a check.
Longer term, Monsanto has committed to leading the way in corporate efforts to mitigate and adapt to climate change, publicly committing to becoming a carbon neutral corporation. However, the company cannot seem to shake doubts from the public about the sincerity of its motivations for profit vs. purpose. It remains to be seen how much the firm’s brand is tied up in ongoing scandals over glyosphate fertilizer and possible carcinogenic properites, and illegal pesticide spraying by farmers on fields planted with Monsanto soybeans.
A savvy move for Monsanto would be to shift their business efforts, which are focused mainly on climate change adaptation, to higher profile and impactful projects on mitigation, while phasing out less environmentally friendly business lines. For example, research indicates that chemicals intended to be used alongside Monsanto’s genetically modified seeds reduce soil sequestration – in other words, reduce the ability of soil to act as a carbon sink, and result in emitting carbon into the atmosphere. Marketing these chemical products undermines Monsanto’s policy and regulatory credibility to fast-track approvals for environmentally friendly seeds.10,11 The Series B investment by Monsanto Ventures into Blue River, which focuses on using data to reduce the use of chemical pesticides by targeting them to limited areas, was a move in the right direction.12 Another way to further this effort would be R&D on new ways to grow or produce food with lower carbon output, or target crops to areas with highest yield globally based on analytics and sell this data to farmers. A further investment area could involve monetizing some of their work in CSR to increase global carbon sinks, e.g. conservation of trees and increased carbon sequestration in soil. However, hanging over Monsanto’s head for the past year has been a pending deal by pesticides and pharma firm Bayer to acquire Monsanto for $66B.13 To the public, this results in a “mixed signals” that Monsanto is hedging on their future.
Key questions to evaluation going forward will be:
- How will the potential acquisition by Bayer affect Monsanto’s ability to help the agriculture industry respond to climate change?
- Is Monsanto serious about their carbon neutral commitment and mitigation of climate change? Will they be able to overcome their reputational damage from from previous businesses (now divested) in petrochemicals, and herbicides used with their GMO seeds (Battle Over Monsanto’s Potent New Weedkiller, WSJ 11/8/2017), in order to pursue their strategy?
- Did David Friedberg make the right decision to sell Climate Corp to Monsanto? (Further reading: https://www.newyorker.com/tech/elements/why-the-climate-corporation-sold-itself-to-monsanto)
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[1] IPCC (2007) Climate Change 2007: The Physical Science Basis. Contribution of Working Group I to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. Solomon S, Qin D, Manning M, Chen Z, Marquis M, Averyt KB, Tignor M, and Miller HL, Eds. Cambridge University Press. https://www.ipcc.ch/publications_and_data/publications_ipcc_fourth_assessment_report_wg1_report_the_physical_science_basis.htm. Accessed November 15 2017.
[2] Ortiz R, Sayre KD, Govaerts B, Gupta R, Subbarao GV, Ban T, Hodson D, Dixon JM, Ortiz-Monasterio IJ, Reynolds M (2008). Climate change: Can wheat beat the heat? Agriculture, Ecosystems & Environment, 126(1):46-58. http://www.sciencedirect.com/science/article/pii/S0167880908000194. Accessed November 15 2017.
[3] Schlenker W, Hanemann WM, Fisher AC (2005). Will U.S. agriculture really benefit from global warming? Accounting for irrigation in the hedonic approach. The American Economic Review, 95:395-406. https://asu.pure.elsevier.com/en/publications/will-us-agriculture-really-benefit-from-global-warming-accounting. Accessed November 15 2017.
[4] IPCC (2001) Climate Change 2001: Impacts, Adaptation and Vulnerability: Contribution of Working Group II to the Third Assessment Report of the IPCC. McCarthy JJ, Canziani OF, Leary NA, Dokken DJ, White KS. Cambridge University Press. http://hcl.harvard.edu/collections/ipcc/docs/27_WGIITAR_FINAL.pdf. Accessed November 15, 2017.
[5] Diffenbaugh NS, Hertel TW, Scherer M, Verma M (2012). Response of corn markets to climate volatility under alternative energy futures. Nature Climate Change 2:514–518. https://www.nature.com/articles/nclimate1491. Accessed November 15 2017.
[6] Monsanto Corp. Annual Report, 2016. https://monsanto.com/investors/reports/annual-reports/financial-highlights. Accessed November 15, 2017.
[7] Monsanto News Release (2012), Monsanto to Introduce Genuity Droughtgard Hybrids in Western Great Plains In 2013. https://monsanto.com/news-releases/monsanto-to-introduce-genuity-droughtgard-hybrids-in-western-great-plains-in-2013/. Accessed November 15, 2017.
[8] Monsanto News Release (2013), Monsanto’s Drought Tolerance Trait In Genuity® DroughtGard® Hybrids Receives Final Major Import Approval From China. https://monsanto.com/news-releases/monsantos-drought-tolerance-trait-in-genuity-droughtgard-hybrids-receives-final-major-import-approval-from-china/. Accessed November 15, 2017.
[9] Sherman DG. High and Dry: Why Genetic Energy is not Solving the Drought Problem in a Thirsty World. Union of Concerned Scientists, 2012. http://www.ucsusa.org/sites/default/files/legacy/assets/documents/food_and_agriculture/high-and-dry-report.pdf. Accessed November 15 2017.
[10] New York Times (2013). Misgivings about how a weed killer affects the soil. http://www.nytimes.com/2013/09/20/business/misgivings-about-how-a-weed-killer-affects-the-soil.html. Accessed November 15 2017.
[11] Fortune Magazine (2016). Can Monsanto save the planet? http://fortune.com/monsanto-fortune-500-gmo-foods/. Accessed November 15 2017.
[12] Blue River Technology Raises $17 Million in Series B Funding. http://www.businesswire.com/news/home/20151216005360/en/Blue-River-Technology-Raises-17-Million-Series. Accessed November 15, 2017.
[13]Bloomberg News (2017). Bayer Monsanto Deal Stares Down Hurdles at One Year. https://www.bna.com/bayermonsanto-deal-stares-n57982087845/ Accessed November 15 2017.
Laura, thank you for covering this broad topic, and for being discerning in your follow up questions!
I personally experienced Monsanto’s reputation damage, working alongside volunteer fellows in Latin America who had been dedicated to promoting permaculture, as opposed to the monoculture-based farming that Monsanto’s innovations primarily support. The reason for this support stemmed from a general distrust of corporate seed suppliers, but also spoke to the great risk a farmer faces when sowing a field full of one crop that is invariably exposed to stressors, be they climated-induced, pest-induced, or a combination. DroughtGuard, as you have presented it, reminds me of so many “me too” drugs in the pharmaceutical industry – drugs that offer little incremental benefit to diseases with significant patient volume and still command top dollar for their cumulative effect. Is addressing climate change on a corporate level best achieved by investing more in this sort of incremental benefit, by acquiring promising new technologies like Blue River, or by offering products directly to farmers based on idiosyncratic need for data that may help their harvest but not benefit their eco-efficiency?
Your analysis was excellent, because it raises even more questions than answers.
This is a great piece on a very salient debate. I think agriculture companies have a dilemma on their hands when it comes to climate change. On one hand, they can increase crop yields today to feed an ever-growing global population by reducing the sequestration capabilities of land through deforestation or chemicals. On the other hand, they can accept lower yields now to maintain good faith on their climate change mitigation measures, though that would exacerbate current global hunger. It comes down to valuing lives in the present versus even more lives in the future. Chemicals and pesticides only marginally increase yields in the present, as you mention, but do much more harm in terms of sequestration abilities of land. To show their commitment to mitigating the effects of climate change, Monsanto needs to really distance itself from its past businesses. Inviting bids from chemical giants like Bayer does not improve its image in the climate change battle.
Great post, Laura!
The concept of sustainability and how much of it falls upon big business has been top of mind for me since the IKEA case a few weeks ago. This is another excellent of how an influential company can set the tone for industry by being at the forefront of sustainable efforts. I believe Monsanto can pace the industry by introducing more environmentally friendly products which may increase costs for the company in the short term, will ultimately lead to stronger performance and an improved reputation in the long term. The trends are so staggering and the food and water crises that are only getting more intense that if leaders such as Monsanto fail to act, the world as a whole could suffer. Cooperation between business, government, and non-profit organizations may provide the push needed to drive toward increased sustainability. I recently came across an article from Monsanto’s CEO and Chairman which addresses the very topic and highlights the need for collaboration which may be of interest (https://monsanto.com/company/sustainability/climate-change/articles/commitment-collaboration-will-dictate-success-addressing-climate-change/). Overall, the relationship between business and the environment will only become more important in the future.
This was an excellent post on a truly pressing issue that I have spent some time on in my prior investing role looking at the Ag Chem space. Monsanto is more acutely focused on the impact of climate change on Agriculture than many of its peers; and the string of acquisitions the company has pursued, coupled with their continued innovation is clear evidence of this commitment.
This being said, I wonder if the merger with Bayer will derail this strategic focus, particularly as Bayer looks to divest many assets to consummate the deal. What is more, with looming anti-trust issues delaying the merger (Source: https://www.reuters.com/article/us-monsanto-m-a-bayer-review/bayer-says-antitrust-reviews-going-into-unimaginable-depths-idUSKBN1DT155) many innovative projects within Monsanto have been put on temporary-hold. And while investors and public markets may be unhappy with the delays, the clear loser is the environment as innovation is pushed out pending deal closure.
Laura, this is a very interesting topic! I wonder how these issues will develop in the near and medium term. It is necessary for their long-term strategy to focus on addressing climate change concerns, not only through reactive measures (e.g. helping farmers mitigate climate change) but also through a proactive approach, as they are great contributors to climate chaos. I’m interested to see the impact of Trump’s decision to pull the US out of the Paris climate change agreement on Monsanto’s strategy and decisions going forward, and whether public scrutiny will be sufficient to push Monsanto in the right direction.
Great work. Very well written and gives a great look at both a business dilemma and an ethical one. If I were Monsanto, I would sell the information to farmers, but not at a profit maximizing level. By selling it to farmers, it can make their supply chain better and help farmers know when they’ll need a specific type of crop from Monsanto. It will also allow Monsanto to use the data a “sales tool” to show farmers why they may need to buy a certain crop from Monsanto. By using it in a sales capacity, Monsanto could improve clarity in the agriculture supply chain and profit as well.
Great post, Laura. I really appreciated the balance in your analysis–I think it is much more common place to portray Monsanto as an evil corporation that polluting our nutrition and taking advantage of farmers.
I agree with you that Monsanto carries a lot of negative baggage from previous business ventures. I believe the only way for them to pull themselves out of this hole is to double down on mitigation initiatives like the ones you’ve described. It isn’t enough for them to develop seeds still produce in the more volatile weather patterns brought about by climate change–they have to produce products that don’t require the use of pollutants as complementary goods.
In terms of the Climate Corp acquisition, I believe David Friedberg did the right thing. If he truly wants the data to affect agribusiness in the largest way, there’s not a larger platform he could be using than Monsanto.