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May 01, 2003
Innovest Report Identifies Business Risk of Genetic Engineering for Monsanto Investors
    by William Baue

The controversy surrounding genetic engineering creates substantial risks to shareowner value at Monsanto, according to a new report from Innovest.

Regardless of one's opinion on the ethical, environmental, or nutritional status of genetic engineering (GE), the ultimate success or failure of this controversial biotechnology in the market carries significant implications for investors in companies that produce it. In 2002, the seeds used to plant more than 90 percent of GE crops globally came from Monsanto (ticker: MON), according to a report from Innovest Strategic Value Advisors, a sustainability ratings company. The report identifies two primary economic risks regarding GE: market rejection of GE products, and liabilities due to the inevitable GE contamination of non-GE seeds.

"We approached the report from a very strict fiscal perspective, namely: 'Is Monsanto going to make money on genetic engineering?'" said Marc Brammer, the Innovest senior analyst that authored the report. "We don't think they will."

Monsanto, which lost $1.7 billion on sales of $4.7 billion in 2002 and whose stock price has fallen 50 percent since 2001, calls into question the objectivity of the report.

"From our point of view, the report Innovest issued is highly biased," said Lori Fisher Monsanto's director of financial communications. "It cherry-picks information, not only about the plant biotech industry, but also about Monsanto specifically. That appears to be done to advance a political agenda, which is not surprising, since the report was commissioned by Greenpeace."

Making this claim of bias at Innovest stick may prove difficult considering the March 3, 2002 Financial Times article written by Innovest CEO Matthew Kiernan about the latitude of socially responsible investment (SRI) strategies.

"Genetically modified foods . . . are anathema to virtually all European SRI funds," wrote Dr. Kiernan. "Yet a strong argument could be made that new, drought-resistant hybrid crops have saved hundreds of thousands of lives in Africa."

Focusing on the substance of the report, Innovest corroborates its claim of market rejection by pointing out that more than 35 countries have enacted or announced laws restricting GE imports or requiring labeling foods containing GE ingredients. The European Union is the most visible market to reject genetic engineering. According to the report, U.S. corn exports to Europe have fallen from $305 million in 1996 to $2 million in 2001.

"I disagree a little bit that markets are rejecting this technology," Ms. Fisher told "There's been a slowdown in biotech acceptance worldwide, but it's an overstatement to say that markets are rejecting every biotech grain, because they're not."

The report points out that current market acceptance of GE in the U.S. may result from the fact that U.S. law does not require products with GE ingredients to be labeled as such, a situation that GE industry lobbying favored strongly. The report lists more than 20 polls conducted in the U.S. since 1997 that demonstrate overwhelming public support for labeling products with GE ingredients and strong public opposition of growing GE crops. A June 2001 ABC News poll found that 93 percent of people want GE food to be labeled, while an April 2001 PBS/Frontline poll found that 65 percent of respondents oppose the growth of GE crops.

The report also discusses the financial risks related to GE seeds contaminating non-GE seeds, an inevitability that Monsanto admits in its 10K filing with the Securities and Exchange Commission. The report points out that such contamination of non-GE foods by StarLink corn, a GE product not approved for human consumption, has cost Aventis (AVE) nearly $1 billion.

"The real problem here is that we're talking about pollenators: you put GE crops out there and it's going to end up in someone else's field," Mr. Brammer told "Cynically, I think that might be Monsanto's plan. They are actively suing farmers for patent right infringement when they find biotech crops growing in someone's field who hasn't paid a license fee."

Monsanto investors are not blind to the risks outlined in Innovest's report. A shareowner resolution calling on the company to prepare a report on the business risks of GE by March 2004 received 5.93 percent support from voting shareowners, almost twice the percentage required by the SEC to refile the proposal for a second year.


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