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Ag Biotech: Thanks, But No Thanks? by Frank J. Mitsch and Jennifer S. Mitchell

Deutsche Banc Alex. Brown, July 12, 1999. Downloadable at www.biotech-info.net/Deutsche.html.

The most serious critique of and blow to biotechnology this decade was issued in July by one of its strongest advocates, Deutsche Bank. The report wasn't about ethics, but about what the financial industry calls "hits" to earnings and valuation. Having issued "buy signals" on many of the companies commercializing ag biotech, Deutsche Bank stepped on the brakes for the simple reason that the industry was starting to suffer from "an incurable attack of market forces" (Amory Lovins's phrase). Deutsche Bank clearly summarizes the developments that have thrown off the economic models used to justify the very high valuations received by companies such as Monsanto and Pioneer-HiBred.

The critical factor is development of a two-tiered pricing system in the grain market. Due to growing demand from European and Japanese companies for uncontaminated grain, genetically modified (GM) corn and soy are selling at a discount, while non-modified seeds are selling at a premium. Economic gains realized, or hoped for, out in the field (due to herbicide or pest resistance) are being wiped out at the grain elevator. Unless GM yields become considerably better, the farmer planting GM crops will earn less money.

As this movement gains momentum, what company can thumb its nose at a concerned public? Big and small food companies are backpedaling under pressure from boycotts and stigmatization, announcing they are or will go GM-free. As an executive from Nestlé told representatives of GM seed companies: "Why should we take a bullet for your corn?" In other words, GM foods are value-detracted instead of value-added.

The report gets things wrong too. It repeats the industry saws that genetically modified organisms are the only way to feed a growing hungry world, or that without them, we will need to use more chemicals. Nevertheless, it clearly defines the uphill struggle faced by the life-science giants as they try to channel their proprietary products into the human food chain. ?Paul Hawken

"We are willing to believe that the GMO crops are safe and, in fact, may provide a benefit for the environment. What we are saying, however, is that the perception wars are being lost by industry, one battle after another....Perception is far more important than reality for this issue.

"In the United States, the GMO debate would have occurred earlier this decade had the FDA opened up the question for debate. Rather, in 1992, the FDA unilaterally decided (in its opinion) that as long as a GM food is no more toxic [or] allergenic, or any less "substantially equivalent" than its standard counterpart, it need not be labeled to show the process that created it. That decision is in sharp contrast to European labeling laws, introduced in 1997, which require that any food must be recorded as a GM one if it contains residues of engineered DNA or protein. While the science behind the GMOs may say one thing, we believe the lack of public discourse back then should lead to more heightened scrutiny when it does come.

"When all the above is taken into consideration, we believe the prudent observer will come away with a longer time horizon for consumer acceptance of ag-biotechnology. Experience has shown...that fantastic profits may not be realized. This lengthens the payback period for the massive investments already made and decreases the ROI [return on investment]. The huge prices paid for seed companies depend on the value added and rapid rate of technology development that GMOs promise. It also strips out some of the former...enthusiasm for investing in ag-biotech today that led to very impressive multiples being paid.