Wednesday, January 06, 2010

Forbes sells the next best thing to snake oil

Forbes Magazine this month named Monsanto as "Company of the Year."

Monsanto's business model employs the company's monopoly on several lines of genetically modified crop seeds to extract an unusually large fraction of the producer surplus earned by corn and soybean farmers. The seeds grow corn and soybean plants, which have pesticidal properties or which can tolerate especially large applications of the chemical pesticide glyphosate (Roundup). Roundup, of course, is sold by Monsanto.

That business model is profitable, but it does not usually win praise from others. So, Monsanto's public relations folks spend endless hours promoting products that have not yet been marketed successfully, which some day may end world hunger, repair the environment, or reverse obesity and chronic disease.

Forbes credulously repeats these promises about future products as if they were already here, while burying its more skeptical coverage of Monsanto's main business lines.

The article focuses first of all on Monsanto's efforts to provide omega-3 fatty acids through genetically modified soybeans. These fatty acids are found naturally in fish oils. Citing a not-yet-refereed paper from a recent scientific conference, Forbes gushes: "Wouldn't that be a wonderful product to have for sale? Stops heart disease--and protects the environment, too. People could get their nutritional supplements without depleting fish stocks."

Stops heart disease? For starters, let us look for the statement on omega-3 fatty acids in the Food and Drug Administration's page about health claims that have significant scientific agreement. No wait, omega-3 and fish oil claims are not there, because the evidence is too weak. So, let us look on FDA's page about second-tier "qualified" health claims that have mixed scientific evidence, and which are permitted only because the Supreme Court restricted FDA's ability to regulate claims that might perhaps maybe come true. Here, we find that fish oil merits a qualified health claim. If Monsanto made this claim on a label, the company would have to state the claim's evidence base in "supportive but not conclusive research." Instead of such frankness, wouldn't it be nice for Monsanto if it could instead convince Forbes to carry the message that the product will "stop heart disease."

Even if you believe the fish oil health claim, which many people do, Monsanto's genetically modified technological marvel would achieve the same outcome that you already have available in a common dietary supplement.

Forbes' adoration of Monsanto is not the unanimous view of the business media. Here is Jim Cramer's more insightful summary last Fall of Monsanto's business and policy risks. I use this video in my teaching, in a class session on imperfect competition in the food industry.


Matt DiLeo said...

Careful with your word choice - Monsanto is absolutely NOT a monopoly. They have exclusive control of "Roundup Ready" crops the same way Ford has exclusive control of the "F150" truck, but that doesn't mean Ford has a monopoly on pickup trucks.

There are no shortage of other companies that sell their own pesticide and herbicide resistant crops (e.g. DuPont-Pioneer, BASF, Bayer, Dow and Syngenta), all of which are MUCH bigger than Monsanto.

usfoodpolicy said...

Monsanto is the monopoly seller of several lines of genetically modified seed. The monopoly on those lines of seed is protected by U.S. patent law.

Even if you considered the market to be "all soybean seed" instead of "GMO roundup-ready soybean seed," Monsanto's share is astonishing -- over 60%.

See Andrew Pollack's excellent coverage in the New York Times.

Ford has a much smaller share of the market for pickup trucks, and there is no analogy in the pickup truck market to Monsanto's patent-protected monopoly of a key food technology.

Matt DiLeo said...

Thank for the link!

Patent law and copyrights are critical to facilitate technological and cultural progress but it's a HUGE pet peeve of mine when organizations try to extend their claim beyond what's precedented. I'm glad to hear Monsanto's getting slapped down.

I wouldn't worry about the 60% figure at any rate. I'm sure DuPont had that market saturation and better when they introduced chemistries like nylon, teflon and tyvec. Monsanto's ahead of the other companies because it was the first out of the gate, but as long as we enforce patent expiration and don't over-regulate the industry, they'll have no shortage of competition.

The Almond Doctor said...

Monsanto really burned themselves in the public view when they started sending out their "scouts" to determine if farmers were keeping their round-up resistant seeds. I thought this was an over-stepping of US law - and many others did too - hence the negativity towards Monsanto.

Another problem that will most likely affect Monsanto in a negative way is how many of Monsantos products (or generics) are widely used by the AG industries. In general, when a product is used widely, environmental issues become more relevant, which then bring regulation to help protect the environment. In a few years (if not already) we will probably start hearing mass media reports about the dangers of glyphosate resistant crops.

As far as the business plan that Forbes touts - I dont think it is any different than any company that has a patented/licensed technology: Develop it, Patent it, Produce it, and sell the heck out of it for as long as possible, Repeat. This model works well if you have a product that works and is wanted.

Parke: You probably know more about this, or a term for it: but it seems once a company hits a critical point or size, they can keep their momentum and continue developing new innovation/patents/etc. Outside of government regulation, how is it stopped? Public opinion?

R said...

Monopoly isn't a desirable industry structure, but it's tricky to get the patent protection balance right in industries where new products require huge R&D investments (pharma is another example).

The GM soybeans featuring omega-3 fatty acids seem a bit silly, I agree, but there is scope for other seed improvements which could have hugely positive impacts (e.g. drought tolerance in corn and wheat).

@The Almond Doctor, "stopping innovation" (which inevitably generates patent-protected products) is not a good thing. As long as old varietals can still be used once the patent expires (as MAT Kinase suggests, and for example the Roundup Ready 1 soybeans mentioned in the NYT article Parke linked to), and as long as new products satisfy sufficiently rigorous environmental and food safety standards, private research that generates seed innovations is great.

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usfoodpolicy said...

Great points, MAT kinase, Almond Doctor, and R.

I think of the property rights assignment through patent law as a social choice that the government can make freely in the public interest. Monsanto owes intellectual debts to generations of soybean breeders, and future generations will owe debts to the scientists of today. Monsanto doesn't have any natural right to a monopoly on a major soybean technology. The question is -- what legal restriction on the ancient practice of saving seed should the government enforce against farmers in order to provide Monsanto with sufficient incentive to innovate? The current policy regime seems wrong to me. Farmers could be treated much better, and Monsanto's dominance of the soybean seed market could be loosened, without really crippling the incentives for innovation.

R said...

I agree that "sufficient incentive to innovate" is the right target to aim for - we don't want to be too far over or under. Has anyone done a hard numerical analysis of how much seed-saving would reduce Monsanto profits, and compared that to the magnitude of their R&D investments?

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