The End Of An Era

In 1972, Monsanto launched Roundup, an herbicide that would go on to transform both the company and the very face of agriculture. Last month, Monsanto acknowledged that Roundup’s best years have come to an end. It announced 900 layoffs, mostly of people involved with Roundup, and said it would carve out its herbicide franchise into a stand-alone division.

As is the case for many chemicals these days, the fall from grace for Roundup, known generically as glyphosate, is due mainly to China. As many as 15 Chinese chemical companies have jumped into the glyphosate business, causing prices to plummet even as demand continues to grow.

When it was introduced, glyphosate was a breakthrough nonselective herbicide. It acts by inhibiting an enzyme in plants involved in the synthesis of essential amino acids. It’s relatively nontoxic to humans and breaks down readily in soil.

For two decades, farmers used Roundup mainly as a cost-effective means of clearing weeds from fields prior to planting. Then, in 1996, Monsanto introduced Roundup Ready seeds genetically engineered to resist glyphosate. With the new seeds, farmers could apply Roundup before, during, and after planting. The era of crop biotechnology was born.

Glyphosate’s patent expired in 2000, but Monsanto continued to dominate the business. Today, glyphosate is the world’s largest-selling agricultural chemical. Nufarm, an Australian firm that calls itself the number two marketer of glyphosate, puts overall sales at about $3.8 billion per year.

Gautam Sirur, principal consultant at Cropnosis, a Scottish market research firm, says Chinese companies have been edging into the market for the past decade. Because of small manufacturing plants and older technology, however, their initial impact was somewhat muted.

In 2007 and 2008, shortages of energy and phosphorus, both critical to glyphosate production, put a crimp on output from China. With consumption on the farm still growing, the result was what Robert Reis, a Nufarm board member, calls a “demand/price bubble.”

Behind the scenes, though, the Chinese were busy. According to Reis, numerous Chinese companies have increased capacity over the past 18 months. Add in better phosphorus availability on the supply side and farm-belt financial woes on the demand side, and glyphosate prices suddenly plummeted back to Earth.

The impact has started to show up at Western firms. Early last month, Albaugh, a large U.S. supplier of generic crop protection products, announced the layoff of 37 workers at a facility in St. Joseph, Mo. The company, which uses the plant to finish glyphosate it manufactures in Argentina, blamed unfair competition from China.

In mid-June, Nufarm stated that demand and price declines for glyphosate would cause it to miss its fiscal-year earnings target by about 15%. A week later, Monsanto disclosed that gross quarterly profit in its herbicide business had been cut in half because of the rapid price drop.

“The sheer volume of competitive product sitting in the distribution channel, particularly in the U.S., is unprecedented,” Carl M. Casale, Monsanto’s executive vice president for strategy and operations, told stock analysts during a conference call. He said prices for technical glyphosate were down from about $10 per kilogram in August 2008 to roughly $3.00 last month.

Monsanto continues to see value in the glyphosate business, Casale emphasized. Despite the price drop, the company expects to earn $1 billion per year in gross profits from Roundup through 2012. “We remain confident in our ability to remain the low-cost producer,” Casale asserted.

Cropnosis’ Gautam says Monsanto is focusing on its Luling, La., plant, where it announced a $196 million expansion in April 2008. There, the firm has pioneered a production route that uses a platinum catalyst to convert diethanolamine into the intermediate disodium iminodiacetate. Other producers form the imino compound from hydrogen cyanide, ammonia, and formaldehyde. Some Chinese companies make glyphosate via an even older technology based on glycine.

Gautam figures that Monsanto will do all right under glyphosate’s new economics. “Right now it’s still a very profitable business for them,” he says.

The outlook is cloudier for competitors such as Albaugh and Nufarm. According to Gautam, they have come to rely on intermediate chemicals produced in China. But Chinese companies are starting to work around those firms and directly supply glyphosate to crop chemical distributors in the U.S. and elsewhere.

Nufarm’s supply chain is sound, Reis contends. The firm gets some glyphosate intermediate from Monsanto, and it invested about $25 million last year in several Chinese producers. “In broad terms, we expect to source about 50% of our intermediate needs from Monsanto and from our Chinese suppliers in the current year,” he says.

And as for Monsanto, although glyphosate helped make the company what it is today, it sees its future in seeds and crop traits. During his talk with the analysts, Casale used the language of finance to describe what the herbicide has become. “I think of Roundup as the annuity that accompanies the greater growth stock of seeds and traits,” he said.