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Bolen, C.D. 1993. New crops from a seed company perspective. p. 658-660. In: J. Janick and J.E. Simon (eds.), New crops. Wiley, New York.

New Crops from a Seed Company Perspective

Carrol D. Bolen

CRITERIA FOR INVESTMENT DECISIONS
SUMMARY

Seed companies are often encouraged to become more involved in the development and commercialization of new crops. Seed industry response to requests for support have generally been viewed as lukewarm, at best. Although this response may seem unusual considering the fact that the seed industry is accustomed to making long-term investments in research and development, a thorough examination of the criteria used for investment decisions by seed companies sheds light on the difficulty of getting support for investment in new crops.

CRITERIA FOR INVESTMENT DECISIONS

Seed companies differ in the approach they use to make investment decisions. This will depend upon such factors as company size, interest in diversification, capital resources available, or willingness to take risks. However, most seed companies will look at a similar group of factors in making an investment decision. Comments here are those things generally considered by Pioneer Hi-Bred International, Inc.

Intellectual Property Protection

As we look at new opportunities, a key consideration is intellectual property protection. We must be convinced that we can adequately protect the investment made in research and development. Hybrid crops have generally given that protection, while self-pollinated crops have not. The Plant Variety Protection Act provides some protection, but the farmer exemption permitted by the Act is clearly a major limitation to investment in self-pollinated crops. For example, Pioneer started research and development of hard red winter wheat in 1970. After several years of marketing products during the 1980s, the program was dropped in December of 1989. Farmers had accepted our products which commanded a nice market share, but most of the seed was coming from farmers' bins rather than a Pioneer seed bag. We simply could not make enough money to get a reasonable return on our research investment. A similar scenario developed for our hard red spring wheat program. Cotton ginners saving and selling seed was a major reason we decided to terminate our cotton seed business in the United States.

Pioneer will likely not be interested in any new crop that doesn't have one of the following protection mechanisms: (1) capable of being hybridized; (2) an effective plant patent; (3) vertical integration through contract production.

Kenaf is a good example of a new crop that offers intellectual property protection through vertical integration. I've been impressed with the Kenaf International program and believe that system merits consideration in other new crops as well. Clearly, we plan to use a similar plan for some of the specialty products being developed at Pioneer. We intend to control a major portion of the value added chain.

Synergy with Existing Business

Businesses often expand into other areas because of synergistic effects. The seed industry is no exception. Pioneer started as a hybrid seed corn company and over a period of years successfully expanded into several other crops. The logic was that we could use our plant breeding technology and seed distribution channels as a competitive advantage. Generally speaking, this strategy has been effective. However, as we look at new crops, we must assess how important our strengths are in relation to what is needed to make the new crop successful.

I can recall evaluating triticale as a potential new crop for Pioneer in the mid-1980s. We started a full scale triticale breeding program in 1986 after determining there would be good synergy between triticale and our winter wheat program. Also, working with triticale should improve our chances of being successful in hybrid wheat development. However, we decided to get out of hard red winter and hard red spring wheat development in December of 1989 and as a consequence decided to drop triticale at the same time. So, synergy helped get Pioneer into triticale and synergy helped to get us out.

Canola is our most recent example of a new crop for Pioneer. The decision was made in 1988 to enter the canola seed market. We acquired the canola program of Biotechnica Canada, in 1989, and started our own research and development program in Europe. In 1990, we acquired Allelix Crop Technologies of Toronto, Canada, a major developer of canola seed. The major reasons for our interest in canola are: (1) hybridization seems likely; (2) seed margins are good, especially in Europe; (3) canola oil is growing in popularity with consumers; (4) canola hectarage is significant worldwide and beginning to show growth in the United States; (5) we are already involved with other oilseed crops (soybeans, sunflowers) and needed canola to complete our involvement in the three major annual oilseeds; (6) seed can be marketed through existing distribution systems; (7) canola is a good crop for developing specialty oils which is a target of Pioneer.

Stage of Commercialization

Most "new crops" have been around for a long time. Some have been in commercial channels for years, but because of limited production are still considered new crops. Naturally, we are most interested in crops that are developed to the point where they have proven their commercial worth. This may be viewed by many as wanting the reward without the risk. However, we see the risk of too early an entry as being greater than the potential reward. Pioneer's position is that once a crop has proven its' potential, we can then become a player and obtain most of the benefits without much risk. That places the major responsibility for new crop development in the hands of public institutions. It is a role they have performed well over the years and should continue to perform. There does become a point when a new crop looks promising enough that a company like Pioneer will decide to become actively involved.

Market Potential

We must have some idea of the market potential for the new crop in order to determine our interest. Ideally, we like to see large volume potential with very good profit margin. Realistically, this seldom happens. Given a choice, we're more inclined to opt for low volume and high margin rather than high volume and low margin.

Financial Considerations

In dollar terms, we're seldom interested in looking at anything new unless it has the potential of contributing at least one million dollars in profit per year. We're not going to get very excited unless the long term potential is five million dollars or more per year.

Pioneer has a stated goal of 20% return on stockholders equity. Although this may sound like a high target, it is an accepted norm for many of the food industry companies. New crops are evaluated against the 20% return on equity (ROE) target. If the crop is still several years away from commercial scale-up, it is very difficult to invest much at this stage and show a long term 20% ROE unless there is a very good margin once the product comes to market.

Because of the large public ownership of seed companies that has resulted from consolidation within the industry, there is considerably more pressure on companies for good short to intermediate financial returns. This is not the best environment for considering investing in something that likely will not return a good profit for several years.

Alternative Opportunities

Seed companies generally have many investment options with limited resources available. Priorities must be established. Heading the list of priorities will generally be those items that protect or enhance the existing business. New opportunities will normally be secondary.

There are two growing investment areas which I believe will make it difficult to obtain funding for new crops. One is biotechnology in general, and the other modification of traditional crops. Most, if not all, seed companies that invest in research and development have maintained or increased their traditional plant breeding budgets while adding on a layer of biotechnology costs. In addition, Pioneer has begun a significant effort to modify the protein, oil, and starch profiles of several traditional crops.

I firmly believe that modification of major crops will prove to be tough competition for some of the product targets of new crops. Through a combination of traditional plant breeding, mutations, and biotechnology, we are seeing many opportunities for new products. For example, vegetable oils with a modified fatty acid profile or protein meal with a modified amino acid profile. These are much more exciting to us today than anything we've looked at in the new crops area. Perhaps one of the main reasons for this view is that we see a need to protect and an opportunity to enhance market share in our existing seed product lines.

SUMMARY

Although there are several new crops that show promise for commercialization, the seed industry has shown very little interest in supporting the development process. That trend is likely to continue for the following reasons: (1) there are few new crops success stories; (2) there are many investment alternatives; (3) new crops often take a long time to get a return on investment while the seed industry is looking to more short to intermediate needs; and (4) intellectual property protection is limited with many new crops.

Last update May 16, 1997 aw