South America Calling

Monsanto's Brazil Royalty Talks

Monsanto is willing to offer Brazilian farmers concessions, if in return they drop legal action contesting royalty payments of first-generation Roundup Ready soybeans since 2010, Hugh Grant, the company's chief executive, indicated on a conference call this week.

"If we can reach a business solution, that would be preferable," he told investors.

However, Brazilian farm leaders said they aren't interested in what is on the table at present as they feel they have a very strong case.

Back in October, a Mato Grosso court temporarily suspended the payment of royalties on Roundup Ready seeds in the No. 1 producing state, upholding an injunction brought by the state's agricultural farm federation that argued the relevant patents expired in October 2010, not in 2014 as the company claims.

This decision prompted Mato Grosso farm leaders to call on other state associations to apply for similar injunctions and led Monsanto to suspend royalties nationwide.

In November, the court amended its decision, saying that Monsanto could charge royalties in Mato Grosso until a final ruling was made, but that monies must be deposited with the court. This prompted Monsanto to resume charging royalties everywhere except in Mato Grosso.

The St. Louis-based biotech company maintains its international patents, which expire in 2014, supersede local patents, which expire in 2010.

But Grant told investors that the company wants to 'clear the decks' on this issue to allow the smooth introduction of the Intacta RR2 soybean technology and the expansion in the use of its VT PRO 2 corn technology.

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He was tightlipped about what a deal to resolve the issue might look like, but according to the Mato Grosso Soybean and Corn Producers Association (APROSOJA -- MT), the world's No. 1 seed company has offered to waive RR1 royalties between now and 2014 as long as farmers don't seek reimbursement for payments since 2010.

Mato Grosso farm leaders have rejected Monsanto's down-the-middle offer as they feel confident they can win the legal battle.

"We have a strong case. We, and probably (all) of the other state associations, are not going to accept this," said Ricardo Tomczyk, vice president of APROSOJA-MT.

Roundup Ready currently dominates the Brazilian soybean market with the gene present in approximately 85% of locally produced beans. So, considering that Brazil may be the world's No. 1 producer this season, that's a pretty big deal.

Indeed, RR1 royalties from Brazil would represent $0.20 to $0.25 of 2013 projected earnings per share, if they had not been excluded, according to Monsanto. Currently, ex-Brazil RR1 guidance for this year is $4.30 to $4.40 per share.

However, the opportunity presented by Intacta RR2 soybeans and VT PRO 2 corn, in Brazil is much greater than for the first-generation RR technology, Grant told investors.

As such, the smooth introduction and dissemination of these genes is Monsanto's main priority here.

The company is testing Intacta RR2 in Brazil and plans to launch the pest-resistant strain as soon as China, the South American's main client, approves the technology, which it hopes will happen before the 2013-14 season. VT PRO 2 has been employed in Brazil since 2011, and Monsanto says it is seeing utilization growing exponentially, along with the growth of second-crop corn production.

Grant indicated that negotiations over RR2 royalties could dovetail with the RR1 talks.

Monsanto informed farm groups earlier this year that it would charge a royalty of R$115 per hectare ($22.93 per acre) or 7.5% on production for Intacta RR2. Farmers balked at the proposed charges, which are more than double those for RR1, while Monsanto argued that the higher royalty is justified by higher yields and reduced costs.

One area where these negotiations could link with those over RR1 is on the question of royalties on production.

Monsanto instituted the system of charging on delivery of crops because, under Brazilian law, it is lawful for farmers to multiply seeds for their own use.

Farm leaders argue charging on seed on delivery of the product is illegal, but, according to Tomczyk, would be prepared to talk about dropping the RR1 case, if Monsanto relented on charging royalties on beans produced with Intacta RR2 technology.

However, Grant said one of Monsanto's main priorities is maintaining the current collection system.

Monsanto says the conversations are going well; the farmers say not so much.

This is a story that is set to develop in the coming months.


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