Review of Factors Affecting Domestic and International Agricultural Input Prices
My name is Jack Bernens, Vice President of Marketing for Novartis Seeds. I want to thank Chairman Combest and Members of the Committee for inviting me to be here today.
Novartis Seeds is a leading agriculture and biotechnology research organization that develops genetics and value-added products, while also producing and selling corn, soybean, alfalfa, sunflower, sorghum, wheat, sugar beet, vegetable and flower seeds. We trace our history back over 100 years in the United States to the founding of Northrup King Co. in Minneapolis, Minnesota and Funks Seeds in Bloomington, Illinois. Our products were among the very first to be offered with value added traits developed with biotechnology. Today, we market not only to the American farmer, but also to farmers all over the world. We have operations in all of the major agricultural production areas, including Canada, Mexico, France, Argentina, Brazil and others.
Currently, Novartis Seeds is a sector company of Novartis, a world leader in healthcare. Headquartered in Basel, Switzerland, Novartis operates in more than 140 countries around the world. Novartis recently announced plans to spin off its Crop Protection and Seeds sectors and to merge them with the agrochemical business of AstraZeneca in the second half of 2000 in order to create a consistency in strategic direction.
In the United States, our main effort is placed on the development and sale of corn hybrids and soybean varieties. Our soybeans research effort stretches back over 30 years, developing over 250 varieties since Novartis Seeds began marketing soybeans for sale to farmers. In 1997, we sold varieties for the first time that contained the Roundup Ready trait. Farmers have recognized the value this trait provides, offering application flexibility, cost savings, and a broad spectrum of weed control. More than 65% of our sales volume today consists of varieties that contain this technology.
We have been developing varieties with the Roundup Ready gene via a commercial agreement with Monsanto that was signed in 1993. The terms of the agreement allow us to market our products in the United States as we see fit in exchange for an upfront financial investment to fund research of the technology. Our varieties are priced based on the value they bring to the customer and the benefits that they provide to the markets in which they are planted. It is important to note that we offer extensive risk assurance programs for growers who purchase our seed, including:
· If a grower’s initial stand is insufficient, replant seed is provided at a significant discount.
· If a grower’s Roundup Ready soybean field encounters an extraordinary flush of weeds (assuming they have followed proper use instructions) we offer either cash back or a product voucher to provide for a respray application of the field.
Our customers receive the advantage of high quality, professionally produced seed. All of our U.S. production is produced under the internationally recognized ISO9002 standards. This effort ensures that our product germinates as expected and that all plants will tolerate the Roundup herbicide as intended. We are developing new methods of seed handling, packaging and treatment in conjunction with our dealers that save farmer’s precious time and labor during the busy planting season.
Novartis Seeds markets soybeans in Canada and Argentina as well, including Roundup Ready soybeans. In these countries, we market this technology under license from Monsanto. In Canada, we have sold Roundup Ready soybeans since 1999. Prices for our varieties vary according to the value they bring to the customer and the benefits they provide to the markets in which they are planted.
In Argentina, growers will purchase our Roundup Ready soybean varieties for the first time this fall. We market our varieties under a commercial agreement with Monsanto for the use of the Roundup Ready gene. The sale of our varieties is accomplished via a royalty arrangement with independent seed multipliers who sell our seed to growers, establishing a price themselves on the sale of the seed. A royalty and technology fee is collected on the sale of the seed by the multiplier to the grower. Novartis Seeds does not provide any replant or respray programs for the grower, and the seed quality is dependent upon the prevailing standards for the given market.
We initiated conventional soybean sales in Brazil in 1999, but do not yet produce Roundup Ready varieties for sale in that country. We have been marketing conventional soybeans in Italy for many years.
In the soybean seed business, price for seed is impacted by the production cost of the seed, the marketing programs that are provided with the sale of the seed, and the ability of the seed to provide value vs. an alternative. As a self-pollinated crop, the harvested soybean can be replanted each year with little yield loss. Some markets around the world place a high value on convenience, risk assurance, and seed quality – others do not. As we price our product, those factors must be considered. In fact, the price for seed corn and sunflower seed in Western Europe is significantly higher than in the U.S. market. Like any product sold in the world economy these and many other factors influence price. As an example, the price of gasoline remains below $2.00 per gallon in the U.S., but is over $4.00 per gallon in many other markets around the world. In much the same way, these factors must also be considered as Novartis Seeds invests in research and product for the future.
In summary, Novartis Agribusiness spends $500 million annually on research for variety development and biotechnology research to develop products that will bring value to producers. Some projects that are currently underway make take 5 years to produce a commercial product, others make take 10 years or more. Ultimately, investment decisions for projects in soybeans and other crops are evaluated based on the target market of the product and the technology applied. The cost of new products and technology must be reasonable to our customers during both good economic conditions and during times when the agricultural economic condition is not as good.
On behalf of Novartis, I thank you for this time to share our perspective with the committee.