ITEM 1. BUSINESS
Monsanto Company, with its subsidiaries, is a global provider of agricultural
products and integrated solutions for farmers. We produce leading seed brands,
including DEKALB and Asgrow, and we develop biotechnology traits that assist
farmers in controlling insects and weeds. We provide other seed companies with
genetic material and biotechnology traits for their seed brands. We also make
Roundup herbicide and other herbicides. Our seeds, related biotechnology trait
products and herbicides can be combined to provide growers with integrated
solutions that improve productivity and reduce the costs of farming. We also
provide lawn-and-garden herbicide products for the residential market and animal
agricultural products that improve dairy cow productivity and swine genetics.
"Monsanto," the "company," "we," "our" and "us" are used interchangeably to
refer to Monsanto Company or to Monsanto Company and its subsidiaries, as
appropriate to the context. With respect to the time period prior to Sept. 1,
2000, these terms also refer to the agricultural business of Pharmacia
Corporation (Pharmacia). (For more information on our history as a company,
please see "Relationships Among Monsanto Company, Pharmacia Corporation, Pfizer
Inc. and Solutia Inc.," below.) Unless otherwise indicated, trademarks owned or
licensed by Monsanto or its subsidiaries are shown in special type. Unless
otherwise indicated, throughout this Form 10-K, references to
"Roundupherbicides" mean Roundup branded and other branded glyphosate-based
herbicides, excluding all lawn-and-garden herbicides; and references to "Roundup
and other glyphosate-based herbicides" mean both branded and non-branded
glyphosate-based herbicides, excluding all lawn-and-garden herbicide products.
In July 2003, Monsanto's board of directors approved a change to Monsanto's
fiscal year end from December 31 to August 31. The 2003 Form 10-K was a
transition report, and included financial information for the eight-month
transition period ended Aug. 31, 2003. This Form 10-K includes financial
information for the 12-month period ended Aug. 31, 2004, the eight-month
transition period ended Aug. 31, 2003, and the 12-month periods ended Dec. 31,
2002, and Dec. 31, 2001, as well as unaudited financial information for the
12-month period ended August 31, 2003, and the eight-month period ended August
31, 2002. In Part I of this Form 10-K, years refer to fiscal years, unless
otherwise specified or apparent from the context.
Information in this Form 10-K is current as of Oct. 27, 2004, unless otherwise
specified.
Monsanto reports its business in two segments: Seeds and Genomics, and
Agricultural Productivity.
The following information, appearing in other parts of this Form 10-K, is
incorporated herein by reference:
Item 7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations (MD&A) - Seeds and Genomics Segment" - the segment
description, and the tabular information regarding the sales of our seeds
and traits
Item 7 - "MD&A - Agricultural Productivity Segment" - the segment
description, and the tabular information regarding net sales of Roundup and
other glyphosate-based herbicides
Item 7 - "MD&A - Cautionary Statements: Risk Factors Regarding
Forward-Looking Statements"
Item 8 - Note 23 - Segment and Geographic Data
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MONSANTO COMPANY 2004 FORM 10-K
PRINCIPAL PRODUCTS
Monsanto's principal products, categorized by our two segments, include the
following:
SEEDS AND GENOMICS
Major Products End-Use Products and Applications
Weed control system for crops tolerant
Roundup Ready trait in soybeans, corn, of Roundup and other glyphosate-based
canola and cotton(1) herbicides
Bollgard and Bollgard II traits in
cotton;(1)
YieldGard Corn Borer and YieldGard Crops protected against certain
Rootworm traits in corn(1) insects
Corn hybrids and foundation seed;
soybean varieties and foundation seed;
sunflower hybrids; sorghum grain and
forage hybrids; oilseed rape and
Agroceres, Asgrow and DEKALB branded canola varieties; wheat varieties and
seeds; Holden's Foundation Seeds; foundation seed; barley varieties; and
Monsoy foundation seed alfalfa varieties
(1) Monsanto also offers growers stacked-trait products, where more than one
trait is combined in a single seed product.
AGRICULTURAL PRODUCTIVITY
Major Products End-Use Products and Applications
Nonselective agricultural,
Roundup herbicide and other industrial, ornamental and turf
glyphosate-based herbicides applications for weed control
Harness, Degree, Lasso and other Control of preemergent annual grass
acetanilide-based and small seeded broadleaf weeds in
herbicides corn and soybeans
Other selective herbicides, such as:
Leader, Monitor, Maverick, Sundance, Control of specific weeds in wheat,
Outrider and Apyros sulfosulfuron corn, grain sorghum, turf, cotton,
herbicides; Permit, Manage and Sempra sugarcane, rice, and barley; and
halosulfuron herbicides; and Machete control of specific weeds on
butachlor herbicide roadsides
Residential lawn-and-garden
applications for weed
Lawn-and-garden herbicides control
Posilac bovine somatotropin Increase efficiency of milk
-------------------------------------- production in dairy cows
Monsanto Choice Genetics swine Increase productivity and meat
genetics lines quality of swine
EPC services for processing plants
for fertilizer producers, basic
metals production, oil refining and
ethanol production; proprietary
Enviro-Chem engineering, procurement equipment and process technologies
and construction management related to sulfuric acid catalysts,
(EPC) services; proprietary equipment mist eliminators, air pollution
and process technologies abatement and heat exchangers
Products may be sold under different brand names in different countries.
COMPETITION
The global markets for our products are highly competitive. We expect
competition to intensify with the continued development and commercialization of
new technologies and products, including biotechnology traits.
We compete with numerous multinational companies globally and with hundreds of
companies regionally. Most of our seed competitors are also licensees of our
germplasm and/or biotechnology traits. In certain countries, we also compete
with government-owned seed companies. Growers who save seed from one year to the
next also affect competitive conditions. Product performance (in particular,
crop yield), customer service, intellectual property and price are important
elements of market success. In addition, distributor, retailer and grower
relationships have been important in the United States and many other countries.
Our traits compete as a system with agricultural chemicals and, to lesser
degree, traits developed by other companies. Other agrichemical and seed
marketers produce chemical and seed products that compete with our Roundup Ready
and insect-control systems. Competition for the discovery of new agricultural
traits based on biotechnology and/or genomics is likely to come from major
global agrichemical companies, state-funded programs and academic institutions.
Enabling technologies may also come from academic researchers and an array of
biotechnology research companies. The primary factors underlying the competitive
success of traits are performance and commercial viability, timeliness of
introduction, value, governmental approvals, public acceptance, and
environmental characteristics.
Competitive success in crop protection products depends on price, product
performance, the quality of solutions offered to growers, market coverage, and
the service provided to distributors, retailers and growers. We have five to 10
major global competitors for our agricultural herbicide products. Competition
from local or regional companies may also be significant.
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For additional information on competition for Roundup herbicide, see Item 7
under the headings: "MD&A - Outlook - Agricultural Productivity," which is
incorporated by reference herein.
Our lawn-and-garden herbicides compete on the basis of product performance. We
have fewer than five significant national competitors and a larger number of
regional competitors in the United States. We are the only supplier of bovine
somatotropin in the United States. The largest market for our lawn-and-garden
herbicides and our bovine somatotropin products is the United States.
DISTRIBUTION OF PRODUCTS; CUSTOMERS
We have a worldwide distribution and sales and marketing organization for our
seeds and traits and crop protection operations. We market our branded germplasm
and traits to growers through distributors, independent retailers and dealers,
agricultural cooperatives and agents. We also license a broad package of our
germplasm and trait technologies to seed companies that do business in the
United States and certain international markets, which then market these
products to growers.
We sell our crop protection products through distributors, independent retailers
and dealers, agricultural cooperatives, and, in some cases outside the United
States, directly to growers. We also sell certain of the intermediates of our
crop protection products to other major agricultural chemical producers.
We sell and ship our Posilac bovine somatotropin directly to U.S. dairy farmers.
Outside the United States, we rely on a single exclusive distributor for these
products. We deliver our swine genetics products directly to swine producers,
who pay for the use of the genetics in upfront fees and/or royalties.
We market our lawn-and-garden herbicide products through The Scotts Company
(Scotts). For additional information, see Item 7, under the heading "MD&A -
Agricultural Productivity Segment - Our Agreement with The Scotts Company,"
which is incorporated herein by reference.
While no single customer (including affiliates) represents more than 10 percent
of our consolidated net sales, our three largest U. S. agricultural distributors
and their affiliates represented, in aggregate, 13 percent of our worldwide net
sales and 25 percent of our U.S. net sales in the 12-month period ended Aug. 31,
2004. During this period, one major U.S. distributor and its affiliates
represented approximately 12 percent of the net sales for our Agricultural
Productivity segment, and approximately 17 percent of the net sales for our
Seeds and Genomics segment.
EMPLOYEE RELATIONS
On Oct. 15, 2003, we announced plans for strategic actions that reduced the size
of our global workforce by eight percent for a net reduction in work force of
five percent in fiscal 2004. As of Aug. 31, 2004, Monsanto had approximately
12,600 employees worldwide. Relations between Monsanto and its employees are
satisfactory.
ENVIRONMENTAL MATTERS
Our operations are subject to environmental laws and regulations in the
jurisdictions in which we operate. Some of these laws restrict the amount and
type of pollutants that can be released from our operations into the
environment. Other laws, such as the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. 9601 et seq. (Superfund), can impose
liability for the entire cost of cleanup on any former or current site owners or
operators or parties who sent waste to these sites, without regard to fault or
the lawfulness of the original disposal activity. These laws and regulations may
be amended from time to time and may become more stringent. We are dedicated to
long-term environmental protection and compliance programs that reduce and
monitor emissions of hazardous materials into the environment, as well as to the
remediation of identified existing environmental concerns. Consistent with a
consent order with the State of Idaho, we have embarked on a multiyear project
to design and install state-of-the-art air emission control equipment at the P4
Production, LLC facility at Soda Springs, Idaho. P4 Production, LLC is
99 percent owned by, and is operated by, Monsanto. While the costs of our
compliance with environmental laws and regulations cannot be predicted with
certainty, such costs are not
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MONSANTO COMPANY 2004 FORM 10-K
expected to have a material adverse effect on our earnings or competitive
position. Because of our investment in the Soda Springs project, our capital
expenditures for environmental control facilities should be higher than normal
in the next few years. Current estimates indicate that total company-wide
capital expenditures for environmental compliance will be approximately $25
million in fiscal year 2005 and $16 million in fiscal year 2006.
In addition to potential liability for our own manufacturing locations and
off-site disposal and formulation facilities, under the terms of our Sept. 1,
2000, Separation Agreement with Pharmacia (Separation Agreement), we were
required to indemnify Pharmacia for any liability it may have for environmental
remediation or other environmental responsibilities primarily related to
Pharmacia's former agricultural or chemical businesses. This includes, but is
not limited to, environmental liabilities that Solutia Inc. (Solutia), the
former chemicals business of Pharmacia, assumed from Pharmacia in connection
with its spinoff on Sept. 1, 1997, to the extent that Solutia fails to pay,
perform or discharge those liabilities. It is reasonably possible that this
indemnification could have a material adverse effect on our financial position,
profitability and/or liquidity. For additional information relating to Solutia
and related risks to Monsanto's financial position, profitability and/or
liquidity, see "Relationships Among Monsanto Company, Pharmacia Corporation,
Pfizer Inc. and Solutia Inc." in this section and Item 8 - Note 22 - Commitments
and Contingencies.
For information regarding certain environmental proceedings, see Item 3 - Legal
Proceedings. See information regarding remediation of waste disposal sites and
reserves for remediation, appearing in Item 8 - Note 22, which is incorporated
herein by reference.
INTERNATIONAL OPERATIONS
See information appearing in Item 7 under the heading "MD&A - Cautionary
Statements: Risk Factors Regarding Forward-Looking Statements - Operations
Outside the United States" and information appearing in Item 8 - Note 23 -
Segment and Geographic Data, which is incorporated herein by reference. More
than 45 percent of Monsanto's sales, 37 percent of our Seeds and Genomics
segment's sales, and 51 percent of our Agricultural Productivity segment's sales
were made outside the United States during fiscal year 2004.
PATENTS, TRADEMARKS, LICENSES, FRANCHISES AND CONCESSIONS
Monsanto has a broad portfolio of patents in the United States and many foreign
countries that provide intellectual property protection for its products and
processes.
We routinely obtain patents and/or plant variety protection for our commercial
varietal products, and for the parents of our commercial hybrid products. We
also routinely obtain registration for our commercial products in registration
countries, such as Plant Variety Protection Act Certificates in the United
States, and equivalent plant breeders' rights in other countries. Monsanto's
insect-protection traits (including YieldGard Corn Borer and YieldGard Corn
Rootworm traits in corn seed and Bollgard trait in cotton seed) are protected by
patents that extend until at least 2011. Based on patent applications filed in
2002 and 2001, it is anticipated that the Bollgard II insect-protection trait
will be patent-protected in the United States, and in other areas in which
patent protection is sought, through 2022. Monsanto's herbicide tolerant
products (Roundup Ready traits in soybean, corn, canola and cotton seeds) are
protected by U.S. patents that extend until at least 2014.
Patents protecting the active ingredient in Roundup herbicide expired in the
United States in 2000, and have expired in all other countries. Monsanto has
several patents on its glyphosate formulations and manufacturing processes in
the United States and other countries, some of which extend beyond 2015. Posilac
bovine somatotropin is protected by a United States patent that expires in 2008
and by corresponding patents in other countries, most of which expire in 2005.
Other patents protect various aspects of bovine somatotropin manufacture in the
United States and expire at varying dates ending March 2012; corresponding
patents in other countries have varying terms.
Monsanto also holds licenses from other parties relating to certain products and
processes. We have obtained various licenses in order to protect certain of our
technologies used in the production of Roundup Ready seeds, and certain of our
technologies relating to pipeline products, from claims of infringement of
patents of others. These licenses last for the lifetimes of the applicable
patents, after which no licenses will be required to use the respective patented
technologies. Monsanto holds numerous licenses in connection with its genomics
program, for example: a perpetual license to certain genomics
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technologies for use in the areas of plant agriculture and dairy cattle;
perpetual licenses to patents expiring from 2018 to 2023 for classes of
proprietary genes for the development of commercial traits in crops; perpetual
licenses to functional characterizations of the company's proprietary genes; and
perpetual licenses to certain genomics sequences and certain genomics
technologies. Monsanto has obtained perpetual licenses to chemicals used to make
Harness and Maverick herbicides, and to manufacturing technology for Posilac
bovine somatotropin. Monsanto also has a license to chemicals for its
halosulfuron herbicides, including Permit, Manage and Sempra; the license
expires in 2005 and is not expected to be extended.
We own a considerable number of established trademarks in many countries under
which we market our products. Monsanto owns trademark registrations and files
trademark applications for the names and many of the designs used on its branded
products. Important company trademarks include Roundup (for herbicide products),
Roundup Ready, Bollgard and YieldGard (for traits), DEKALB and Asgrow (for
agricultural seeds) and Posilac (for dairy productivity products).
P4 Production, LLC holds (directly or by assignment) numerous phosphate leases,
which were issued on behalf of or granted by the United States, the State of
Idaho and private parties. None of these leases taken individually is material,
although the leases in the aggregate are significant because elemental
phosphorus is a key raw material for the production of glyphosate-based
herbicides. The phosphate leases have varying terms, with leases obtained from
the United States being of indefinite duration subject to the modification of
lease terms at 20-year intervals.
A considerable number of Monsanto's patents and licenses are currently the
subject of litigation; see Item 3 - Legal Proceedings.
PRINCIPAL EQUITY AFFILIATES
In September 1998, we entered into an agreement (as amended from time to time,
the Renessen Agreement) to form the Renessen LLC joint venture (Renessen) with
Cargill, Incorporated (Cargill). This joint venture combines our seed assets and
technology capabilities with Cargill's global grain processing, marketing and
risk management infrastructure to develop and commercialize enhanced grain
products in the processing and animal feed markets, and to increase returns on
those products by greater participation in the value chain. Renessen began
operations in January 1999. Cargill and we each have a 50 percent interest in
Renessen. A governance board on which Cargill and we have equal representation
manages Renessen. With respect to Renessen, Cargill and we: (1) have committed
to make equal contributions to fund the Renessen business plan that Cargill and
we review and approve annually; (2) have granted Renessen a worldwide, fully
paid-up, non-exclusive, non-royalty-bearing right and license to Cargill's and
our respective patents and other intellectual property needed for Renessen to
pursue the approved business plan; (3) receive rights to use intellectual
property developed by Renessen in other specified areas; and (4) have the
opportunity to provide specified services to Renessen on a cost-paid or
cost-plus-margin basis. Renessen's products under development include grains
designed to enhance processing efficiency and grain products designed to deliver
better nutrition in animal feed. Pursuant to the Renessen Agreement, we perform
the bulk of Renessen's upstream research and development (R&D) activities. For
the year ended Aug. 31, 2004, we charged Renessen $45 million for R&D expenses.
The expenses that were charged to Renessen are not included in the $511 million
of research and development expenses reflected in our Statement of Consolidated
Operations for the year ended Aug. 31, 2004. Our equity affiliate expense
related to Renessen was $36 million in the year ended Aug. 31, 2004, $26 million
in the eight-month transition period ended Aug. 31, 2003, and $41 million in
each of the 12-month periods ended Dec. 31, 2002 and 2001, all of which is
reflected in other expense - net in our Statement of Consolidated Operations.
See information regarding Renessen in Item 8 - Note 25 - Equity Affiliates.
RAW MATERIALS AND ENERGY RESOURCES
We are a significant purchaser of basic and intermediate raw materials. Our
major raw materials and energy requirements are typically purchased through
long-term contracts. We do not depend on any one outside supplier for a
significant amount of any raw material requirements, but a few major suppliers
provide us certain important raw materials. The markets for many key raw
materials are extremely tight and forecasted to remain so for the next few
years. Although some additional capacity does exist, pricing is substantially
higher than under current contracts. Energy is available as required, but
pricing is subject to market fluctuations from time to time.
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We produce directly, or contract with third-party growers for the production of,
corn seed, soybean seed, oilseed rape varieties, wheat seed, sunflower seed and
sorghum seed in growing locations throughout the world. The availability and
cost of seed primarily depends on seed yields, weather conditions, grower
contract terms, commodity prices and global supply and demand. We manage
commodity price fluctuations through the use of futures contracts and other
hedging mechanisms. We attempt to minimize the risks related to weather by
producing seed at multiple growing locations, where practical.
Different catalysts are used in various intermediate steps in the production of
glyphosate. These are produced by two major catalyst manufacturers using our
proprietary technology at various sites globally. These suppliers have
additional capacity at other manufacturing locations. We purchase most of our
global supply of elemental phosphorus, a key raw material for the production of
Roundup herbicide, from P4 Production, LLC.
We are seeking U.S. Food and Drug Administration (FDA) approval to manufacture
the finished dose formulation of Posilac bovine somatotropin at our facility in
Augusta, Georgia. Sandoz GmbH, a wholly owned subsidiary of Novartis,
manufactures and is our sole supplier of the finished dose formulation until we
receive such approval. In second quarter fiscal year 2004, we notified our
customers that supplies of Posilac would be temporarily limited while Sandoz
completes corrections and improvements at its facility in response to issues
raised by the FDA. This limitation has temporarily reduced volumes of
Posilacavailable for sale and required us to allocate available supplies. We
expect the supply of Posilac to be limited well into 2005 with incremental
increases in supply occurring over time. This allocation is expected to have a
material adverse effect on Posilac revenues as long as it continues. For
additional information regarding our Posilac supply, see Item 7 under the
heading "MD&A - Agricultural Productivity Financial Performance for Fiscal Year
2004."
RESEARCH AND DEVELOPMENT
Monsanto's expenses for research and development were $511 million for the
fiscal year 2004; $313 million for the eight-month transition period ended Aug.
31, 2003; and $506 million and $544 million for calendar years 2002 and 2001,
respectively.
SEASONALITY AND WORKING CAPITAL
For information on seasonality and working capital practices, see information in
Item 7, under the heading "MD&A - Financial Condition, Liquidity, and Capital
Resources," incorporated herein by reference.
RELATIONSHIPS AMONG MONSANTO COMPANY, PHARMACIA CORPORATION, PFIZER INC. AND
SOLUTIA INC.
Prior to Sept. 1, 1997, a corporation that was then known as Monsanto Company
(Former Monsanto) operated an agricultural products business (the Ag Business),
a pharmaceuticals and nutrition business (the Pharmaceuticals Business) and a
chemical products business (the Chemicals Business). Former Monsanto is today
known as Pharmacia. Pharmacia is now a wholly owned subsidiary of Pfizer Inc.
(Pfizer), which together with its subsidiaries operates the Pharmaceuticals
Business. Our business consists of the operations, assets and liabilities that
were previously the Ag Business. Solutia comprises the operations, assets and
liabilities that were previously the Chemicals Business. The following table
sets forth a chronology of events that resulted in the formation of Monsanto,
Pharmacia and Solutia as three separate and distinct corporations, and provides
a brief background on the relationships among these corporations.
Date of Event Description of Event
Sept. 1, 1997 Pharmacia (then known as Monsanto Company) entered into a
Distribution Agreement (Distribution Agreement) with Solutia
related to the transfer of the operations, assets and
liabilities of the Chemical Business from Pharmacia (then
known as Monsanto Company) to Solutia.
Pursuant to the Distribution Agreement, Solutia assumed and
agreed to indemnify Pharmacia (then known as Monsanto
Company) for certain liabilities related to the Chemicals
Business.
Dec. 19, 1999 Pharmacia (then known as Monsanto Company) entered into an
agreement with Pharmacia & Upjohn, Inc. (PNU) relating to a
merger (the Merger).
Feb. 9, 2000 We were incorporated in Delaware as a wholly owned
subsidiary of Pharmacia (then known as Monsanto Company)
under the name "Monsanto Ag Company."
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Date of Event Description of Event
March 31, 2000 Effective date of the Merger.
In connection with the Merger, (1) PNU became a wholly owned
subsidiary of Pharmacia (then known as Monsanto Company);
(2) Pharmacia (then known as Monsanto Company) changed its
name from "Monsanto Company" to "Pharmacia Corporation;" and
(3) we changed our name from "Monsanto Ag Company" to
"Monsanto Company."
Sept. 1, 2000 We entered into a Separation Agreement (Separation
Agreement) with Pharmacia related to the transfer of the
operations, assets and liabilities of the Ag Business from
Pharmacia to us.
Pursuant to the Separation Agreement, we were required to
indemnify Pharmacia for any liabilities primarily related to
the Ag Business or the Chemicals Business, and for
liabilities assumed by Solutia pursuant to the Distribution
Agreement, to the extent that Solutia fails to pay, perform
or discharge those liabilities.
Oct. 23, 2000 We completed an initial public offering in which we sold
approximately 15 percent of the shares of our common stock
to the public. Pharmacia continued to own 220 million shares
of our common stock.
July 1, 2002 Pharmacia, Solutia and we amended the Distribution Agreement
to provide that Solutia will indemnify us for the same
liabilities for which it had agreed to indemnify Pharmacia
and to clarify the parties' rights and obligations.
Pharmacia and we amended the Separation Agreement to clarify
our respective rights and obligations relating to our
indemnification obligations.
Aug. 13, 2002 Pharmacia distributed the 220 million shares of our common
stock that it owned to its shareowners via a tax-free stock
dividend (the Monsanto Spinoff).
As a result of the Monsanto Spinoff, Pharmacia no longer
owns any equity interest in Monsanto.
April 16, 2003 Pursuant to a merger transaction, Pharmacia became a wholly
owned subsidiary of Pfizer.
Dec. 17, 2003 Solutia and 14 of its U.S. subsidiaries filed a voluntary
petition for reorganization under Chapter 11 of the U.S.
Bankruptcy Code.
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