Genetically Modified Plants

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As water and synthetic fertilizers become more expensive, agriculture has no choice but to adapt. Farmers will stop spraying water on their fields and shift to techniques like drip irrigation, which applies water in smaller amounts at the root zone, where it' s most beneficial. They'll use pesticides and fertilizers more carefully. And, despite their perhaps reasonable misgivings, they' ll buy and plant genetically modified (GM) seeds that produce higher yields with less water, fertilizer, and pesticide. Research into new crop varieties is now a huge business, and agricultural biotech—the science of genetically altering crops for various advantages—is exploding. This is not universally seen as a good thing; in fact, it's not clear to many critics that genetically modified plants and animals deserve to be viewed as clean tech. The arguments against take two general forms: First, because GM crops are new additions to the gene pool and food chain, their long-term effects on the ecosystem and consumers are unknown. What if they transmit genetic traits to nearby crops or wild relatives? If certain traits turn out to have unintended consequences, we won't be able to call them back, and the damage may be irreversible. Second, GM foods are unnatural and creepy, and therefore unappetizing.

The first of these concerns, at least, is legitimate. But because it's outweighed by the high probability that desperate times are coming, farmers and consumers are likely to put aside their misgivings in favor of what works in the here and now. Europe has banned GM foods almost entirely, but the rest of the world has proved more hospitable. In 2007, 10 million farmers were planting genetically altered crops worldwide. Nine million of those farmers were in the developing world, which now accounts for 40 percent of global biotech acreage. In the United States, GM seed accounts for 73 percent of corn, 87 percent of cotton, and 91 percent of soy production. And the trend line is steepening: By 2015, more than 20 million farmers in 40 countries are projected to be growing genetically altered crops.

Farmers and plant breeders have, of course, been modifying crops for centuries by selecting and sowing seeds from plants with desirable traits in the hope of passing those traits on to the next generation. In the process, they modified the genetic makeup of crop plants to the point that current varieties often bear only a passing resemblance to their wild ancestors. Such crossbreeding was a blunt instrument because it involved thousands of genes, only a few of which were responsible for the desired traits. But with the discovery of DNA (deoxyribonucleic acid) in 1953, scientists began to realize that all cells operate on the same basic principles and share the same language. All contain DNA that tells them, among other things, which proteins to make in what quantities. From there, it didn't take long to figure out that moving a snippet of DNA from one cell to another would cause the second cell to start behaving like the first. Now it 's possible to figure out which genes do what and insert them into a plant to produce a version that's identical to its ancestor except for one new, genetically engineered trait—such as the following:

• Pest Resistance. Some GM plants produce pesticides in their cells that kill the bugs that used to eat them. "Bt" crops, for instance, produce a protein derived from a common soil bacteria, Bacillus thuringiensis, that's toxic to some insects. Free from predation, the plants thrive with fewer pesticide applications, increasing per acre yields and saving the farmer time and money.

• Herbicide Resistance. Farmers used to spray herbicides on their fields before their crops sprouted. This killed the weeds but didn't harm the crops. Once the crops were growing, however, the weeds got more of a free ride. But with "Roundup Ready" crops, which are modified to withstand the popular herbicide Roundup, farmers can kill weeds anytime they want without hurting their crops. Fewer weeds means more food and water for crops and bigger yields.

Drought Tolerance. The ability to grow in dry climates or survive if seasonal rains fail would be huge. It's not here yet, but everyone is working on it. Missouri-based Monsanto claims to have a drought-tolerant corn nearly ready for market, with soybeans and cotton in the pipeline. German multinational Bayer CropScience is working on drought-resistant strains of canola, rice, cotton, and corn.

• Salt Tolerance . When groundwater is used to irrigate thirsty crops in dry regions, salt tends to build up in the soil, eventually ruining it. This is a huge problem worldwide, and as rising seas infiltrate groundwater, coastal agricultural land may become increasingly contaminated. In early 2008, California-based Arcadia Biosciences was reportedly licensing a salt-tolerant variety of alfalfa and working on rice, cotton, tomatoes, and canola. Chinese researchers, meanwhile, reported progress with both drought- and salt-tolerant rice.

• Enhanced Nitrogen Absorption. The better a plant is at pulling nutrients like nitrogen from the ground, the less synthetic fertilizer it needs. This is potentially huge from both a financial and environmental perspective, and everyone is working on it.

• Fast-Growing Trees. ArborGen, a South Carolina biotech company, claims to have modified pine trees to grow to marketable size in 18 years rather than the current 30 and to have created a low-lignin eucalyptus tree that is better for pulping. If successful, such "transgenic" trees will allow existing forestry operations to produce more wood on the same land, relieving some of the pressure on old-growth and rain forests. Reducing the amount of lignin, meanwhile, would improve the economics of both paper and biofuels.

• Coming Soon: Multiple Traits. Early on, biotechnologists were able to manipulate only one gene at a time. But in the past few years they've learned how to work with multiple genes and are now mixing and matching them to produce crops with portfolios of new traits. By 2010, Monsanto and Dow Chemical plan to release a strain of corn called SmartStax with eight engineered traits, including protection against several corn pests and a tolerance for certain herbicides. Soon after that, they plan to add drought resistance and enhanced nitrogen absorption.

State of the Market

The market for GM crops is so new and specialized that only a few companies operate there on any scale. Monsanto is the dominant player, and through a combination of innovation and legal hardball, it has managed to alter farmers' buying and planting habits. Instead of buying seeds from four or five seed companies, farmers have begun to narrow the list down to one or two, with Monsanto usually at the top. As a result, its sales are soaring and its profit margins are widening. In early 2008, the consensus among analysts called for sales growth of better than 20 percent a year for the following three years. But now competition is heating up, as Dow Chemical 's AgroSciences division and Swiss-based Syngenta, the world's biggest agrichemicals company, are both bringing out GM seeds. Dow's "Herculex" corn resists an array of harmful insects, while Syngenta is introducing Roundup-tolerant corn.

Agribiotech's Growth Prospects

Genetic engineers are just beginning to figure out how to mix and match genes to produce useful plants. So barring a major Frankenfood incident, next generation GM crops will extend their advantages over traditional varieties and will come to dominate agriculture. But the small number of players (see Table 15.1) limits investors' choices, so this sector doesn ' t require a lot of thought or offer much advantage to in-depth study.

Table 15.1 Agribiotech Stocks

Market Value,

Ticker/

6/27/08

Company

Exchange

Headquarters

($ millions)

Bayer (Bayer CropScience)

BAYG.F/Frankfurt

Germany

60,900

Dow Chemical

DOW/NYSE

U.S.

32,410

(AgroSciences)

DuPont (Pioneer Hi-Bred)

DD/NYSE

U.S.

38,450

Monsanto

MON/NYSE

U.S.

70,430

Origin Agritech

SEED/NASDAQ

China

136

Syngenta

SYT/NYSE

Switzerland

29,972

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