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BIOECONOMY: A NEW FRONTIER FOR AGRICULTURE
Biotechnology is being applied to a range of market opportunities, from the creation of insect-resistant and herbicide-tolerant crops to the development of new pharmaceuticals that target complex diseases. On the horizon, blue sky research is focused on the development of DNA-based computing.

But uncertainty still exists concerning where the greatest value creation potential ultimately will lie. History has often demonstrated that the wealth of new technologies is found far afield of initial market targets. While the consensus view that ag biotech's greatest value will be generated within food-oriented markets is easy to adopt, we may find that even more compelling value could emerge in unconventional sectors.

Value Creation In Agriculture

Today, both the market and research pipeline of plant biotechnology emphasize input traits that create value at the farm gate, reflecting two key factors: 1) weed and insect control in major crops constitute large, predictable, global markets; and 2) the simple value capture of these markets is based on conventional cost displacement economics that are clearly related to the value of today's pesticides and to yield losses. Both the input-oriented traits now on the market - and the agronomic traits that target environmental stresses such as drought and cold, which could become a reality in the next five to seven years - are tactical value drivers. Their business values will continue to be defined through conventional cost frameworks.

But agriculture is at the threshold of a new frontier defined by value creation waves that reach out to novel markets and span the global economy. Output-oriented traits create value downstream from the farm gate and expect to be commercialized over the next three to five years. Output traits focus on adding value for downstream end users - including industrial purchasers and consumers - through specification and differentiation. They are the strategic drivers that will redefine agriculture's value creation potential.

Industrial Markets: The Real Value Driver

Output traits under development include oilseed crops with improved consumer nutritional profiles and grains that enhance livestock feed efficiency. And the use of plants as biofactories to produce human pharmaceutical proteins, or as vehicles for novel industrial proteins, is just beyond the commercial horizon.

As a whole, these technologies could dramatically expand the value creation potential of agriculture across a range of sectors. Some of these sectors, such as those developing industrial biomaterials and bioenergy, are not now directly related to agriculture. But novel ag biotech applications could alter product economics at the end-user level, offering compelling cost-value characteristics. Changes to our industrial economic base could be revolutionary in scope as we move towards a "carbohydrate-based economy." Industrial uses for ag biotech could dwarf the current focus on food, medical and other health-related uses.

The new product and process dynamics derived from output traits have the potential to catalyze a structural transformation of agricultural production, logistics and value by shifting agriculture's cost-driven, commodity orientation toward a focus on value-added customization. The commercialization of output traits may also raise new challenges pertaining to business models and corporate structures, where creating and capturing value are concerned.

The Bottom Line

Forward-looking corporate leadership has led several companies to develop markets in value-added traits for food, feed and nutrition applications. The production of pharmaceuticals from plants has been targeted by a number of large companies, including Monsanto and Syngenta, as well as small companies such as Epicyte, Ventria BioSciences and Meristem Therapeutics.

While direct production of biomaterials in plants remains years away due to technical hurdles, numerous companies are involved in the first phase of development utilizing metabolic engineering-derived bioenzymes to convert corn into biopolymers. Included are a Cargill-Dow Chemical joint venture and DuPont. Both Dow Chemical and DuPont are strategically focused on developing plant-based biomaterials to create a sustainable raw materials platform that would enhance cost-value effectiveness over the long term.

In the future, the ability to create and capture value-added from output-derived ag biotech traits will be built on vision, innovation and, most importantly, the ability to demonstrate sustainable value capture in downstream markets. Success will stem from changing mindsets, particularly in the ways people think about ag's value creation potential and its structural links to the broad economy.

San M. Shimoda is president of BioScience Securities Inc., an institutional research and investment banking firm located in the San Francisco Bay area. E-mail: sano@bioscience-securities.com


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