| MONSANTO CO /NEW/ ITEM 1A RISK FACTORS ______________________________________________________________________ Competition in seeds and traits and agricultural chemicals has significantly affected, and will continue to affect, our sales |
| Many companies engage in plant biotechnology and breeding research, and speed in getting a new product to market can be a significant competitive advantage |
| Our competitors’ success could render our existing products less competitive, resulting in reduced sales compared to our expectations or past results |
| We expect to see increasing competition from agricultural biotechnology firms and from major agrichemical, seed and food companies |
| In addition, we expect to face continued competition for our Roundup and selective chemistries agricultural herbicide product lines |
| The extent to which we can realize cash and gross profit from these products will depend on our ability to: control manufacturing and marketing costs without adversely affecting sales; predict and respond effectively to competitor pricing; provide marketing programs meeting the needs of our customers and of the farmers who are our end users; maintain an efficient distribution system; and develop new products with features attractive to our end users |
| Efforts to protect our intellectual property rights and to defend against claims against us can increase our costs and will not always succeed; any failures could adversely affect sales and profitability or restrict our ability to do business |
| Intellectual property rights are crucial to our business, particularly our Seeds and Genomics segment |
| We endeavor to obtain and protect our intellectual property rights in jurisdictions in which our products are produced or used and in jurisdictions into which our products are imported |
| However, we may be unable to obtain protection for our intellectual property in key jurisdictions |
| Even if protection is obtained, competitors, farmers, or others in the chain of commerce may raise legal challenges to our rights or illegally infringe on our rights, including through means that may be difficult to prevent or detect |
| For example, the practice of saving seeds from non-hybrid crops (such as soybeans, canola and cotton) containing our biotechnology traits has prevented and may continue to prevent us from realizing the full value of our intellectual property, particularly outside the United States |
| In addition, because of the rapid pace of technological change, and the confidentiality of patent applications in some jurisdictions, competitors may be issued patents from applications that were unknown to us prior to issuance |
| These patents could reduce the value of our commercial or pipeline products or, to the extent they cover key technologies on which we have unknowingly relied, require that we seek to obtain licenses or cease using the technology, no matter how valuable to our business |
| We cannot assure we would be able to obtain such a license on acceptable terms |
| The extent to which we succeed or fail in our efforts to protect our intellectual property will affect our costs, sales and other results of operations |
| We are subject to extensive regulation affecting our seed biotechnology and agricultural products and our research and manufacturing processes, which affects our sales and profitability |
| Regulatory and legislative requirements affect the development, manufacture and distribution of our products, including the testing and planting of seeds containing our biotechnology traits and the import of crops grown from those seeds, and non-compliance can harm our sales and profitability |
| Obtaining testing, planting and import approvals can be lengthy and costly, with no guarantee of success |
| Planting approvals may also include significant regulatory requirements that can limit our sales |
| Lack of approval to import crops containing biotechnology traits into key markets can affect sales of our traits, even in jurisdictions where planting has been approved |
| Concern about unintended but unavoidable trace amounts (sometimes called “adventitious presence”) of commercial biotechnology traits in conventional (non-biotechnology) seed, or in the grain or products produced from conventional or organic crops, among other things, could lead to increased regulation or legislation, which may include: liability transfer mechanisms that may include financial protection insurance; possible restrictions or moratoria on testing, planting or use of biotechnology traits; and requirements for labeling and traceability, which requirements may cause food processors and food companies to avoid biotechnology and select non-biotechnology crop sources and can affect farmer seed purchase decisions and the sale of our products |
| Further, the detection of adventitious presence of traits not approved in the importing country may result in the withdrawal of seed 11 _________________________________________________________________ [101]Table of Contents MONSANTO COMPANY 2006 FORM 10-K ______________________________________________________________________ lots from sale or in compliance actions, such as crop destruction or product recalls |
| Legislation encouraging or discouraging the planting of specific crops can also harm our sales |
| In addition, claims that increased use of glyphosate-based herbicides or biotechnology traits increases the potential for the development of glyphosate-resistant weeds or pests resistant to our traits could result in restrictions on the use of glyphosate-based herbicides or seeds containing our traits or otherwise reduce our sales |
| The degree of public acceptance or perceived public acceptance of our biotechnology products can affect our sales and results of operations by affecting planting approvals, regulatory requirements and customer purchase decisions |
| Although all of our products go through rigorous testing, some opponents of our technology actively raise public concern about the potential for adverse effects of our products on human or animal health, other plants and the environment |
| The potential for adventitious presence of commercial biotechnology traits in conventional seed, or in the grain or products produced from conventional or organic crops, is another factor that can affect general public acceptance of these traits |
| Public concern can affect the timing of, and whether we are able to obtain, government approvals |
| Even after approvals are granted, public concern may lead to increased regulation or legislation, which could affect our sales and profitability, and may adversely affect sales of our products to farmers, due to their concerns about available markets for the sale of crops or other products derived from biotechnology |
| In addition, opponents of agricultural biotechnology have attacked facilities used by agricultural biotechnology companies, and may launch future attacks against our field testing sites, and research, production, or other facilities |
| The successful development and commercialization of our pipeline products will be necessary for our growth |
| Commercializing new biotechnology products entails considerable time (as much as 10 years) and investment (as much as dlra100 million per product) |
| Commercializing new germplasm products using traditional breeding approaches does not require as much time and investment |
| A considerable percentage of our new product concepts are abandoned and never commercialized |
| There are a number of reasons why a new product concept may be abandoned, including greater than anticipated development costs, regulatory obstacles, competition, inability to prove the original concept, lack of demand, and the need to divert focus, from time to time, to other initiatives with perceived opportunities for better returns |
| Many of our competitors are also making considerable investments in similar new biotechnology or improved germplasm products |
| Commercial success frequently depends on being the first company to the market |
| Consequently, if we are not able to fund extensive research and development activities and deliver new products to the markets we serve on a timely basis, our growth and operations will be harmed |
| Adverse outcomes in legal proceedings could subject us to substantial damages and adversely affect our results of operations and profitability |
| We are involved in major lawsuits concerning intellectual property, biotechnology, torts, contracts, antitrust allegations, employee benefits, and other matters, as well as governmental inquiries and investigations, the outcomes of which may be significant to results of operations in the period recognized or limit our ability to engage in our business activities |
| While we have insurance related to our business operations, it may not apply to or fully cover any liabilities we incur as a result of these lawsuits |
| In addition, pursuant to the Separation Agreement, we are required to indemnify Pharmacia for Solutia’s Assumed Liabilities, to the extent that Solutia fails to pay, perform or discharge those liabilities |
| We have recorded a reserve for certain estimated payments or costs related to third-party tort litigation and environmental matters that we are managing following Solutia’s refusal to manage such matters, for which the amount recorded in our Statement of Consolidated Financial Position as of Aug |
| We believe that the recorded amount represents the estimated discounted cost that we would incur in the future in connection with these litigation and environmental matters |
| However, our actual costs may be materially different from this estimate |
| The degree to which we may ultimately be responsible for the particular matters reflected in the reserve is uncertain |
| Further, additional litigation or environmental matters that are not reflected in the reserve may arise in the future, and we may also assume the management of, settle, or pay judgments or damages with respect to litigation or environmental matters in order to mitigate contingent potential liability and protect Pharmacia and us, if Solutia refuses to do so |
| Additional information about Solutia and other litigation matters and the related risks to our business may be found in Note 22 and in other sections of this report |
| 12 _________________________________________________________________ [102]Table of Contents MONSANTO COMPANY 2006 FORM 10-K ______________________________________________________________________ Our operations outside the United States are subject to special risks and restrictions, which could negatively affect our results of operations and profitability |
| We engage in manufacturing, seed production, research and development or sales in many parts of the world |
| Although we have operations in virtually every region, our sales outside the United States in fiscal year 2006 were principally through our businesses in Argentina, Brazil, Canada, Mexico and Switzerland |
| Accordingly, developments in those parts of the world generally have a more significant effect on our operations than developments in other places |
| Our operations outside the United States are subject to special risks and restrictions, including: fluctuations in currency values and foreign-currency exchange rates; exchange control regulations; changes in local political or economic conditions, such as the recently imposed state governmental pricing directives in India; import and trade restrictions; import or export licensing requirements and trade policy; restrictions on the ability to repatriate funds; and other potentially detrimental domestic and foreign governmental practices or policies affecting US companies doing business abroad |
| Customers in weakened economies, such as Brazil, may be unable to purchase our products, or it could become more expensive for them to purchase imported products in their local currency, and we may be unable to collect receivables from such customers |
| Further, changes in exchange rates may affect our net income, the book value of our assets outside the United States, and our shareowners’ equity |
| In the event of any diversion of management’s attention to matters related to acquisitions, a failure to receive antitrust clearance to close the Delta and Pine Land Company acquisition, or any delays or difficulties encountered in connection with integrating acquired operations, our business, and in particular our results of operations and financial condition, may be harmed |
| We have recently completed several acquisitions involving seed companies and have entered into an agreement to acquire Delta and Pine Land, and we expect to make additional acquisitions |
| We must fit such acquisitions into our long-term growth strategies to generate sufficient value to justify their cost |
| If the Delta and Pine Land acquisition does not close, we may be obligated to make a dlra600 million payment to Delta and Pine Land, which would materially affect our business, results of operations and financial condition |
| For more information, please see Item 7 — MD&A — Financial Condition, Liquidity, and Capital Resources — Pending Acquisition which is incorporated by reference herein |
| Acquisitions also present other challenges, including geographical coordination, personnel integration and retention of key management personnel, systems integration and the reconciliation of corporate cultures |
| Those operations could divert management’s attention from our business or cause a temporary interruption of or loss of momentum in our business and the loss of key personnel from the acquired companies |
| Fluctuations in commodity prices can increase our costs and decrease our sales |
| We purchase our seed inventories from production growers at market prices and retain the seed in inventory until it is sold |
| These purchases constitute a significant portion of the manufacturing costs for our seeds |
| We use hedging strategies to mitigate the risk of short-term changes in these prices but are unable to avoid the risk of medium- and long-term changes |
| Accordingly, increases in commodity prices may negatively affect our cost of goods sold or cause us to increase seed prices, which could adversely affect our sales |
| Farmers’ incomes are also affected by commodity prices; as a result, commodity prices could have a negative effect on their ability to purchase our products |
| Compliance with quality controls and regulations affecting our manufacturing may be costly, and failure to comply may result in decreased sales, penalties and remediation obligations |
| Because we use hazardous and other regulated materials in our chemical manufacturing processes and engage in mining operations, we are subject to risks of accidental environmental contamination, and therefore to potential personal injury claims, remediation expenses and penalties |
| We have entered into agreements with various regulatory agencies for the management of many of our sites, and if we fail to comply with such agreements, we could be subject to penalties and facility shutdowns |
| Should a catastrophic event occur at any of our facilities, we could face significant reconstruction or remediation costs, penalties, and loss of production capacity, which could affect our sales |
| In addition, lapses in quality or other manufacturing controls could affect our sales and result in claims for defective products |
| 13 _________________________________________________________________ [103]Table of Contents MONSANTO COMPANY 2006 FORM 10-K ______________________________________________________________________ Our ability to estimate farmers’ future needs, and match our production and the level of product at our distributors to those needs, has a significant effect on our sales |
| Farmers’ decisions are affected by market, economic and weather conditions that are not known in advance |
| Failure to provide distributors with enough inventory of our products will reduce our current sales |
| However, product inventory levels at our distributors may reduce sales in future periods, as those distributor inventories are worked down |
| In addition, inadequate distributor liquidity could affect distributors’ ability to pay for our products and, therefore, affect our sales or our ability to collect on our receivables |
| Our ability to issue short-term debt to fund our cash flow requirements and the cost of such debt may affect our financial condition |
| We regularly extend credit to our customers in certain areas of the world so that they can buy agricultural products at the beginning of their growing seasons |
| Because of these credit practices and the seasonality of our sales, we may need to issue short-term debt at certain times of the year to fund our cash flow requirements |
| The amount of short-term debt will be greater to the extent that we are unable to collect customer receivables when due, to repatriate funds from operations outside the United States, and to manage our costs and expenses |
| Any downgrade in our credit rating, or other limitation on our access to short-term financing or refinancing, would increase our interest cost and adversely affect our profitability |
| Weather, natural disasters and accidents may significantly affect our results of operations and financial condition |
| Weather conditions and natural disasters can affect the timing of planting and the acreage planted, as well as yields and commodity prices |
| In turn, the quality, cost and volumes of the seed that we are able to produce and sell will be affected, which will affect our sales and profitability |
| Natural disasters or industrial accidents could also affect our manufacturing facilities, or those of our major suppliers or major customers, which could affect our costs |
| One of our major US glyphosate manufacturing facilities is located in Luling, Louisiana, which is an area subject to hurricanes |