Agricultural-biotech giant Monsanto Co. (MON) is already a global leader in the development of genetically engineered crop seeds.

Now the St. Louis-based firm is exploring the potential for biofuels, one of the hottest sectors in the alternative energy realm.

Monsanto and the Hayward, Calif.-based Mendel Biotechnology Inc. have joined forces to study how certain prairie grasses could be transformed into biofuels.

The terms of the deal were not released. But the companies aren’t strangers. In fact, Monsanto and Mendel say that they’ve spent more than a decade collaborating on the development of "biotechnology traits" for such crops as corn, soy, cotton and canola. And the two firms bring highly complementary sets of skills to the table at a time when those skills figure to be in high demand.

The decade-old Mendel has largely operated as a research-and-development enterprise. It linked up with Monsanto as a way of eventually commercializing its technology.

Monsanto develops insect- and herbicide-resistant crops and other agricultural products. In fact, it’s a world leader. Of the 100 million acres of "transgenic" – genetically altered, or engineered – crops planted worldwide, 90% contain at least some element of "trait technology" created by Monsanto, Mendel said of its longtime partner.

Mendel Biotechnology is a plant-biotechnology company that develops products focused on both "row crops" and on so-called "cellulosic" ingredients for biofuels. Cellulosic biofuels are made from leaves, stems, stalks or other typically non-edible parts of plants, and which therefore also have the potential to expand the biofuels supply and deliver environmental benefits such as reduced greenhouse gas emissions, according to Monsanto.

In this latest partnership, the two companies will apply Monsanto’s expertise in crop testing, breeding and seed production to perennial grass seed varieties Mendel is developing for use in biofuels and other commercial applications. Cellulosic biofuels will be a key focus.
Research shows the application has real promise.

An Energizing Outlook

Diverse mixtures of native perennial grasses and other flowering plants not only provide more usable energy per acre than corn-based ethanol or soybean biodiesel fuels, they also don’t strain the world’s food supply and are far better for the environment, according to a 2006 research study conducted by University of Minnesota Ecologist David Tilman. The research was funded by the National Science Foundation (NSF) and the University of Minnesota’s Initiative for Renewable Energy and the Environment.

In fact, the University of Minnesota research showed that even "degraded" agricultural land planted with diverse mixtures of prairie grasses and other flowering plants produced 238% more bio-energy, on average, than the same land planted with various single prairie plant species, including switchgrass.

"This study highlights very clearly the additional benefits of taking a less-intensive management approach and maintaining higher biodiversity in the process," said Henry Gholz, program director of the NSF Long-Term Ecological Research Program. "It establishes a new baseline for evaluating the use of land for biofuel production."

The timing couldn’t be better. Global food prices are soaring, thanks in part to growing demand overseas. But the growing use of corn and soybean for the production of biofuels is exacerbating the imbalances, and is causing prices to escalate even more [Please click here to read a related story on soaring corn prices in today's issue of Money Morning].

The soaring prices and escalating shortages are actually causing riots in some countries abroad, and have spawned intervention initiatives by both such international organizations as the United Nations and World Bank.

Controversies Continue

Here in the United States, Congress has been haggling for months over a new Farm Bill that President George W. Bush contends does little to help make food more affordable. The new bill, now in its final negotiating stages in Congress, would cut the ethanol tax credit of 51 cents a gallon by 6 cents, while creating a credit of $1.01 a gallon for cellulosic ethanol.

"Americans are concerned about rising food prices," Bush said during a news conference on Tuesday. "Congress is considering a massive, bloated farm bill that would do little to solve the problem."

Global food-aid workers and other groups contend that the United States is diverting a full one-quarter of its corn harvest to energy production, which they say is driving up grain prices, making it more expensive to feed livestock and making food even less affordable for the world’s poor.

In this week’s news conference, President Bush said the long-term solution to the soaring price of corn is to switch to cellulosic ethanol that uses grasses and other non-food sources as fuel source.  Critics say that will take too long, and are calling for a moratorium on corn-based ethanol.

"Our models analysis suggest that if a moratorium on biofuels would be issued in 2008, we could expect a price decline of maize by about 20% and for wheat by about 10% in 2009-10. So it’s this significant," Joachim von Braun, head of the International Food Policy Research Institute, told reporters in a briefing earlier this week.

Other experts say that a combination of corn-based ethanol and cellulosic fuels is a solution.

According to Mendel, the production of corn-based ethanol will level off in the next 10 years at an annual output of 10 billion to 15 billion gallons. By the time that happens, new cellulosic-fuel plants will begin operations. And the cellulosic fuels will hold down prices and open up land for crops.

"Biofuels made from high-diversity mixtures of prairie plants can reduce global warming by removing carbon dioxide from the atmosphere," Tilman, the University of Minnesota researcher, said back in 2006. "Even when grown on infertile soils, they can provide a substantial portion of global energy needs, and leave fertile land for food production."

About 12 million hectares – about 1% of the world’s fields – already are devoted to growing biofuels, and this figure is set to grow. Many studies question the logic of this expansion, even with oil prices at near-record levels. The point to the current concerns about global food supplies as evidence of their stance, and state that land devoted to biofuel use takes away from land normally cultivated for food production.

But research led by Ken Vogel of the U.S. Agricultural Research Service in Lincoln, Neb., could help swing the debate back in favor of biofuels, the New Scientist Environment reported in January. The team paid farmers in Nebraska, North Dakota and South Dakota to grow plots of switchgrass – a tall prairie grass native to North America – for five years in areas ranging from 3 to 9 hectares.

They measured the energy needed to grow the crops, including that used to make fertilizers and the diesel consumed by farmers’ vehicles. The bottom line: They calculated that ethanol derived from these research plots should yield 5.4 times as much energy as all these inputs combined.

According to the New Scientist, Vogel’s results will not please ecologists who want to restore prairie ecosystems by growing mixtures of grasses without fertilizers, even though many also support using the cellulose they produce to make ethanol.

"It just takes too much land," said Vogel, who has calculated that fertilized switchgrass monocultures will give higher yields per hectare.
Regardless of the precise type of cellulosic fuels that end up as the favorite, Monsanto stands a very strong chance of being a player in this new agricultural biotech realm.

News and Related Story Links:

• Reuters:
  Bush backs ethanol despite concern about food costs.

• Feedstuffs:
  The Weekly Newspaper for Agribusiness: Monsanto, Mendel Biotechnology enter cellulosic biofuels collaboration.

• The National Science Foundation:
  Mixed Prairie Grasses Better Source of Biofuel Than Corn Ethanol and Soybean Biodiesel.

• New Scientist Environment:
  Prairie grass revives hopes for biofuels.

• Wikipedia:
  Cellulosic ethanol.

• Money Morning Special Investment Report:
  Six Ways to Protect Yourself – and Profit – From a Global Food Crisis That’s Here to Stay.

• Money Morning News Analysis:
  It Takes a Task Force: The U.N.’s Latest Attempt to Feed the Planet.

• The U.S. Department of Energy:
  Biofuels from Switchgrass: Greener Energy Pastures.