Monsanto, Sinochem in deal talks

Chemicals conglomerate Sinochem Corp. is in advanced discussions with Monsanto Co. to deepen their ties significantly, people familiar with the discussions said, an important sign of China's growing appetite for U.S. crops and biotechnology.

The two companies have been in talks for months, the people said. It was unclear what form an agreement might take, though arrangements could include a large joint venture, the sale of a minority stake or Sinochem assuming a larger role marketing Monsanto products in China.

Discussions have been difficult, the people said, because of economic and political sensitivities of moving the companies closer together. "You have to be very cautious and careful in these situations," one of the people familiar with the matter said. "It's all very sensitive."

A Sinochem spokesman said he wasn't aware of a deal involving Monsanto and declined further comment. Monsanto also declined to comment.

With a market value of $40 billion, Monsanto dominates crop biotechnology, a 15-year-old market the St. Louis company essentially created.

Monsanto has at least one of its patented genes in about 90% of all the soybeans grown in the U.S. and in about 80% of U.S. corn. Farmers pay a big premium for seeds containing such genes because they equip plants to, for example, tolerate exposure to Monsanto's popular Roundup herbicide or produce their own insecticides.

Beijing-based Sinochem has a similar role in China, where it is the nation's largest importer and distributor of fertilizer and a large seed producer. Begun as a state-owned enterprise in 1950, the government-owned company today has more than $50 billion in annual revenue with operations that include real estate and finance. But Sinochem's primary role is to help ensure food security in the world's most populous nation, which increasingly means expanding internationally to procure supply lines and technology to feed 1.34 billion.

Although China is the world's largest producer of wheat and rice, and the second-largest producer of corn, behind the U.S., the country isn't producing enough. That forces China to import more crops—a rare category in which the U.S. is a net exporter to China—to keep volatile food prices from stirring up discontent.

China's ability to grow more grain is limited. There isn't much arable land that isn't already under plow and the water table in some areas is falling amid heavy irrigation. The surest way for China greatly to increase its harvests is to raise field productivity—an area ripe for improvement. Chinese corn farmers produce an average of 85 bushels an acre compared with about 158 bushels for U.S. farmers, according to the U.S. Agriculture Department.

A big difference between U.S. farmers and their Chinese counterparts is crop biotechnology. Outside of cotton and papaya, few of China's crops are genetically modified. In the U.S., where genetically modified seeds were introduced commercially in the mid-1990s, the vast majority of the corn, soybeans and cotton are bioengineered.

The Chinese government is doing extensive crop-biotechnology research, but the country remains far behind the U.S. in terms of commercialization partly because Beijing, leery of ceding control of its food supply to outsiders, has wanted to control the technology.

Monsanto has had a hybrid-corn-seed joint venture with Sinochem's China National Seed since 2001. But Monsanto, which agreed in 2008 to pump an additional $84 million into the venture, is a minority partner. A senior Monsanto executive complained last year that the Chinese government was continuing to ban foreign companies from investing in agricultural biotechnology in China.

Chinese companies have been eager to develop close ties to U.S. agricultural companies. China's Cofco Ltd. owns a 4.2% stake in U.S. pork processor Smithfield Foods Inc. DuPont Co.'s seed unit has corn-breeding joint ventures in China.

Sinochem has made no secret of its desire to strengthen its agricultural technology, saying in its 2010 annual report, "We are committed to developing ourselves into China's largest and the world's leading provider of agricultural inputs and services."

The Chinese government is concerned about food security because the expanding economy is creating more middle-class families who want to upgrade their diets by eating more meat and drinking more milk, which requires crops for feeding livestock. China imports nearly a quarter of the U.S. soybean crop, in part to fatten hogs and chickens craved by China's middle class.

China's textile mills are responsible for nearly a third of U.S. cotton exports. Corn prices moved higher last week at the Chicago Board of Trade because traders believed China is on the verge of importing millions of metric tons of U.S. corn.

Should Sinochem and Monsanto strike a new alliance, they will have to proceed carefully. Countries including Canada, the U.S. and Australia have grown more protective of their home industries, fearing the leakage of significant technology to foreign buyers, notably China. Chinese telecommunications company Huawei Technologies Co. dropped its offer for 3Leaf Systems Inc. this year after the U.S. Committee on Foreign Investment in the U.S. opposed the deal.

Protecting natural resources has been a particular concern for governments. A $5.5 billion deal for Canada's Ecana Corp. to sell a 50% stake in a natural-gas field to China's PetroChina Co. fell apart last month, partly because of politics, people familiar with the matter said.