Is the Doomsday Buzz About This Stock Really True?

Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Not many are complaining about Monsanto (NYSE: MON). Superb quarterly numbers, better guidance, and great stock run up – it’s an investor’s delight. Or is it? For all the euphoria, there’s an uneasiness brewing about the company. It’s not about the stock prices or company financials--it’s about the product that’s also Monsanto’s bread and butter.

Punch in ‘GMO news’ on your Google search box and words like "fears," "ban," "protest," etc. will fill up your screen. Hardly any good is written about genetically modified organisms, or GMO's. From health to environment concerns, the number of studies and reports that show GM technology in bad light are increasing by the day. Monsanto is a specialist in GM seeds,but is it really so bad that investors should just drop out of Monsanto? Recent worldwide developments may actually suggest otherwise.

Revealing numbers

Starting at home, the Obama administration continues to support GM. Some weeks ago, the President signed a law that drew smiles on pro-GM advocates’ faces. The U.S. planted the highest number of hectares with GM crops last year among all other countries, covering nearly 90% across all major crops.

In another part of the world, the Indian government, which has long been caught in the tug of war between scientists and environmental activists, is citing the need to feed the nation’s burgeoning population as a backing for GM crops. Interestingly, leading Indian companies in the agriculture sector are voting for GM crops as well. India was the fifth largest grower of GM crops last year, as an additional 7.2 million small farmers decided to go for Bt cotton. Monsanto supplies almost all of those Bt cotton seeds.

For the fourth straight year, Brazil topped the list of countries widening their GM crop base in 2012. Hectarage in the nation jumped 21% from 2011. Monsanto was rightly banking on a good safrinha crop season in Brazil to help it sail through its second quarter. Safrinha is the follow-up second corn-crop season in the nation. Monsanto says it was a record planting season.

In fact, according to the ISAAA report that also revealed the figures mentioned above, developing countries made up 70% of the total markets that planted genetically engineered seeds last year. They alone accounted for 52% of global GM crops planted.

Here to stay

If you ask me, these numbers only suggest that the GM story is here to stay. As the largest seed company in the world, Monsanto could be have a huge opportunity on its hands, especially because it is now going full swing in Latin America after capturing a huge market in India. The former is where all the action is right now. Monsanto calls it time for ‘significant acceleration’ in Latin America.

After its first double-stack corn in Brazil and triple-stack corn in Argentina, the focus is now on soybeans. The wild surge in soybean prices last year saw Brazilian farmers opting for it over corn. With less than 20% of its seed and traits sale coming from soybeans, Monsanto knew where it had to buck up.

Monsanto’s Intacta RR2 Pro soybean is ready for commercial launch in Latin America this season. Field trials of the pest-resistant and herbicide-tolerant product reported 12% better yields per hectare. Meanwhile, orders are ringing in fast from the U.S., so wider planting of the company’s Roundup Ready 2 soybeans is expected this year. Interestingly, this ’next-generation’ high-yield technology can also be credited for the recent truce between Monsanto and arch rival DuPont (NYSE: DD).

Big win

In a surprising turn of events last month, Monsanto and DuPont decided to call off a long-drawn battle. From a rival, DuPont will turn into Monsanto’s customer for Roundup Ready 2 as it starts making royalty payments in 2014.

This event is glaring proof of Monsanto’s solid foothold in the seed business. That DuPont had to turn to the same company that sued it for patent infringements, costing it considerable loss of time, reputation, and money, must have been hugely embarrassing. But Monsanto’s leadership is indisputable, and none of the other companies can boast of innovative research and development capabilities like Monsanto. So they probably realize that working with, and not against the seed baron, is the safest bet. This was evidenced in another recent deal that involved the other chemical major that is eying agriculture closely, Dow Chemical (NYSE: DOW). Monsanto and Dow will license their respective weed control and pest protection traits to each other to come up with advanced dual-action products for farmers.

Everyone’s at it

So those who count as competitors on one hand show up as partners on the other in this interesting industry. Both DuPont and Dow are raking up products that compete directly with Monsanto’s offerings. DuPont is expanding its soybean plant in Brazil, while working its pipeline of new soybean varieties up the ladder. Its Pioneer brand of seeds helped DuPont expand seed operations to more than 90 countries and take its share of total revenue from the agriculture business up to more than 30% in recent times.

Comparatively, Dow currently gets just about 11% sales from agriculture, so a tie-in with the leader makes even more sense. Solid margins in the business (up to 25% EBITDA margin target) has prompted Dow to take agriculture seriously. It has a multi-crop insecticide up for launch this year, and is the first to launch the five-gene corn trait in Argentina.

Only Syngenta (NYSE: SYT) isn't as closely involved with Monsanto, but who knows? Reports suggest that Syngenta’s GM corn might also be vulnerable to rootworms like Monsanto’s. If that’s the case, the two companies might as well brainstorm to come up with better products. DuPont already has plans to add a Syngenta trait to its corn variety. Otherwise Syngenta is very strong in Latin America, which contributes more than 25% to its total sales. A new plant and four-stack corn trait in Argentina, and quadrupling corn production in Brazil, are just few of its plans.

Not going anywhere

Now if farmers or governments were indeed wary of modified products, what is propelling these companies forward? Genetically modified crops have now found their way into as many as 29 countries, and their reach is only getting bigger. So the revolt against Monsanto won’t really hold water unless the real users, farmers, start abandoning GM technology.

Keep in mind that all this is from an investment point of view, and you might want to refuse a plate that serves engineered food. But Monsanto seems to have the wind at its back, and you have enough time before the company runs out of business. If it ever does, that is. 

Neha Chamaria has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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