Why These Ag Companies Could Plummet in 2014

By Roland Hughes - February 6, 2012 | Tickers: MON, SYT, DOW | 0 Comments

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There is a perfect storm brewing in the agriculture market which should hit both Dow Chemical (NYSE: DOW) and Monsanto (NYSE: MON) around the end of 2014. This perfect storm may or may not coincide with the bursting of the agricultural bubble. I’ve already told you the ag bubble will burst on or about the time T-Bills hit 6%. If you did not read that post, I’m sorry.

You need to understand a bit of history before you understand the “why” behind this and why the timing is a bit fuzzy. During the days of my “yoot”, long before I could drive, everybody controlled wees in in their corn with a combination of Atrazine (tm), now owned by Syngenta (NYSE: SYT) and 2,4-D owned by Dow Chemical but lots of generic versions even back then. Most people don’t know it, but 2,4-D is roughly half of the formula of Agent Orange. (You might remember Agent Orange from all of the Vietnam era press coverage.) There were many other products on the market, but they were all very expensive. If a farmer had his kids do the spraying, you could spray corn with 2,4-D for just a couple of dollars per acre when everything else was $8/acre or more.

When we first started spraying 2,4-D, if even a whiff of the spray got on a mature cocklebur, not even enough to make a shiny spot on a leaf, that thing died in three days. About the time I was old enough to drive legally you could literally have the spray running off every leaf and most of them would perk up seeming to say “thank for the drink, can I buy you one?” Why did this happen? It was the cheapest weed control you could get. If the early spraying didn’t kill everything, a second pass was done with a Hi-Boy because two passes with 2,4-D was generally still half the cost of the available alternatives. Eventually, the weeds didn’t care how much 2,4-D you hit them with.

Fast forward to a time near 2000 when Roundup Ready (tm) soybeans and corn are widely available. Despite all warnings about planting both soybeans and corn with this trait stack, excessively greedy farm managers and land owners charging $300-$500/acre rent for ground which is documented to be marginal, not prime, foisted this reality on the nation. Once generic versions of Roundup (tm) hit the market you could get complete weed control in one pass for under $12/acre. The next chemical option in most regions has a cost of around $45/acre so, most farmers are opting for a second pass with Roundup when the first pass fails to control weeds. The list of weeds now immune is getting longer and covering many states.

This is a triple whammy for both Dow and Monsanto.

• Both of these companies have been adding $200+ to the price of each bag of seed sold which has any of their “trait stacks” incorporated into the plant. That revenue stream will begin disappearing en masse near the end of 2014. Why pay $200+ per bag for a trait you can no longer take advantage of?
• Both Dow and Monsanto have been banking on a shiny new trait stack which adds immunity for a shiny new form of 2,4-D to both corn and soybeans (2,4-D traditionally killed soybeans if they were exposed to even the smallest quantity of it.) Only one problem. 2,4-D was not pulled from the market when it quit working for farmers. It was sold to landscaping companies and to consumers at big box stores. Even though it has been 20+ years since it was used in the Ag market, the weed seeds coming out of the suburbs and towns still carry the resistance. Thanks to that, the shiny new formula already has very stubborn weeds which are resistant to it. Shiny new $200+ per bag trait stack is obsolete before being brought to market.
• Obviously sales of Roundup (and the generics) are going to plummet. Oh, the stuff will still be sold in big box stores and to landscaping companies so the resistance trait never ever has a chance to be bred out of the weed population. I mean, just because 2,4-D was continually sold into this market and the resistance never left the weed population doesn’t mean people selling Roundup (and its clones) at big box stores are going to have any trouble ordering more.

There is nothing in the pipeline to replace Roundup. All the Ag industry has been told about for the past five years was this shiny new 2,4-D concoction. You were going to be able to blend it with Roundup and kill everything except your crop. Now it is obvious this new formula and genetic trait have failed before they left the starting gate. Following this is not rocket science. We have been down much the same path before.

Why didn’t we have this same trouble with Syngenta’s Atrazine? To start with, you could only use it on corn. Add to that it had (at least initially) a residual issue. Farmers who planted corn back on corn and went overboard on Atrazine eventually learned a hard lesson the first time they planted soybeans in that field. Their soybeans got about three inches high then suddenly died. Ironically this has given Atrazine a long life. Since you either learned to control your usage of it or paid a heavy price, it is still an effective product.

For those who have to have their information pre-digested:

• Both Dow and Monsanto will start to wain at the end of 2014 with lots more bad news surfacing in 2015 about lost sales. By end of 2015 it should be a full on rout as both farmers and the Ag trade press start venting about lack of a Roundup replacement.

• Atrazine sales, long languishing because Roundup killed everything and costs less will see a short term spike and so will Syngenta.

• If you happen to know of a lab which has developed a viable Roundup replacement now would be a real good time to get in and have them schedule an IPO for Q1-2015.

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