Monsanto Company (MON)

Anyone who's been following corn prices knows that Monsanto is in for a huge win. Buzz over ethanol hasn't died down, on the contrary--it's exponentially increased. The spike in corn plantings and corn demand can only mean good things for Monsanto. These days, America is done with flailing around and vacillating on fuel solutions; the government is seizing the corn ethanol catchphrase and milking it for all it's worth. The concept of biofuels--gas from rotting plant parts and food waste--is much too gross for mass American consumption. But corn is clean, pretty, and amazing for the flagging breadbasket states. It's like growing your own oil! With North America whipped into a corn ethanol frenzy, Monsanto only has one way to go: up.

Hunger is a powerful force; perhaps amongst the most powerful force in the world. It has transformed society and created new socioeconomic systems time and time again over the course of history. Corn and ethanol as a driver of growth is caused of energy insecurity. Were it that the sole catalyst for MON, I would not be bullish on MON.

Demographics point to massive growth in India and China through 2050. This growing population needs to be fed. MON as a company with leading seed technology has the power to usher in the next green revolution without which the populace cannot be fed.

The problem with feeding a hungry and impoverished population is that the demand curve is wierd. One would have thought a staple is a staple is a staple; what food is needed is needed and will be the first cut of income. This is neat and clean developed country thinking. In an emerging (dare I say undeveloped) country, people by food by the Rs not the Kg. As food prices rise, demand falls, it is not stable because absolute poverty brings the affordibility factor into play - demand must after all be backed by the ability to pay.

MON is one company which can ensure food supply remains adequate and with strong supply, it remains affordable. Failing in satisfying a basic need for food will lead to a Malthusian crisis like never before and with it more likely than not some nasty social consequences. It is something the world cannot afford and so it will not occur - as always human ingenuity will provide and answer - and MON as a leader in seed technology will race ahead.

In the short term, MON could see problems. Corn and ethanol as quasi energy plays will suffer as the economy contracts. Farmers in developing nations also get averse to investing in seed & fertilizer when margins are thin - during an economic crisis demand falls and with a good crop so do prices.

Monsanto will benefit more than any competitor if corn-based ethanol grows in importance. It has the most pro-ethanol traits in research, and several of these are expected to hit markets within the next one or two years.

Monsanto currently leads the pack in biotech research. This gives it an important competitive edge, both in capturing market share and in price leveraging. Its partnership with BASF will also speed up its Research and Development process significantly.

Monsanto and Kansas State University announced a non-exclusive partnership to share technology and germplasm research in an effort to improve wheat breeding. Monsanto has steadily increased investment into Research & Development, posting $279 million in R&D in the second quarter of 2010, a 5% increase from the same quarter the previous year. R&D investment has been steadily increasing in an effort to diversify from a faltering herbicide market as well as the downfall of Monsanto's Round-Up line.

Monsanto Co. (MON), the world’s largest seed producer, is selling off its rights to a synthetic milk-producing hormone in order to focus its attention more closely on its core business of developing genetically modified seeds and pesticides.

U.S. pharmaceutical company Eli Lilly & Co. (LLY) will pay Monsanto $300 million for Posilac, the brand name for recombinant bovine somatotropin or rBST. The deal includes the global sale rights and a Georgia-based manufacturing plant.

While Lilly’s motives for the purchase remain unclear, it’s a smart move for Monsanto.

Growing consumer opposition to the use of hormones in dairy products has been swelling over recent years. Sales of such products are already outlawed in Canada and parts of the European Union.

In the United States, leading grocer The Kroger Co. (KR), coffee-chain Starbucks Corp. (SBUX) and the largest domestic milk processor Dean Foods Co. (DF) all refuse to use milk that contains rBST.

This recent sale is part of Chief Executive Officer Hugh Grant’s plan to sell-off Monsanto’s smaller animal units in order to concentrate company efforts on Monsanto’s popular crop-agriculture product lines, which include Roundup-brand herbicide, as well as modified corn and soybean seeds.

Divesting this controversial asset can only help Monsanto bolster its international reputation. Shares gained $5.22, or 4.63% yesterday (Wednesday), to close at $118.08.

St. Louis-based Monsanto Co. (MON), whose recent second fiscal quarter earnings doubled from the previous year - earning $1.13 billion, or $2.02 per share, in the three months ended Feb. 29, up from $543 million, or 98 cents per share, in the prior year - on the strength of its corn seed and herbicide sales.

Once highly controversial, Monsanto’s genetically engineered products have established a definite foothold in agricultural markets throughout the world. Farmers in China and India planted more than 17 million acres of biotech crops last year, according to BusinessWeek.

Approximately 7% of the world’s farmland acreage is planted with genetically modified crops. While some pockets of controversy remain - and likely always will - Monsanto’s financial performance is a strong indication that sales of these modified agricultural products are only going to increase in the years to come.

Emerging middle classes in China, India and elsewhere are driving the need for commodities. As more people incorporate meat and dairy products into their daily diets, supplies of "double-duty crops" - capable of feeding both livestock and people - continue to fall short of global demand. Drought and floods have also done their part to reduce crop yields, but companies such as Monsanto and DuPont are doing their part to try to boost those yields.

"The agri-boom is alive and well," said Horacio Marquez, a Money Morning contributing editor and a former Wall Street veteran. "The relative lack of rain in the southern United States, Argentina and Brazil promise to restrict supply [of farm-grown crops], while demand is exploding as more and more global consumers come out of poverty and demand better food, including bread, meat and vegetable oils."

According to Marquez, this trend is even more powerful in India and China. Similar trends are playing out in other Latin American, African, and Asian countries that export commodities and are being lifted by globalization. Energy trends - including the move into ethanol - also are driving demand for robust seeds.^[1]

1. ↑ Money Morning Research

Anyone who's been following corn prices knows that Monsanto is in for a huge win. Buzz over ethanol hasn't died down, on the contrary--it's exponentially increased. The spike in corn plantings and corn demand can only mean good things for Monsanto. These days, America is done with flailing around and vacillating on fuel solutions; the government is seizing the corn ethanol catchphrase and milking it for all it's worth. The concept of biofuels--gas from rotting plant parts and food waste--is much too gross for mass American consumption. But corn is clean, pretty, and amazing for the flagging breadbasket states. It's like growing your own oil! With North America whipped into a corn ethanol frenzy, Monsanto only has one way to go: up.

A 15% increase in corn plantings (mostly diverted from soybeans) combined with a strong corn market will raise Monsanto's corn seed revenues for 2007. Monsanto makes much more profit per acre selling corn seeds than soybean seeds.