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WIKI ANALYSIS
Monsanto Company (NYSE: MON) is the world's largest provider of patented genetically modified seeds for crops such as corn, soybeans, and cotton, bringing in $11.7 billion in 2009.[1] Monsanto is also the inventor of Round-Up, the first commercial glyphosate herbicide (weed-killer), and SmartStax, a seed that will require 70% less pesticide and increase whole-farm yields by 5-10%.[2] The Round-Up patent has expired, so now Monsanto faces increasing competition in its chemical business. Due to heightening competition in its pesticide business, Monsanto has shifted its strategy towards seed development.
Anything that makes food more expensive benefits Monsanto, because it encourages genetically engineered crops. Crops become more expensive due to droughts, developing economies eating more meat, and demand for bio-fuels increasing because of high oil prices. Though Monsanto took a hit with the economic downturn, analysts say that it is primed for a come back, noting the strength of the market and the need for such seeds.</ref> [3]
In addition to the effects of the economic downturn, Monsanto also faces governmental push-back abroad. Germany, France, Hungary and Austria, for example, have all banned some lines of Monsanto corn for health reasons. Monsanto sued to lift the bans and lost in all 4 instances. [4] International concerns over health harms from Genetically Modified Foods make PR important for Monsanto, which has been lambasted in Vogue Magazine and the movie Food Inc. for dangerous and even predatory business practices.
Despite such attacks, Monsanto and the industry at large have shown promise of emerging from the economic downturn as of late, earning media and analyst praise. Though considered an under-performing market as of the end of summer, the agriculture industry at large has seen growth surpassing market averages. Monsanto especially has led the market in this growth. [5] [3]
Business Overview
Business Financials
Monsanto's products fall into two main categories: Chemicals (Round Up, and Other Chemicals) and Seeds and Traits (Corn, Soybean, Cotton, Vegetable Seeds and Genetic Traits).
Chemicals (30.8% of Gross Profit)
The chemical sector, termed Agricultural Improvement by Monsanto, includes a variety of herbicides and lawn/turf treatments that Monsanto sells to farmers and gardeners to help improve their yields.
Products include:
- Roundup broad-spectrum herbicides, based on the agricultural chemical glyphosate
- Selective herbicides for home and agricultural use
- Turf- and ornamentals-focused herbicides for commercial and private use
- Posilac bST (bovine somatotrophin) supplements to enhance milk production [6]
In 2000, Monanto’s RoundUp patented chemical mix lost its protection, and much like a generic drug, is now being sold at cut rates. Prices for glyphosate herbicide (RoundUp’s active ingredient) have dropped from $10/kilo to $3/kilo due to low-cost competitors. Monsanto is consolidating its RoundUp division, which has historically accounted for 30-40% of its profits, and is focusing on seed research and development. By 2012, Monsanto expects Round-Up to only account for 15% of its profits. As Monsanto focuses on genetical engineering, it will begin to look a lot like a bio-tech company. That means big R&D expenditures, lots of risk, along with the potential for block-buster returns. [7]
Seeds and Traits (69.1% of Gross Profit)
Monsanto is a leading marketer of genetically modified corn, cotton, soybean, and canola seeds. It develops genetic traits for plants such as weed resistance, or herbicide resistance that are extremely useful for increasing yields. Farmers want to increase yields when food prices are high and precipitation is low, which is when Monsanto has historically thrived most.
Over time, Monsanto's business has been increasingly reliant on corn. The development of ethanol spurred demand to increase yields, and therefore to buy special Monsanto seeds. A typical US car entirely powered by ethanol for 1 year would consume enough corn to feed 7 people for an entire year. It takes about 21 pounds of corn to produce 1 gallon of ethanol.[8] Because ethanol is less efficient than gasoline, recessionary gas prices have destroyed demand for the fuel, leading to a 60-70% decline in Corn prices from 2008 to 2009.
Despite the collapse of ethanol, Monsanto remains focused on corn. It recently partnered with the Dow Chemical Company (DOW) to release a new flagship corn-seed called SmartStax. Monsanto says, ""Genuity™ SmartStax represents the most significant single innovation under way to contribute to Monsanto's goal of doubling its gross profit by 2012." 3-4 million acres are being seeded with SmartStax, and harvest results will be available by 2010. The company is promising whole-farm corn yield to increase by 5-10%. The seeds require up to 70% fewer pesticides, which makes them very environmentally friendly.[2]
Monsanto clearly hopes that its R&D investment in SmartStax will compensate for its declining margins in the increasingly competitive glyphosate chemical market.
Quarterly and Annual Earnings
FY 2009 Annual Earnings
MON's annual earnings increased across the board for FY 2009. Annual net sales increased by 3% from FY 2008 finishing at $11.7 billion.[9] Gross profit similarly grew, increasing by 9% from $6.2 billion to $6.8 billion and subsequently pushing gross margins by 4 points to 58% from 54% the previous year.[9] Driving this growth was a 19% increase in gross profit for Seeds and Traits, with gross profit finishing at $4.5 billion.[9] Return on capital also grew from 24% in FY 2008 to 25% in FY 2009.[9] MON also increased R&D spending to 9% of sales in tandem with a restructuring initiative aimed at offsetting operations costs.[9]
Trends and Forces
Lower Gas Prices, Demand for Biofuels
Ethanol in the U.S. is produced from corn, one of the most fertilizer and nitrogen intensive crops. [10] From 2007-2008, corn prices jumped 125% due to heightened demand for biofuels, food, and livestock feed. [11]
The demand for Ethanol and biofuels peaked in 2008 along with gas prices, only to falter in 2009. People only consume biofuels, it seems, when gas prices are extremely high. For instance, the Midwest has seen a 52% drop in ethanol consumption, with only a 3% drop in gasoline consumption. Ethanol is about 15-20% less efficient than gasoline, and studies have shown it needs to be about 40 cents cheaper per gallon to compete. [12]
There is also evidence that ethanol is extremely fuel inefficient, requiring 70% more energy to produce than it actually yields. Soy-based fuel is somewhat more promising Soy biodiesel is significantly more powerful than ethanol, yielding 120,000 BTUs per gallon versus 80,000 BTUs. [13] [14] While Monsanto does sell premium soy-bean seeds, they do not compare with its new SmartStax corn seed. Still, higher soy prices will benefit Monsanto.
New research done at UC Merced and published in the journal Science in May 2009 presents evidence that crops yield 81% more energy per unit area of land when it is burned to make electricity to power cars than when it is refined into ethanol.[15] Furthermore, greenhouse gas emissions from this "bioelectricity" are 100% lower per unit area of land than cellulosic ethanol.[16] The growth of agri-power may not provide a major windfall to Monsanto if it does not require the same outrageous yields that biofuel does.
Additionally, It is also possible that Monsanto seeds will not be used to plant crops for biofuels in the future. In July, 2009, Exxon Mobil (XOM) entered a five-year, $600 million partnership with Synthetic Genomics Incorporated, to develop algae-based biofuels.[17] Algae grows in the ocean, an area that Monsanto does not play in.
But assuming corn and soy biofuels remain the primary alternative energy prospect, if petroleum prices go up, demand for both corn and soy biofuel will increase. If Ethanol wins out, Monsanto will benefit the most. If soy biodiesel wins out, Monsanto will still benefit. If oil prices stay low, Monsanto will suffer because farmers may not need to increase their yields.
The World Food Crisis and Temperature and Precipitation Fluctuations
High food prices, and moderate drought conditions will improve demand for Monsanto's yield increasing products. Severe drought conditions will disrupt demand for Monsanto's seed and fertilizer because it is pointless to tend to dead fields (think: Grapes of Wrath). Low food prices, and great weather will decrease demand for Mosaic's fertilizers.
Large farming regions within the United States, India, and China are experiencing severe drought conditions that makes growing crops extremely difficult. On one hand, higher demand for food due to lower supply will improve demand to fertilizer. On the other hand, farms will not pay for fertilizer if there is not enough water to grow crops. [18]
Despite drought conditions in California, however, the Midwest is expected to yield a record corn and soybean crop in 2009. Good weather and favorable pollination conditions have driven crop prices down, anticipating record supply surpluses. [19], [20]
Even with supply surpluses, the world food crisis will place some upward pressure on food prices. A 2008 FAO report pegged the number of undernourished people in the world at 963 million, nearly 15 percent of the world's population. [21] Many liberal organizations blame US fertilizer companies for misleading farmers and partially contributing to the world shortage, but at the end of the day, high demand for food will translate into high fertilizer demand absent a severe worldwide drought.
High food prices, and moderate drought conditions will improve demand for the Monsanto's products. Severe drought conditions will disrupt demand for Monsanto's seed and fertilizer because it is pointless to fertilize dead fields. Low food prices, and great weather will decrease demand for Monsanto's seed because farmers will not need artificial assistance.
Reduction in Arable Land, Increasing Populations
The amount of arable land worldwide is dwindling. The population boom has cut the amount of arable land per person in half over the past 50 years.[10] As population and personal incomes in developing regions of the world increase, the worldwide demand for food also has increased. Worldwide population has grown 12% in the past ten years, while farm acreage has grown only 2%.[22]
Brazil, China, and India are three of the five most populous countries and are trying to meet the growing demand for food, fuel, and feed for livestock. Brazil, China, and India each have just 7%, 15%, and 49% of arable farmland, respectively,[23] and with their respective populations on the rise, these countries need to make the most of the arable land they have. In addition, weather factors such as temperature, rain, floods, droughts, and hurricanes destroy arable land for a particular crop season and render land unusable for a few seasons.
Reduction in arable land should increase the demand for yield-increasing fertilizers in the long run and benefit Monsanto. In the short run, however, violent destruction of arable land through natural disasters could disrupt Monsanto's contracts (farms often buy seeds on credit) and damage the company's profitability.
The policy of international governments
MON810 maize is genetically engineered to produce Bacillus thuringiensis, which some scientists claim, is toxic to the corn borer pest. Germany, France, Hungary and Austria all banned this line of Monsanto corn. Monsanto sued to lift the bans and lost in all 4 instances. [4] International condemnation of Genetically Modified Foods enforced by governmental bans could seriously hurt Monsanto's business.
Monsanto also sued a Canadian farmer for using genetically engineered seeds. The farmer protested that the seeds had pollinated his land, and that it was not his fault. He lost. The court ruled that Monsanto's seeds are Monsanto's seeds, and that if you benefit from them, you should pay. [24] Monsanto has filed 138 intellectual property lawsuits over the past 10 years, and won all 9 cases that went to trial. [25] One reason that lawsuits are not more common is that Monsanto inserts something called a "terminator gene" into its crops to prevent them from cross pollinating. This also minimizes the risk of sustainable IP theft from developing countries that might ignore Monsanto's patents.
Monsanto has been criticized in the media for using "gestapo style" fear and intimidation to protect its intellectual property, notably in the movie Food Inc. and the magazine Vanity Fair. [26]
Competition
Although Monsanto is in many ways the industry leader, it faces stiff and rising competition from chemicals giant DuPont and seed and agrochemical company Syngenta AG (SYT). DuPont could prove to be an especially significant threat, with its comparable market share but dramatically different approach to the future alternative fuels market. By casting its R&D "net" as widely as possible, DuPont has set itself up to take the lead in seed sales and technology if corn-based ethanol fails.
| Sales in $M | Ranks | |||||
| Total Sales | Agrochem | Seeds/Biotech | Total | Agrochem | Seeds/Biotech | |
| Monsanto | 6,323 | 3,078 | 3,245 | 2 | 3 | 1 |
| DuPont | 5,288 | 2,302 | 2,986 | 3 | 4 | 2 |
| Syngenta | 8,104 | 6,307 | 1,797 | 1 | 1 | 3 |
| BASF | 3,981 | 3,981 | 0 | 4 | 2 | --- |
Source: Phillips McDougal (2005)
References
- ↑ Monsanto Company Google Finance, Financial Statements
- ↑ 2.0 2.1 Monsanto Company Website, SmartStax News Release
- ↑ 3.0 3.1 Agricultural Stocks And Precious Metals Miners Next Hot Stock Sectors
- ↑ 4.0 4.1 Ban on Monsanto Corn Products
- ↑ Monsanto Planting Seeds for Further Gains?
- ↑ The Monsanto 2008 Annual Report, p. 28
- ↑ Seeds of Growth for Monsanto, Seeking Alpha
- ↑ statistics
- ↑ 9.0 9.1 9.2 9.3 9.4 Q4 2009 Monsanto Company Earnings Conference Call
- ↑ 10.0 10.1
- ↑ | www.wikinvest.com: Corn Prices
- ↑ [http://news.yahoo.com/s/ap/20090714/ap_on_re_ca/us_farm_scene_e85_outlook | Yahoo News: Massive Ethanol Decrease in 2009]
- ↑ Soy biodiesel gives bigger bang than ethanol
- ↑ The Viability of Biodiesel in Kansas
- ↑ CNET: "Study: Bioelectricity bests biofuels on miles per acre"
- ↑ CNET: "Study: Bioelectricity bests biofuels on miles per acre"
- ↑ http://seekingalpha.com/article/149477-exxon-s-biofuel-bet?source=email SeekingAlpha: Exxon's Biofuel Bet]
- ↑ | Map of International Drought, Global Researcher
- ↑ | UNL's Drought Monitor
- ↑ | Good corn pollination in the 2009 season so far
- ↑ [http://www.un.org/apps/news/story.asp?NewsID=30256&Cr=Food+crisis&Cr1 | UN News Centre]
- ↑ Delta Farm Press, "World population trends favor farmers," December 5, 2007
- ↑ | C.I.A. World Factbook: Brazil, China, India
- ↑ Monsanto Case
- ↑ | Monsanto Blog
- ↑ | Vanity Fair on Monsanto
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