Monsanto And The Challenge Of The Hungry Planet

| About: Monsanto Company (MON)

In July Monsanto (NYSE:MON) announced that it will drop all of its European Union applications for approval for new GM (genetically modified) crops. The decision affects 10 applications in process. It is understood that Monsanto is pulling all of its applications in frustration over delays of approval.

In contrast, biotech crops are highly successful in the rest of the world. More than 170 million hectares of land are under GM crops, sustained by 16 million farmers in 28 countries, with no reports of apparent damage to health or the environment. More than half the world's population, 60 per cent or about 4 billion people, live in the 28 countries planting GM crops.


The European Union has not approved a new GM crop for cultivation since 1998 and the decisions on current requests are suspended for political reasons. Only two crops, a pest-resistant corn and a potato that mainly produces starch for industrial uses, have been licensed, and they are grown in Spain, Germany and France, although not widely.

Europe today is effectively a conventional seed market. But aside from the failure in GM crops, Monsanto´s business in Europe is strong and growing. Monsanto will now focus on selling conventional seed and enabling the import of GM crops for use as animal feed, a widespread EU practice that is less controversial than cultivating the crops in the fields.

Monsanto is planning to invest hundreds of millions of dollars in Europe throughout the next decade, including $300 million in corn production plant expansions that are already under way in France, Hungary, Romania and Turkey.

Hungry planet

A new study shows that if the world is to grow enough food for the projected global population in 2050, agricultural productivity will have to rise by at least 60 percent, and may need to more than double.

Globally, yields of four key crops: corn, rice, wheat and soybean are increasing 0.9-1.6 percent every year. At these rates, production of these crops would likely increase 38-67 percent by 2050, rather than the estimated requirement of 60-110 percent. The top three countries that produce rice and wheat were found to have very low rates of increase in crop yields.

A good example is wheat in Europe. Wheat is an important food crop in Europe; it represents 24-36 percent of the dietary energy and harvested in almost all European countries. However, in Eastern Europe (Ukraine, Moldova, southern Romania, Bulgaria, parts of Hungary and Slovak Republic), southern France, and northeastern Spain, wheat yields are generally decreasing with the exception of a few regions. In total, national wheat yield improvements in European countries are generally less than 1 percent per year, with the exception of small Estonia, which shows 1.5 percent per year.

Food costs are rising across the globe, driven by two factors: the rising population and increasing wealth of the emerging middle classes, particularly in developing countries. Global population growth continues to increase, with about 200,000 new inhabitants being added every day. Right now, there are about 7 billion people on the planet, according to the U.S. Census Bureau's continuously running U.S. and world population clocks. The UN estimates that this figure will hit 8.1 billion in 2025, and further increase to 9.6 billion in 2050 and 10.9 billion by 2100. Most of that growth will take place in developing countries: the UN sees their combined population rising to 8.2 billion in 2050 from 5.9 billion today.

Increasing developing-world wealth is increasing demand not only for more food but for higher-quality food. For example, China's per capita consumption of meat has risen by more than 90 percent over the past decade, while dairy consumption has nearly tripled.

Food prices are expected to rise 10 to 40 percent over the coming decade, with the cost of meat rising faster and that of grains more slowly, according to Ken Ash, director general of the OECD's trade and agriculture division.

The slow increase in agricultural productivity around the world stands in marked contrast to the "green revolution" that led to a huge increase in crop yields in Asia in the 1960s to 1970s, with the widespread use of new artificial fertilizers, pesticides and growing techniques.

Norman Borlaugh, a Nobel prize winning American scientist, the "father of the Green revolution," has worried about the limited potential for land expansion for cultivation. Borlaug believed that genetic manipulation of organisms (NYSEMKT:GMO) was the only way to increase food production as the world runs out of unused arable land. GMOs were not inherently dangerous "because we've been genetically modifying plants and animals for a long time. Long before we called it science, people were selecting the best breeds."

In order to increase crop yields, farmers have the options to increase fertilizer use, upgrade to more efficient farm equipment and planting more genetically modified seeds to grow higher-yielding plants that are more resistant to insects, disease and drought.


Monsanto is basically a seed company and its customers are mostly farmers. Since the late 1990s, US farmers had widely adopted GM cotton engineered to tolerate the herbicide glyphosate, which is marketed as Roundup by Monsanto. The herbicide-crop combination worked spectacularly well, until it didn't.

In 2004, herbicide-resistant weed Palmer amaranth was found in one county in Georgia; by 2011, it had spread to 76. The weeds are fighting back against glyphosate.

Genetically engineered crops dominate cotton, soybean and corn farming in the US, accounting for more than 85 percent of the total acreage of all three. The vast majority of these GM crops are herbicide-resistant, bred to survive powerful pesticides that are used to kill invading weeds and help prevent crop loss. In theory, this helps reduce pesticide use, saving farmers money and reducing the negative environmental impact of the excessive use of chemicals, including loss of wildlife.

Graham Brookes of PGEconomics, a pro-GM consultancy says:

"Nobody disputes that in the last five years the trend on herbicide use in the US has increased and that one of the reasons for that is farmers have a problem with weeds resistant to glyphosate. But it is not only an issue related to GM crops. There are other non-GM herbicides that have got just as much, if not more, of a resistance problem."

Citing 2012 figures, Monsanto admitted last summer in government documents that 13 species of weeds have been confirmed to survive glyphosate. Brookes estimates just 5-10 percent of the crop area in the U.S. has a weed resistance problem. "If it was a bigger problem for farmers we would be seeing them switching away from these crops," he says. He believes farmers should take the blame for the problem for overusing pesticides and not properly managing their farmland and that farmers should start to consider growing non-GM crops in some years to help stem the resistance problem.


The growing threat of "superweeds" present a threat to Monsanto's market position and an opportunity to rivals to introduce alternatives for Roundup and Roundup Ready seeds. Dow AgroSciences, a division of Dow Chemical (NYSE:DOW) is racing to introduce an herbicide and seed system called Enlist. Dow wants to roll out Enlist corn, and then soybeans and cotton, genetically altered to tolerate treatments of the Enlist herbicide mixture, which is a combination of the weed-killers 2,4-D and glyphosate.

Monsanto, in partnership with BASF, a German company, is seeking regulatory approval for new genetically altered soybeans and cotton that resist a new dicamba-based herbicide. Both the Enlist system and the dicamba system are seen as replacements for the combination of Roundup herbicide used on Roundup-resistant crops that now dominates U.S. agriculture.

In May the Department of Agriculture delayed approval and said it needs an environmental impact statement after receiving an onslaught of opposition from activists.

Dow officials had hoped to have "Enlist" on the market by 2013 or 2014 at the latest, but now 2015 looks more likely.

In the meantime, Monsanto continuously innovates. It renews about 20 percent of its cotton portfolio every year with higher yielding strains. That means that in every four to five years, the entire portfolio is turned over.

Monsanto also has big plans for soybeans, so much so that it calls the coming decade the "decade of the bean." In theory, there are an estimated 200 million acres of soybeans in the world waiting for Monsanto's three new products, Roundup Ready 2, Intacta and Roundup Ready 2 Xtend with extended ranges of weed control. The new products are expected to be especially successful in Brazil and Argentina.

Investors' summary

Monsanto operates through two main divisions: Seed Genomics, which makes genetically modified seeds, and Agricultural Productivity, which makes pesticides.

In Monsanto's fiscal 2013 third quarter, which ended May 31, sales rose 0.7 percent from a year earlier, to $4.25 billion, but came in below Wall Street's expectations. Seed Genomics' sales fell 2.4 percent, to $3.05 billion from $3.13 billion. Soybean sales declined 5.7 percent, and cotton sales were 21.4 percent lower. However, corn seed sales, which account for over a third of Monsanto's revenue, rose 3 percent, to $1.56 billion.

Corn is the company's most important crop. Monsanto's rootworm-killing corn seeds were used on 37 million of the 96 million acres that U.S. farmers planted last year. The company also has a strong presence in South American countries, accounting for 77 percent of Brazil's 30 million acres and almost all of Argentina's 11 million acres last year. The Agricultural Productivity division's sales rose 9.4 percent, to $1.19 billion.

Profits fell 3.0 percent, to $909 million, or $1.68 a share. As expected, the third quarter results reflect the decreased year-over-year contribution from the Brazil soybean business, a decrease in overall planted cotton acres and continued effect of higher production costs due to the 2012 drought.

Monsanto reaffirmed its guidance for 2013 earnings in the range of $4.50 to $4.58 a share. For 2014, it said that it expects ongoing earnings growth "in the mid-teens."

The company's balance sheet remains solid, with long-term debt of $2.1 billion, lower than its $3.1 billion of cash and short-term investments. The quarterly dividend of $0.375 a share yields 1.48 percent on an annual basis.

Monsanto's stock in early 2005 stood at $28, in May of this year it approached $110 and in recent days it was around $95. Market cap is near $51 billion. In August the company increased its dividend from 37.5 cents per share to 43 cents per share. The dividend is payable on October 25, 2013 to shareowners of record on October 4, 2013.

Genetically modified foods remain controversial, which could increase regulatory hurdles that Monsanto faces. That's one risk of investing in the company. Monsanto also faces a number of lawsuits. But in spite of the army of activists opposing the company at every opportunity, Monsanto is a successful firm with a bright future.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.