While there has been a good harvest on farm fields, it may not be all that productive for Monsanto (NYSE:MON) when future seasons plow along. The business environment for agricultural biotechnology companies doesn't seem to be providing the most fertile ground for them to grow. Ongoing conflicts with farmers over seed patents, rising consumer concerns about GMO foods and heated debates brought on by social advocacy groups are all sources of headwinds that can potentially slow down the expansion of big agribusiness. Despite the supposedly favorable agriculture investment theme based on the need of feeding the world of growing populations, investors are better off keeping in mind some of the contentious issues surrounding the use of genetic and biological technologies in present-day farming.
Some of the current agribusiness practices by Monsanto and others may have to be more adaptive to changes in the business environment to continue their corporate success. But given Monsanto's long business history, the company should be able to meet such challenges. Founded in 1901 as a chemical company, Monsanto has gone through many transformations, from a major producer of plastics early on to the first company mass-producing LEDs, and then at one time, a manufacturer of controversial insecticides like DDT. It has been only about 15 years since Monsanto became more focused on agricultural and biotech businesses, and investors can expect that responding to changing times, the company will continue on after more than 100 years in business.
However, Monsanto's current agriculture business model contradicts the traditional farming practice, particularly in the way how seeds are obtained. Its model is based on a business technique used by biotech and drug companies, which allows recouping investments in research and development through exclusive sales of patented products. When applied in agriculture by Monsanto, the approach calls for selling its patented seeds to farmers one season at a time. In other words, Monsanto requires farmers to repurchase seeds season after season to secure continued cash inflows for the company, as any harvested seeds by farmers in any season cannot be used for future planting.
Traditionally, farmers harvest and save seeds themselves for next season's planting. Now, using commercial seeds from Monsanto and others, farmers can retain and consume their harvested seeds, except using them for planting purposes, because any seeds obtained from the fields are the property of the seed patent holder. Such business dealing is contrary to the practice that farmers are used to ever since the earliest days of farming, and may have become a sore spot in the business relationship between farmers and agribusinesses like Monsanto. Reportedly, some farmers have, for their own convenience, reused seeds obtained from corps grown out of initially purchased commercial seeds, and Monsanto has spent considerable resources, both money and manpower, to track down patent violators and litigate against them in courts.
Fighting with your own customers on a regular basis doesn't seem to be the very recipe for sustained business success. Of course, investments in researching and developing new seeds must be recognized. But Monsanto could switch to a licensing scheme whereby with annual licensing fees paid to the company, farmers would be allowed to conveniently save the seeds right from their fields for future planting. Sustaining no financial losses, Monsanto could become more accommodative to farmers' needs. Meanwhile, without having to go through the process of reselling the same seeds every year, it would also save Monsanto on everything from cultivating old seeds in its corporate fields to distributing them to markets across farmlands. However, once new seeds with different traits are developed and ready for the market, Monsanto can resume selling seeds to farmers who then must sign a new round of licensing for subsequent seed uses.
A more friendly customer relationship could also reflect better on Monsanto with the public in general as consumers and other social advocacy groups will likely be on the side of farmers, rather than agribusiness corporations, when there's a conflict between the two parties. For now, Monsanto and others may continue to press on with their current business practice focused on patent enforcement since it's still a seller's market in seed supplies. Farmers today seem to have little market power as Monsanto and others have dictated a unified seed selection process because of their dominant use of technologies in seed inventions and modifications.
But all that could change, if and when there're enough consolidation on the farming side. Bigger farms with stronger financial backing could one day commission their own seed research and development by partnering with other independent genetic and biological technology companies. Such business initiatives could potentially break up the business dynamic in current seed supplies, and challenge Monsanto in the agriculture market. A lot of farms nowadays are no longer the sole proprietary but registered as certain forms of companies. This allows them to better attract capital from outside investors interested in agriculture. As such, incorporated farms may rise in corporate ranks and finally have a say in the seed market.
An investment thesis based on investment returns solely on the need to feed a hungry world may not guarantee lasting growth for Monsanto. Already, GMO seeds are banned in Europe, where Monsanto can only have the conventional seed business. Also, other technologies may someday come to aid in more productive organic farming. When seed diversity desired by farmers one day supersedes seed uniformity created by corporations like Monsanto, previously predicted investment outcomes may become doubtful.
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.