On Feb. 22, 2012, Ceres (NASDAQ:CERE) managed to raise $65 million through a 5 million share offering priced at $13/sh. The company had originally expected to raise $132 million for its shares on February 9 with a price range between $21-23/sh. But poor investor demand, a poorly timed crop outlook release, and a subsequent delay of the IPO all led to a poorly priced offering. Nevertheless, despite its stumbling start, the company's long-term picture may offer a glimpse into the expansion of the genetically modified seed market.
Ceres is an agricultural biotechnology company that specializes in selling seeds specifically geared towards the production of renewable bioenergy feedstocks. Through the use of innovative plant breeding and trait biotechnology, Ceres produces low-input dedicated energy crops that are capable of producing high yields per acre. Specifically, the company produces enhanced seeds that increase yields for crops that will one day be necessary for the advanced biofuels market. Such non-food based feedstocks are critical for the production of sugars without disrupting the market of consumed food.
Yet fundamentally, the feedstocks Ceres produces will likely one day be critical in the pursuit to lower production costs for much of industry around the world. Though seemingly constrained to biofuels today, non-food based feedstocks are likely to power much more than this. Advanced biofuel companies are already expanding beyond the scope of mere biofuels and are already pursuing higher margin markets through products that are normally derived from petroleum.
Case in point, renewable oils giant Solazyme (SZYM) has already identified an addressable $3.1tTrillion market opportunity (yes, with a "t") with its biologically-derived oils that can effectively replace oils made from petroleum, animal fats, and plant oils. Using enhanced micro-algae and stewing in a cellulosic sugar broth, Solazyme's ongoing commercial-scale tests have already indicated very lucrative margins.
This gives reason for confidence to believe that within just 3-5 years there will be exact replicas of current oil profiles being produced in bulk. The product in turn can be used in everyday products as diverse as jet fuel, shampoo, ice cream, plastics, cosmetics, paint, etc. With such a wide market and a growing population, the need for large scale cellulosic feedstock farms will ultimately be present.
As a result of such improving technologies, the ability to optimize the output of feedstock resources will ultimately fall into two perceivable categories: catalysts and feedstock enhancers. Catalysts such as enzymes made by Novozymes (OTCPK:NVZMY) and Codexis (NASDAQ:CDXS) help increase the amount of sugars derived from cellulose. Likewise, high-yielding feedstocks grown from genetically modified seeds will serve as the greatest production multiplier necessary for optimal production. Enzymes make the process more efficient. Modified seeds increase the amount of material to process.
As it stands, Ceres has much to gain in the extended future as a first-to-market modified seed pioneer for a practically non-existent market in the present. The seed market is essentially dominated by 5 large players: Monsanto (NYSE:MON), DuPont (NYSE:DD), Syngenta (NYSE:SYT), Bayer (OTCPK:BAYRY), and Dow Chemical (NYSE:DOW). Collectively between them, these conglomerates have bought up more than 200 other companies that managed to have influence in the seed market.
As a result of this practical oligarchy, there is much future profit to be made in the pursuit to patent crops that become market essential. For Ceres, the potential of its operations are well-recognized. Even Monsanto has acknowledged its potential since 2002, as it became an investor and working partner with the company. In doing so, it acquired the rights to specific Ceres technologies in exchange for license payments over several years.
Nevertheless, the poor IPO showing by Ceres might have signified the biofuel industry's equivalent of "A Bridge Too Far." With an underlying need for agriculture to first adopt a new batch of crops for an advanced biofuel industry that is yet to be truly established, Ceres was unlikely to harness much support for its offering to begin with.
As witnessed by the biofuel industry itself, the demand for more near-sighted returns has become increasingly clear. Just a few weeks ago, Amyris (NASDAQ:AMRS) pushed back its ramped-up production guidance as the company gave up on biofuels in the present. In less than a month, the company lost over half its market value in a hard reaction by investors.
Presuming its ability to endure the coming years, Ceres offers a lucrative opportunity into a market that has yet to be fully explored by its competition. Utilizing that time building up a strong intellectual property portfolio could leave this company at a noteworthy advantage in the future. Shareholders in the company should therefore proceed with caution and invest as venture capitalists would - with much patience and a clear sense of direction. To expect any quick returns in the near future would be wishful thinking at best.
Disclosure: I am long SZYM, AMRS.