The Future Looks Sweet For Monsanto As New Opportunities In Agribusiness Emerge

Aug.19.12 | About: Monsanto Company (MON)

Genetically Modified Products Are a Force for Good and Here to Stay

Monsanto (NYSE:MON) is the undisputed leader in providing agricultural products to farmers around the globe. Through its seeds and genomics division it creates the highest-yielding plant seed optimized for specific growing conditions. Corn, soybean, canola, cotton, and most vegetables are represented in Monsanto's stable of genetically modified seeds. Monsanto's agricultural productivity segment provides glyphosate-based herbicides for industrial, agricultural, ornamental, and turf applications. At its core, Monsanto is a sort of biotech for agricultural applications, and its world-beating products, prolific R&D budget, and global distribution channel gives it an economic moat that allows it to thrive in good economic times and bad.

People need to eat and farmers want to optimize yield to make a profit. This is why the reliability and steady growth of Monsanto's earnings enables the company to create such value for its shareholders-- the stock is near all-time highs and it enjoys mega-cap status to the tune of $48 billion dollars. Not bad for a company (the original Monsanto) that started to gain traction in the 80s with its nascent seed business and as the purveyor of artificial sweeteners (NutraSweet) that was purchased from G.D. Searle in 1982.

That Monsanto's future lies at the nexus of biotech and the consumer adoption of plant byproducts derived from genetically modified seeds is not up for debate. Whether consumers like it or not, the "brave new world" of food is destined to include completely natural products originating from genetically engineered seeds. This is the future, and the debate is largely over regarding the safety of products derived from genetically modified seed stock. All grains and vegetables have been genetically engineered through selective harvesting over millennia. So the discussion over what is "natural" becomes a disingenuous intellectual exercise if we fail to look at the history of human engineering of seed stock. It is best to frame the debate in terms of the safety and efficacy of the byproducts of these seeds: the fruit, vegetable or grain that ultimately hits the dinner plate of the consumer. The market will decide whether the quality of such an item is fit to hit end-user markets.

The resurgence of buying locally sourced fruits and vegetables is a testament to the power of consumer choices governed by the desire to eat healthy organic foods. Monsanto will carve out its future along these lines: the highest-quality product that can be produced at the lowest-possible cost. Consumers will pay a premium for heirloom quality tomatoes until one is developed that has the hardiness and yield of current seed stock. Preferably, it can be produced close to end-user markets to cater to a consumer class that is keeping sustainability in mind. It is all about moving up the value chain. Monsanto recognizes this and will be looking to create value in a product portfolio that will likely expand in scope and quality. One area that is ripe for innovation is the plant sciences with respect to natural sweeteners.

Enter Stevia, the Natural Zero Calorie Sweetener

It seems that chemically derived zero-calorie sweeteners are losing their luster in the minds of the ever more fickle and sophisticated consumers who are gravitating to natural unprocessed foods. The first crest of this wave has been the emergence of an entire supply chain oriented to providing healthy alternatives to the masses. The success of such enterprises speaks for itself: Whole Foods (WFMI), Sprouts Markets, and entire divisions of Wal-Mart (WMT) are now happily catering to a demographic that takes to heart the mantra "you are what you eat."

In an era where a premium is assigned to health-oriented consumption, it is likely that this generation of "label reading" shoppers will reach for zero or low calorie beverages and food products that can now tout natural, plant-derived sweeteners. Stevia (as derived from the stevia plant) has the blessing of both the U.S. Food and Drug Administration (FDA) and the European Union for use in food and beverages, and this is changing the landscape of what is now (as of 2010) an over $58 billion global sweetener industry.

Even the World Health Organization has weighed in with studies showing that stevia could replace up to 20% of all dietary sweeteners. A company called Stevia First Corp. (OTCQB:STVF) is the leading California agribusiness with a clear focus on development and production of the highest-quality natural sweetener at a time when consumers are looking for alternatives to sugar and chemically derived sweeteners.

Location Matters: The "Silicon Valley" of Agribusiness

So how can established companies like Monsanto or an emerging company like Stevia First Corp. position themselves to capture this burgeoning market? One element for building a leadership position in this niche includes being close to the end-user markets (read the U.S.) and to have access to the best California based science and production techniques that will enable it to produce a higher quality product at potentially lower price points. Stevia First Corp. company Chairman, Avtar Dhillon, has alluded to the benefits and location of production in central California, "Add a scientific approach and we have a good chance to come out with the right plant in the right soil with the right techniques for growing and harvesting." By leveraging expertise in California's Central Valley (what many consider to be the "Silicon Valley" for agriculture), Stevia First has an opportunity to develop a leadership position in the technologies related to cultivation, processing, and formulation, allowing it to potentially "leapfrog" its international competition and put pressure on companies like Monsanto to enter the fray.

Stevia First Corp. has bigger plans than merely being a producer of the natural sweetener however. The goal is to be the first to create a vertically integrated enterprise in a region that can support an almost unlimited amount of production. Chip Morris, the director of farming operations for Stevia First, has maintained that "California could become the stevia production capital of the world. The market for all natural, zero-calorie stevia is exploding." Clearly, there are big domestic plans for a compound whose production, to date, has primarily taken place in China. With R&D operations and more than 1000 acres of land at its disposal in California's Central Valley, Stevia First plans to capitalize on the demand for locally and sustainably derived ingredients. The location allows it to cull biotech expertise from such institutions as UC Davis and provides access to U.S. federal research grants.

R&D Capabilities and Pedigree Key to Value Added Production and World Class Customers

By moving up the value chain and creating separation from low-quality, high-volume production, emerging companies have the ability to become premier global suppliers of branded products in the food and beverage industries. For an established company like Monsanto, it means looking at this new market through R&D channels or making an acquisition to gain exposure to it. Monsanto has done this before: in its skillful co-opting, production, and enhanced branding of NutraSweet, whose FDA approval and consequent commercial success in the '80s prompted Monsanto to purchase G.D. Searle (the developer of NutraSweet).

It was indeed a sweet and profitable ride for investors in both entities, and it stands to reason that as the evolution of stevia unfolds, the highest value producers with the best access to technology, capital markets, and ties to the major U.S. food brands (think Coca-Cola (KO), Pepsi (PEP) and others) will be best positioned to succeed. Stevia First seems to have the pedigree to best meet the marketplace as the premier value-added supplier with the scale and sophistication to bring stevia-derived products into the mainstream.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.