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Is Monsanto Really a Tech Play?

by: Michael Filloon June 18, 2008 | about stocks: MON    

Michael Filloon

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On December 27th of last year I made a call on Monsanto (MON) at $112.43 per share on theupdown.com and since is up 26.86%. There was plenty of static with the call as the name had already had a pretty good run up. I have owned it in my brokerage account since it traded for $66.13. Even at this price I still believe the stock is a long term play on world agricultural technologies. Its hard to believe on March 10th of 2003 this stock sold for just $7.03 a share. These types of runs are generally not long lived, and investors have lost huge sums of money not taking any off of the top. If you have made gains I would take some profits, but I still think this is a good investment going forward.

The reason to invest in Monsanto is the current state of agriculture. The US is flourishing for demand for corn from ethanol and world food consumption. Argentina is supplying larger sums of corn to Latin America and Brazil is using land availability to produce soy for growing demands in China. The demand environment is three pronged. The first is biofuels, as there will be expanded production of ethanol and biodiesel. The second is an increase in world wealth increasing demand for meat, and agricultural commodities are used to feed these animals. Lastly, China's growth has caused them to become an importer as they can no longer produce enough food to feed their people. Since most of the world's farm land is already being cultivated the only way to increase the food supply is to increase yield, and this is Monsanto's forte. Current examples of yields per acre with respect to the United States show how underdeveloped the world's yield is. The US currently has 90 million acres that produce 151 bushels per acre. In comparison, the following countries acres and bushels per acre of corn:

  • Canada 3 million and 136 bushels per acre
  • Europe 27 million and 99 bushels per acre
  • Argentina 10 million and 111 bushels per acre
  • Brazil 36 million and 58 bushels per acre
  • China 69 million and 83 bushels per acre
  • Mexico 18 million and 48 bushels per acre
  • India 20 million and 32 bushels per acre

If Brazil, Mexico and India would increase their yields to just 100 bushels per acre they would produce 4 billion bushels of corn, and much of the reason they don't have this type of yield is they do not allow some of the biotech traits that Monsanto can offer to farmers. As agricultural commodities increase in price this will further push countries to adopt seed hybrids that Monsanto offers and extend their world wide push into markets. In 1996, their Roundup Ready seeds revolutionized the space, and by 2012 their drought tolerant corn seeds will make more farmland available to grow the commodity. In 2014 this will be further moved by nitrogen utilization corn.

Even with high expectations for Monsanto it is seen that they continually beat expectations they set for themselves. In 2007, they expected their rootworm control to be in 20.8 million acres, corn borer control to be in 42.4 million, glyphosate tolerance in 57.9 million, and triple stack 17.6 million. Initially estimates for 2008 had growth to 26-28 million, 40-42 million, 63-65 million and 25-27 million respectively. These estimates were raised in the second quarter update to 27-29 million, 40-42 million, 65-67 million and 26-28 million. 2010 estimates are at 45-55 million, 60-70 million, 80 million, and 45-55 million.

Much of this growth is seen to be taking place in Brazil and Argentina. In Argentina, hybrid acres will are estimated to grow 20% this year with Monsanto's share moving up from 40% to 45% in 2008. The average price increase seen in this area is up from $23/ac to $26/ac over the same time span. Brazil's hybrid acres are expanding from 23 million to 27 million. Although Monsanto's share looks to be stable they will be charging an increase of $5 per acre for corn seed. Currently, these areas are going to continue to prove their acres for hybrid technologies although there are some obstacles ahead. As the world needs more food, Monsanto is well placed on their technologies.

Disclosure: Long

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This article has 6 comments:

  •  
    Jun 18 03:05 PM
    I have to say, usually I disagree with most of the Seeking Alpha articles. This one however appears to be well thought out and factual. Great Job.
    Reply
  •  
    Jun 18 03:40 PM
    Nice work. Since you make the analogy between MON and tech, is there any chance you can address further how MON treats its products as intellectual property (IP) and the restrictions it puts on farmers who use its products? Thanks, in advance.
    Reply
  •  
    Jun 18 09:23 PM
    With respect to the question about I.P., monsanto has a wealth of I.P. in the genetics that they own for their seed hybrids. These genetics are generally developed internally and sometimes acquired by others, but genetic research has been a focus of their RD for the past 10 years. It is very difficult to replicate once strong genetics are developed and it is the reason that their hybrids outperform all of their competitors.
    Reply
  •  
    Jun 19 09:19 AM
    Great article - very informative - I wish I wrote it! I would like to add an important point, that many people just don't get. These great improvements in seeds and genes that Monsanto does all add up to the same result - A greater and faster depletion of the nutrients in the soil, as plants mine the soil for everything it has of value.Therefore more fertilisers must be used to replace what's taken out.This is an investors dream and is going to continue at least five to ten more years! What Monsanto has in its pipeline is almost beyond belief!I'm very long!
    Reply
  •  
    Jun 21 01:21 PM
    chartguy69, With respect to IP, I think Stonebraker answered the question very well, but one thing to look up is the recent Sygenta deal where it looks like they will do anything to protect the monopoly they have and not go to court. I believe the big get bigger and the weak die or get bought for some time to come. I own and will continue to buy on dips.
    Reply
  •  
    Jun 30 10:47 AM
    I own Monsanto before reading your article. Reading your excellent analysis convinces me to hold on to this investment. Impressed with your research effort.
    Reply
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