Hi Investors,
This is an Investment research summary on Monsanto Inc.
Key Findings
1) Strong Demand for Monsanto’s Seeds
2) Digital Agriculture Initiatives
(A) Business Description
Monsanto Company, together with its subsidiaries, provides agricultural products for farmers worldwide where their main region of operation is in the US.
It operates in two segments, Seeds and Genomics, and Agricultural Productivity. The Seeds and Genomics segment produces row crop seeds, including corn, soybean, cotton, and canola seeds under the DEKALB, Asgrow, and Deltapine brands; and vegetable seeds, such as tomato, pepper, melon, cucumber, squash, beans, broccoli, onions, lettuce, and others under the Seminis and De Ruiter brands. It also develops biotechnology traits that assist farmers in controlling insects and weeds in corn, soybean, and cotton crops. In addition, this segment licenses a range of germplasm and trait technologies to large and small seed companies.
On the other hand, the Agricultural Productivity segment manufactures and sells herbicides for nonselective agricultural and residential lawn and garden applications for weed control under the Roundup brand name; and herbicides for selective agricultural applications for weed control under the XtendiMax brand name.
The company markets its products through distributors, independent retailers and dealers, agricultural cooperatives, plant raisers, and agents, as well as directly to farmers. It has strategic alliance with Pairwise Plants to advance agriculture research and development by using gene-editing technology.
(B) Macroeconomic Activities
a) World Population
There were only less than 1 billion humans living on Earth 200 years ago and the world’s population increased to 6.1 billion in year 2000 (Figure 1). The world’s population would continue to increase but the growth rate would be going down, with projections estimating an annual rate of 0.1% for 2100.
b) Technological Advancement
On the other hand, there have been significant progress in the technological frontier. The upcoming 5G network would definitely improve the connectivity and collaboration across sectors such as finance, transport, retail and many more. Together with the increased in smartphone penetration rate across many regions (Figure 2), it would enable people to get better access to information and services. Thus, the connection between the various businesses and the consumers would improve, leading to a more friction-less society as a result.
(C) Industry overview and competitive positioning
From the various market study companies’ forecasts, the CAGR growth of the seed market in the coming few years varies from 6.8% to 13.3%.
a) Growth of Genetically Modified (GM) Crops
The sales of GM seeds in were up by 3% in 2016 (Figure 3), according to Cropnosis, and the 4 main GM crops are corn, soyabeans, cotton and canola. Furthermore, there has been a steady increase in the GM crops farmed since 1996. Additionally, there could be growth in GM crops as the International Service for the Acquisition of Agri-Biotech Applications (ISAAA), a global network of non-profit centres that promote agricultural biotechnology, found an emerging demand in Africa and Europe.
b) High Degree of Seeds Companies Concentration
Within the seed market, it is dominated by 3 large players which collectively holds approximately 60% market share in terms of sales (Figure 4). Monsanto is the market leader (26% as of 2013), followed by Dupont Pioneer (21%) and Syngenta (10%). However, the seed market could be consolidated further with Monsanto having greater market share because of the yet-to-approved merger with another seed company, Bayer.
c) Competitive Positioning
Monsanto’s dominance in the seed industry is significant as it is the leader in 3 major field crop seeds (Figure 5). Within the corn seed sector, it is dominated by 2 large players which collectively holds approximately 68% market share in terms of revenue. Dupont Pioneer is the market leader (34.7% as of 2017), followed by Monsanto (33.3%). Whereas within the soybean seed sector, it is also dominated by the same 2 players which collectively holds 60% market share with the former and latter having 31.9% and 28.2% as of 2017 respectively. On the other hand, within the cotton seed sector, it is also dominated by 2 large players which collectively holds approximately 70% market share in terms of revenue. Bayer is the market leader (38.5% as of 2015) and Bayer (31.2%).
(D) Investment Summary
a) Strong Demand for Monsanto’s Seeds
Corn and soybean seeds and traits are 2 of the highest gross profit generator for Monsanto (Figure 6) and its quality and demand could be inferred from its share of the market in the corn and soybean seed market. Furthermore, Monsanto’s relentless pursue (Figure 8) of a more competitive seed could prevent many other players from snatching away its market share because they would have a slim chance, due to its limited resources, of developing a more powerful seed more quickly than Monsanto (assuming that most competitors stick with its R&D expenses allocation since 2013 in Figure 7). Thus, Monsanto could continue to dominate the seed industry in the future. Also, since corn and soy corps are mainly used as animal feed and personal consumption, we could expect that as the world’s population grows, the demand for corn and soybean seeds would grow as well. Moreover, the newly developed seeds would be patented which further raises the barrier of entry for competitors. All these would lead to a long-term dominance of Monsanto and the reduced bargaining power of the farmers. Eventually, Monsanto would have higher bargaining power which could translate into stronger pricing power in the future.
b) Digital Agriculture Initiatives
Now that Monsanto is able to meet the world’s demand for corn and soybean, one could imagine how Monsanto would dominate the world if they have an efficient distribution network. Monsanto’s digital AG platform, Climate Fieldview, currently serves the needs of the farmers by providing relevant insights that would improve their farming productivity and this initiative/platform could be a good step towards mass data collection on the industry. Thus, these collected data could be used to improve on the distribution network process as Monsanto would have a better outlook for the demand of their seeds. Additionally, as the world becomes more digital (Figure 9), Monsanto would be ready to cater to the new group of farmers who might be more technology-savvy. On the other hand, Monsanto could take this opportunity to develop and cross-sell their products that could solve the farmers’ problems and this would strengthen Monsanto’s other revenue segment.
(E) Catalyst
a) World Population Boom
Since the underlying demand lies in the global population, if the population growth starts picking up again, it would ultimately lead to more business for Monsanto. Furthermore, several major countries are facing aging population and are actively encouraging more births. Thus, if these countries succeed in producing more babies, the global population growth would definitely increase.
b) Demand Increase in GMO Food
Currently, most of the GMO demand is coming from the American region. Thus, if the other regions starts to consume GMO food, Monsanto could potentially cater to the demand efficiently as they are currently one of the largest seed suppliers in the world today. The GMO food is slowly increasing as in Europe, the region which has anti-GM beliefs, has seen 17% increase in hectares of insect-resistant corn planted.
(F) Risk
a) Demand Decrease in GMO Food
GMO food continues to face disapproval from other regions of the world because of the negative impact it does onto the environment and human health. Thus, if there is a research paper in the future that describes the negative impacts, consumers would avoid GMO food which would lead to decreased demand.
(G) Conclusion
In conclusion, Monsanto’s greatest strength is its dominance in the seed market and it would generate positive recurring business as they contributes to the food that we consume today. Thus, unless the world’s population falls, Monsanto would have growing business. Lastly, Monsanto’s venture into the digital sphere is an important step for them in not only capturing the next generation of farmers, and also to create a more efficient business process in the future. Thus, you will never miss Monsanto’s seeds.
Jia Yang
Research Analyst, Mind Kinesis Value Investing Academy
Disclaimer: Please note that all information stated in this article is just for education purpose only and should not be used as any form of recommendation or advice.
Click here for our Free Value Investing Guidebook :
Would you like to accelerate your training on investments? Click here to join our Free Value Investing Masterclass In Singapore :
Click here to hear what our graduates have to say about the value investing course in Singapore :
