Spreading the seed

Today I am writing about a very interesting business called Monsanto who released results on Wednesday. Some of you may have heard of this business because it operates in a very controversial industry, generic seed manufacture. There is an ongoing debate about whether this is a good thing or not. Generically modified food scares people. Here is how the company describe their business from the latest annual report.


"Monsanto Company, along with its subsidiaries, is a leading global provider of agricultural products for farmers. Our seeds, biotechnology trait products, and herbicides provide farmers with solutions that improve productivity, reduce the costs of farming, and produce better foods for consumers and better feed for animals.


We manage our business in two segments: Seeds and Genomics and Agricultural Productivity. We view our Seeds and Genomics segment as the driver for future growth for our company."


If you want more info go and explore their website Monsanto


Both the investment story and the environmental story are based on the following premise. Over the past decade 70% of the growing demand for food has been supplied by growth in acres farmed. This is of course unsustainable because land is finite. So are our jungles, forests, fresh water supply and nature reserves. Therefore to be able to keep supply up with demand, farmers need to grow the yield of their current land. That is where Monsanto comes in. They manufacture high-yielding conventional and biotech seeds; advanced traits and technologies that enable more nutritious and durable crops and safe and effective crop protecting solutions.

The business is very profitable. For the quarter, sales came in at $5.8bn which resulted in net income of $1.67bn. It is a massive business with a market cap of $61.5bn. That is bigger than Richemont, Naspers or MTN. Earnings for the full year are expected to come in at $5.24 per share. The stock trades at $117, 22 times forward. Not cheap but they are expected to grow earnings by 16.5% in 2015. As you can imagine earnings can be very unpredictable. Soybeans and Corn are their main products (top selling seeds), depending on the weather and all other things affecting crops, demand is volatile and dependant on many external factors.


As mentioned earlier, this technology is controversial. They have been adopted in the US and South America but it seems like Europe is not convinced. I chatted to a client of ours who is a farmer in the Natal Midlands and he said that commercial farmers have certainly adopted this kind of technology in South Africa. He said that over the last ten years his yield has increased over 50% because of better farming methods and technologies. This applies to the improvement of machinery, seeds, herbicides and technique.


Investment case. Populations are growing and so will the demand for food. Populations are also getting richer so demand per person will increase. Consumer patterns will also change as wealthier populations demand more meat. The feed for these animals will require high yielding crops. I would also see demand growing as farms in developing nations become more sophisticated, especially as subsistence farming shifts to commercial.


Environmental case. I strongly believe that it is fantastic for both the environment and for mankind. We still have hundreds of millions of people starving. Higher yields mean more supply and more importantly, cheaper prices. As far as the environment is concerned the biggest threat to every single endangered animal is habitat. If people are starving, protected reserves would have to make way for farmland. We have to increase the yields of our currently used arable land, especially in Africa. We are buyers of this stock at current levels. If you are on the other side of this argument please feel free to send me your side of the story.