The U.S. Government's Favorite Agriculture Company

Monsanto (NYSE: MON  ) has chalked up another one in the win column as it continues to wage its legal battle to protect its intellectual property rights. This time, the company emerged victorious in a case against a single farmer in Indiana. However, the fact that it involved only one defendant doesn't minimize the implications of this case.

In this most recent court ruling, the U.S. Supreme Court ruled that Monsanto's patents enable it to prevent farmers from planting later generations of its seeds without first paying for those seeds. This is real break from the historical norm where in crops that were planted left the farmer with the ability to replicate them by saving and replanting the seeds the crops produced. Now, if those crops originated from Monsanto seeds this is no longer the case as farmers must pay Monsanto for those seeds.

Source: Monsanto

While this ruling is minor in terms of the $84,000 judgment Monsanto will receive from the farmer, what it does is protect the company's cash flows from its growing portfolio of genetically engineered seeds. That patent protection is important – earlier this year, the company struck a deal with DuPont (NYSE: DD  ) in which the chemical manufacturer will pay it $1.75 billion in a licensing deal. In addition, the two companies would drop the standing law suits held against each other. Instead of competing they will be collaborating, with DuPont gaining access to key patents in the Monsanto portfolio.

It's in that deal with DuPont as well as in its recurring seeds business that is the real driver behind these lawsuits. According to the Center for Food Safety, Monsanto has brought over 140 patent infringement suits against over 400 farmers and more than 50 small businesses. Total winnings? About $23 million which is a drop in the bucket for the company.

What it's after is protecting its intellectual property, which drives profits. These court rulings help it maintain control over the commercial seed world which, when combined with DuPont and Syngenta (NYSE: SYT  ) , is 53% according to the CFS. Further, when you consider that around 93% of soybeans and north of 85% of corn in the United States comes from genetically modified seeds, you can understand just how vast the market is for its products. For Monsanto it represents about $2 billion in free cash flow each year.

I can understand that many investors want nothing to do with Monsanto. It's most recent court battle was against an elderly farmer who did what farmers traditionally did, used seeds from last year's harvest to plant this year's crops. To some, lawsuits such as this one against poor farmers are morally reprehensible and to others the fact that the company is messing with the genetics of the food supply is cause for grave concern.

The reason Monsanto and its peers even exist is to help farmers produce more crops from less land in order to feed the world's growing population. There are other ways to invest in a solution to these agricultural issues; some investors might find a more palpable investment opportunity with fertilizer makers Agrium (NYSE: AGU  ) or PotashCorp (NYSE: POT  ) .

Agrium is the largest global agriculture retailer while also being the world's third-largest nitrogen producer. It's also a leading fertilizer distributor and a world leader in controlled-release fertilizers. Finally, the company also is a low-cost potash producer.

While Agrium offers diversity, PotashCorp offers focus. The company's Canadian operations represent 20% of global capacity and the company has more potash than any other company in the world. That's important because potash is a key nutrient in helping farmers produce more food on less land. Both companies are helping farmers do more with less, which like it or not is a driver behind Monsanto's business as well. 

No matter your view of the company, Monsanto continues its winning ways in court. With that, the company and its peers have locked up a large part of the commercial seed market. That's proved to be a winning combination which has sent the company's shares up over 1,000% in the past decade.

It's understandable if Monsanto isn't the type of company you'd consider worthy of your investment dollars. However, with less and less arable land available around the world, increasing yields from existing plots will become vitally important to keeping up with expected population growth. Cheap and effective fertilizers could be the key to achieving this goal. As the global leader in potash production, PotashCorp has established several barriers to entry that make it nearly impossible for competition to break through. Click here now to access The Motley Fool's premium research report that covers precisely what these barriers to entry are and details several other key reasons why PotashCorp presents such a compelling investment opportunity today.


Read/Post Comments (7) | Recommend This Article (2)

Comments from our Foolish Readers

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  • Report this Comment On May 14, 2013, at 5:11 PM, eyeknonothing wrote:

    Just so we all know what really happened; Vernon Bowman bought seed at a grain elevator. Yes, he probably knew that GMO soy seeds were in there, but he had no contract with Monsanto or anyone else not to plant them and then use the offspring of those crops to plant more.

    The most important issue in this larger issue of GMO's is that as we all know, the free market is what drives business. There is no, none, zip, zilch demand from consumers for GMO products. Farmers are in business, but we control what they grow by demanding non-gmo.

  • Report this Comment On May 14, 2013, at 5:27 PM, funfundvierzig wrote:

    DuPont's unethical Management tried to steal and use Monsanto's superior patent-protected biotechnology without paying for it. After being sanctioned for fraud by U. S. DIstrict Court Judge Richard Webber, and facing a jury award to Monsanto of $1 billion (potentially increased to $3 billion because the conduct of DuPont officials was so egregious and deliberate), DuPont struck the deal. The licensing arrangement specifies that a minimum of $1.75 billion be paid over the next few years to Monsanto beginning in 2014. That's a lot of money, increasing Monsanto's profit margins and dampening DuPont's.

    DuPont Management has yet to learn after so many documented misdeeds that a CHEAT-to-COMPETE culture does not build shareholder value; it demolishes it. ...funfun..

  • Report this Comment On May 15, 2013, at 1:08 AM, groggy920 wrote:

    What a ridiculously biased article. Did you read the court transcripts? The grower, Mr. Bowman, bought soybeans that are intended for animal feed, but that he knew contained a high percentage of Roundup Ready herbicide tolerant beans. He then sprayed Roundup on the crop (no farmer would ever do this unless he knew he had Roundup Ready beans) not just once to segregate the RR Beans from the non-RR beans, but every year for 8 years to kill weeds.

    Any farmer who doesn't want to buy Monsanto's technology and sign the agreement that they won't save seed are free to do so. There are hundreds of "public" varieties of soybeans available from independent seed companies and universities. They can save those seeds to their heart's content. What they can't do is steal a product and not pay for it.

    The "Monsanto sues poor innocent farmers" story is pure urban legend. In the 17 years that biotech crops have been available, there have been +/- 150 court cases (there are approximately 400,000 growers who farm corn, soybeans and cotton every year in the U.S. - times 17 years - that’s 6.8 million opportunities for Monsanto to sue farmers). Court documents are public records and available to anyone. Read them. Every story is the same - the court finds that the grower willingly planted Monsanto's technology, benefited from the technology, and did not pay for it. Look up OSGATA vs. Monsanto (the court transcripts - not the propaganda websites). In this case, some organic growers tried to sue Monsanto to preemptively try to "halt" Monsanto's ability to sue them if their biotech products showed up in organic fields. The judge threw the case out because she found that what OSGATA was trying to prevent has never actually happened or been attempted.

    Mr. Bowman did not do what "farmers traditionally (do)" anymore than shoplifters are just doing what regular shoppers traditionally do.

  • Report this Comment On May 15, 2013, at 7:25 AM, funfundvierzig wrote:

    groggy920,

    Your legal synopsis was one of the most lucid and perceptive I have ever read. In short, Mr. Bowman was stealing from Monsanto and its shareholders.

    ...funfun..

  • Report this Comment On May 15, 2013, at 7:52 AM, TMFmd19 wrote:

    @groggy920 - Just an FYI - I hope you noticed that the disclosure at the bottom states that I have a net long position in Monsanto. So if there is a ridiculous bias, its not the direction you seem to think.

    Matt

  • Report this Comment On May 15, 2013, at 6:27 PM, groggy920 wrote:

    Sorry Matt - I did not mean to insinuate that you were biased in promoting your investment position. I have too much respect for MF to think that is your agenda. I just simply think that if someone read your article, then read the transcript of the court proceedings, they would come away with two very different interpretations of the case. I challenge you to look at some of your word choices and statements:

    -Is 53% share (when you add in DuPont and Syngenta) really "control of the commercial seed world"?

    -Can a case really be made that this lawsuit is "morally reprehensible"?

    -Does a Supreme Court win really mean that Monsanto is “the U.S. Government’s Favorite Agricultural Company”?

  • Report this Comment On May 16, 2013, at 8:40 AM, TMFmd19 wrote:

    No problem - I've just noticed in writing about Monsanto that the opinions are very strong on both sides and those that comment sometimes miss that these articles are written from an investment perspective.

    So, what I was trying to do is point out that Monsanto isn't doing anything wrong in protecting its IP, however, I understand that some won't invest in the company because some really do find lawsuits against farmers (or GME's in general) to be morally reprehensible (BTW - you should check out the WSJ's article on this if you want to see some interesting word choices).

    I can understand not liking some of the word choices, but again I was trying to point out that this case, while seemingly small, is big for protecting profits for the group that now controls more than half of the commercial seed market. It's strengthens the moat.

    So, again in the context of the fact that I have a long position in Monsanto, I tried to stay middle of the road..and sometimes by doing that you get hit by both sides :)

    Matt

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