When Monsanto (NYSE:MON) acquired The Climate Corporation on November 1, it effectively took control of all of the variables that farmers cannot control on their own. The goal of the acquisition is to provide farmers with more information and tools regarding the climate, and is in-line with Monsanto's goals of improving agricultural productivity.
Monsanto understands basic biology
Elementary school biology taught us that to grow a plant, one needs a seed, sunlight, and water. Monsanto, DuPont (NYSE:DD) and Syngenta (NYSE:SYT) all provide the one major purchased component that all crop farmers need: seeds with which to grow their crops. Beyond the planting, there is plenty of discrepancy on the other inputs from pesticides to fertilizers, but the seed is the one absolute investment requirement for crop farmers.
A century ago, agriculture was a self-sustainable business where seeds were saved from season to season, fertilizer was provided on-farm by livestock, and pesticides were natural products that were used scarcely by today's standards. The twentieth century saw a radical change in agriculture, as the Haber Process revolutionized fertilizer and transformed it into a commodity business and chemical companies developed and marketed pesticides that enabled more consistent crop yields.
Monsanto's contributions came late, but have since spurred a second agricultural revolution. The commercialization of Roundup herbicide in 1976 and the subsequent introduction of Roundup Ready Soybeans twenty years later changed the playing field. Monsanto's Roundup Ready Seeds and the Pioneer Hi-Bred products now owned by DuPont were created in response to farmer demand, with farmers seeking to get the highest yields from their crops. Seeds have since become an absolute consumable, and farmers' dependence on Roundup translated into Monsanto seeds being a no-brain decision.
Why Monsanto is making a climate move
Increasing crop productivity is Monsanto's (and DuPont's and Syngenta's) business. Like the productivity-increasing agriculture products of the twentieth century, Monsanto sees the weather-predicting prowess of The Climate Corporation as not only a tool to help increase crop productivity, but also as a business capable of producing substantial annual returns. Monsanto may be taking what looks like a huge $1 billion risk on the acquisition, but the move makes complete sense if one looks closer at what Monsanto has been developing beyond just seeds and pesticides.
Monsanto engineers plant traits that enable healthy growth under extreme conditions. Roundup Ready Seeds were an early example, where plants were engineered to withstand a broad-spectrum herbicide that made for less-than-hospitable conditions for the plants. More recently, Monsanto, in conjunction with BASF, has shifted some of its efforts to developing crops that can produce high yields despite extreme environmental conditions like drought. Paired with other efforts, such as its research to increase crop productivity while conserving water resources at the Water Utilization Learning Center and the voluntary participation in the Chicago Climate Exchange, Monsanto has demonstrated an interest backed by significant investment in climate and environmental matters.
Furthermore, Monsanto already invests significant resources into collecting and analyzing crop and weather data. The tools provided through the acquisition of The Climate Corporation will build on Monsanto's existing efforts and will complement their existing Integrated Farming Systems research platform. Farmers' utilization of these resources will have some price tag associated with it, whether it be in the form of a direct fee for the services or a less measurable impact related to increased yields from Monsanto products that expand the seed technology dominance already imposed by the company.
Sunny skies ahead
Monsanto is mostly alone in taking a direct approach to address the effects of climate conditions on agricultural productivity. Syngenta and DuPont create and are developing products to withstand extreme environments, but Monsanto's investment to provide farmers with tools that may reduce weather-related risks is a direct and forward-looking approach that will pay off for Monsanto.
Fool contributor Shamus Funk has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.