Monsanto Company (NYSE:MON) makes money selling genetically modified (GM) seeds. Though once a broader-scale chemicals company, Monsanto's seeds and genomics business accounted for over 70% of the company's gross profit realized in 2013. Products and tools related to Monsanto's Ag Productivity business, however, are growing much faster than the existing seed business. If the prevailing trends continue, Monsanto may undergo another transformation in its identity in the next 5-10 years.
To say that a transition toward the broader "ag productivity" business is an identity transformation is a bit overdramatic. While Monsanto is best known (and heavily criticized) for engineered seeds, the company's broader mission has been to provide agricultural products and services that support farmers. In essence, Monsanto's mission since the 1980s has been "agricultural productivity." Separating out seeds and genomics from the broader agricultural productivity category is in itself a bit misleading, as any Monsanto proponents would argue that the entire purpose of providing farmers with genetically engineered seed products is to increase agricultural productivity.
That said, Monsanto's use of the term "ag productivity" in financial reporting is a bit broad, and could be better described as "everything but the seeds." While there is still remarkable growth yet to be realized in engineered seed due to the potential in undeveloped crops and ever-growing food demand, Monsanto's non-seed businesses are what will be providing investors with the biggest returns a decade from now.
Making the transition
Monsanto has redefined itself a few times over the past century by identifying and capitalizing on emerging markets. From artificial sweetener to plastics to engineered seeds, the key to growth for Monsanto has always been in investing in research and development, and successfully recognizing what new developments would make the largest market impact.
The other critical component of Monsanto's past success that is still in play today is its ability to grow a developing technology at a pace faster than competitors. What makes the company so successful at new product development is the fact that it has a strong and profitable base technology that can feed the research needed to expand smaller yet resource-consuming endeavors.
What is Monsanto's next big business?
The more recognizable crop protection products, like agricultural herbicides paired with genetically modified crop seeds, provide a base from which Monsanto can expand. Though developing crop seeds with new traits comprises the majority of the Monsanto pipeline, Integrated Farming Systems composes the remaining innovation, and may be where the company finds its best avenue for long-term growth.
It is hard to know if the movement against genetically modified organisms (GMOs) will ever take hold, but if or when it does, expect Monsanto to be a step ahead of the competition in the move to new agricultural technologies. Should the U.S. move toward GMO-free foods and feeds, the challenge that farmers will face is the need to increase crop yields without the protection provided by engineered seeds.
Insects and weeds are not going to disappear, but Monsanto is betting that extreme climate fluctuations will present farmers with their biggest threat to crop productivity, and they are developing the data-analysis tools necessary to help farmers manage and adapt to climate change. The foresight of Monsanto comes at a time when the public's concern about global climate change is actually dropping, in spite of anecdotal and hard evidence indicating otherwise. Data collection and analysis is also at the core of Monsanto's FieldScripts offering that looks at seeding rates and depths and seed types tailored to exact field conditions and yields. Again, Monsanto will be at the forefront of what could evolve into a huge market opportunity, while its rivals are still chasing engineered seeds.
The key moving forward for Monsanto will be to remain ahead of the competition in its existing seed technology company while still diverting enough research and development resources toward the development of the next big thing. Competitor DuPont (NYSE:DD) has engineered herbicide-resistant and insect-resistant corn seeds as well as nutritionally optimized soybean seeds, but in the big picture, DuPont's growing agriculture segment, which brought $1.5 billion in total net sales in 2012, pales in comparison with Monsanto's agriculture net sales (which equate with total sales because agriculture is all it does) of $13.5 billion in 2012. Though the main patent on Monsanto's Roundup-ready soybean seed expires this year, the technology has evolved so much since its original development that the only major consequence of the patent expiration is the loss in royalties from licensing to DuPont and other competitors.
Over the long haul, Monsanto has proven to investors that it is a company that will evolve to sustain growth. GMOs may be the current moneymaker, but unlike its competitors, Monsanto is looking past engineered seeds to insure itself (and farmers) against whatever the market might bring.