Monsanto (MON +0.00%) is caught in the middle of a unique situation. The anti-GMO (genetically modified organism) movement could be a threat to existing soybean and corn seed sales, while the potential to commercialize genetically modified (GM) wheat could create a huge new market opportunity. Monsanto's decision to either double-down on GMOs or shy away from a jeopardized industry may shape the future of agricultural technology.
A look into the GMO business
Corn, soybeans, wheat, and cotton are the four largest crops in the U.S. in terms of total sales, and wheat is the only one not grown with GM seed. Worldwide, wheat is the most widely grown crop. Advances in wheat crop technology are believed by many to be one of the most promising ways to address food shortages and starvation across the developing world.
In spite of the promise of GM wheat, DuPont (DD +0.00%) and Monsanto both abandoned R&D efforts focusing on GM wheat at the turn of the century due in large part to each company's own market analysis. The decisions made by both companies were likely influenced at the time primarily by the price of wheat and a fear that the somewhat risky R&D investments wouldn't provide a strong enough return. The price farmers pay for GM wheat would have been notably higher than the existing hybrid seeds available, and given the market price of wheat balanced with what may have only been marginally increased yields, farmers may not have been as receptive to GM wheat as they have been to other cash crops.
The other complicating factor from a decade ago that remains in play today is the lingering suspicion that the international community will be reluctant to purchase GM wheat. China made clear their unease with GM crops at the end of 2013 when the country rejected two shipments of distiller's grain that contained corn product originating from a particular genetically modified seed. Stringent regulations on GMOs in the European Union (EU) add to the concern of international acceptance for newly developed wheat strains.
Monsanto and Syngenta (NYSE: SYT) are among the agribusiness giants willing to make the investment in GM wheat in spite of the potential downfalls. Both companies have advanced to the field testing stage, though more extensive testing on crop yields and other desired properties are needed before a commercial release becomes reality. As the technology continues to develop, the public relations battle will rage on between concerned consumers and activist groups at odds with wheat growers and wheat trade groups who are putting their support behind biotech research on the crop.
Getting out of the GMO business
There has always been a portion of the public against GMOs since their less controversial beginnings, and the anti-GMO movement is continually gaining momentum. In spite of falling short on attempts to require labelling of GMO foodstuffs in California and Washington, anti-GMO proponents are gaining more public attention as major food companies like General Mills and Chipotle join the movement.
Monsanto makes more money from the sale of genetically modified seed than all of its major competitors combined, yet the company's seeds and genomics business is not its fastest growing business sector. Monsanto is far from exiting the GM seed business as demonstrated by continued research and development (R&D) investments into new seed technologies, but the company is also investing heavily into other technologies such as climate and field condition modeling tools to help farmers get the most return from their crops. As public sentiment grows increasingly wary of GMOs, Monsanto is creating alternative methods for remaining the dominant agricultural technology company that farmers will continue to rely on for maximizing their yields.
The takeaway
Demand for wheat is projected to increase 40% by 2030, and the expectations for growth are not going unnoticed by the biggest companies in agribusiness. Whether or not GM wheat sales start contributing to the earnings of Monsanto, DuPont, and Syngenta is more dependent on how the engineered crop is received internationally than it is on domestic considerations. Nonetheless, expect anti-GMO activists in the U.S. to make it well known that adding wheat to the growing list of genetically modified seeds will not happen without a fight.
