Few companies are accompanied by more misinformation than agricultural biotech firm Monsanto (NYSE:MON). The most ironic part of the controversy surrounding the use of yield-boosting genetic traits and herbicides -- nothing more than tools in a farmer's toolbox -- is that both the company and its opposition want the same thing: a more sustainable agricultural system. They may have differing views about how to achieve that goal, but if you think the world needs less of the company's technology, then you need to see one chart. It could change your mind.
More food + less land = help us, technology!
Throughout human history, as the world's population has grown, so, too, has the amount of arable land converted into farmland. It's quite simple when you think about it. If a city needs more housing, then it may consider clearing older lots to make way for additional living spaces. It's the lowest hanging fruit.
But we're reaching an inflection point in agriculture that complicates that simple principle of expansion. The world has nearly exhausted its land reserves available for farming. In fact, the amount of farmland is expected to shrink in the coming decades -- continuing a trend already in place. Urbanization, which reclaims farmland and lures rural citizens into cities offering new ways of life, is the main global culprit, especially in emerging economies in Asia and South America. Even the United States lost 29 million acres of farmland, representing 3% of its total, from 2000 to 2012.
That means humans will need to find a way to increase the amount of food produced from land already dedicated to agriculture. Put another way, agriculture needs to build skyscrapers instead of single-housing units on empty lots. To do that, farmers will need to rely on yield-boosting technology more than ever. Here's the chart that demonstrates that point:
Global demand for corn and soybean increased 24% and 21%, respectively, from 2007 to 2013. Farmers met demand by boosting production through a combination of improving yields (technology) and adding more farmland (simple expansion). As the chart illustrates, roughly 40% of increased corn production during the period came from improving yields, while the remaining 60% bump was derived from land expansion. Similarly, roughly 85% of increased soybean production came from improving yields, while the remaining 15% was derived from land expansion.
Good luck replicating that in the current five-year period that ends in 2019.
Global demand for corn and soybeans is expected to increase 8% and 20%, respectively, during the period. Yet, the additional production for each crop will be overwhelmingly dependent on improving yields (technology) instead of the historical low-hanging fruit presented by land expansion. That presents a daunting challenge, but Monsanto is ready to answer the call.
Solutions are on the way
Monsanto is developing and deploying several novel platforms aimed directly at the agricultural headwinds calling for enhanced yields. It may come as a surprise to many, but new genetic traits are only part of the solution. In fact, CTO Rob Fraley recently admitted that the company's research and development pipeline is in the midst of graduating from the days of being focused solely on breeding and biotechnology. Consider the new technologies -- some of which aren't usually associated with Monsanto -- that will help farmers meet demand with less farmland:
- The Climate Platform: You probably don't think of Monsanto when you think of the Internet of Things, but the company has invested in a portfolio of robust software tools capable of enabling farm equipment to run autonomously to give individual farmers the best shot at success for their farm -- down to the row.
- Microbials: In a partnership with industrial biotechnology leader Novozymes, Monsanto is developing an array of microbial products. In simpler terms, the pair will coat seeds with beneficial, naturally occurring soil bacteria that will increase plant health, pest immunity, and yield after planting. The average yield improvement achieved in early trials was 2%. Although not much, it's a relatively simple way to increase yields that doesn't require any change in farmer behavior. It also represents one-quarter of the production improvement required to meet increased demand.
- BioDirect: Monsanto is developing a suite of topicals that can be applied to crops to selectively target pests without harming other organisms present in the environment. The RNAi technology is even being developed to protect honeybees from several viruses contributing to their decline.
In addition to the new platforms, Monsanto has deployed its Intacta Roundup Ready 2 PRO soybean trait, which was planted on more that 12 million acres in just their second year on the market (a record for soy). The company is also expecting its Roundup Ready Xtend Crop System to be planted on a majority of the world's 200 million acres dedicated to soybean. Considering that global demand for the crop is expected to increase 20% by 2019 compared to 2013 levels, the company's momentum for the crop is encouraging for farmers and investors alike.
What does it mean for investors?
It may sound strange that some of Monsanto's newer platforms will create a world that uses fewer inputs such as synthetic fertilizers and pesticides -- some of which it sells -- but the company knows higher value, higher margin products will replace older, less advanced tools. And that doesn't have to be a bad thing. Agriculture's growing dependence on technology will be a boon for individual farmers, who will be able to produce more food to sell, and the environment, which will gain from the industry's increasing efficiency. Sure enough, it also ensures that individual investors will continue to see market-beating returns. It's a win-win-win.
Maxx Chatsko has no position in any stocks mentioned. Check out his personal portfolio, CAPS page, or previous writing for The Motley Fool, and follow him on Twitter to keep up with developments in the synthetic biology field.
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