Monsanto (NYSE:MON) is one step closer to releasing its first new genetically modified soybean product in more than a decade, but it will be a few years before it sees any profits from the new seeds.
The company announced Tuesday that it had received U.S. and Canadian approval for its Roundup RReady2Yield soybeans. (Yes, that double "R" is supposed to be there.) Since much of the soybean crop is exported outside the U.S., Monsanto will need to wait for importing approval from other countries before it can successfully launch the product. The company has applied for marketing approval in the European Union, China, Japan, Mexico, and elsewhere. It expects that the approvals will be completed for a limited launch in 2009, with nationwide distribution in 2010.
Three years of field-testing has demonstrated that the new seeds have a 7%-11% increase in yield over the first-generation seeds launched in 1996. The higher yields for farmers should allow Monsanto to charge more for the seeds. And since the seeds don't cost any more to produce -- now that the research and development is paid for -- the new seeds will help increase Monsanto's gross margins.
If the vision of increased yields can convince new customers to start planting the crop, Monsanto will get a double boost to its top-line growth. It increases its seed sales, but it also sells more of its herbicide, Roundup. Such herbicides made up 30% of Monsanto's sales last year, much of which is driven by the Roundup Ready product lines.
While the new seeds don't have any revolutionary traits, they will act as a building block for Monsanto to add other traits and expand its soybean product line. Hopefully, its new partnership with BASF (NYSE:BF) will accelerate additions of traits such as healthier oil content or drought resistance.
According to estimates by the Department of Agriculture, Monsanto's Roundup Ready soybeans accounted for 91% of soybeans grown domestically this year. The new beans should help Monsanto keep its edge against tough competition from Syngenta (NYSE:SYT) and Pioneer Hi-Bred, a DuPont (NYSE:DD) subsidiary.
The company hasn't said how much it will charge for the new seeds, but it generally splits the increased income with the farmers. That would be $12 to $20 per acre of additional revenue, depending on yield and price. Add to that the expected increases in prices because of lower soybean supply, as farmers are lured by ethanol-driven high corn prices, and Monsanto could enjoy record sales growth for the next few years.
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Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool has a disclosure policy.
