Monsanto: Turn Rising Food Prices Into Profits

Monsanto (NYSE: MON) makes genetically modified [GM] seeds. GM seeds are designed to exhibit certain desirable traits. For example, one of Monsanto's most popular current products is Roundup Ready corn. Roundup is MON's popular brand of weed-killing herbicide; Roundup can be applied directly to Roundup-Ready corn without negatively affecting the corn plant. Meanwhile, the Roundup will kill all of the weeds in the cornfield, boosting corn yields per acre.

MON makes seeds designed to offer protection against diseases, pests, weeds and environmental conditions for all sorts of crops. Even better, MON is a leader in stacked traits -- seeds designed to exhibit more than one beneficial trait. For example, MON's triple-stacked corn protects against rootworm, corn borers and offers Roundup resistance. By stacking multiple traits, MON is able to significantly boost corn yields per acre; in addition, some of these pest control traits reduce the need to apply pesticides to crops.

MON's main competitive advantage lies in its GM technology. The company has developed or purchased some of the most desirable GM traits; those traits are proprietary, and as a result, competitors can't copy MON's technology. MON is also a leader in stacking -- by the end of 2010, MON will introduce its SmartStax corn with a total of eight desirable traits. The launch will take place at least two or three years before the company's main rivals introduce similar products.

In addition, MON is developing some new, promising traits such as drought resistance. Given water shortages across many key crop-producing regions of the world, this promises to be a truly blockbuster trait for MON.

As for growth, global agriculture markets have been on fire recently, with the prices of wheat, soybeans, corn and other basic food commodities surging to new multi-year highs. There are two main drivers of this trend: rising consumption of agricultural commodities in emerging markets and increased consumption of crops for biofuels production. As consumers' incomes rise in the developing world, meat consumption is soaring, powering demand for basic crops like soybeans and corn to use as feed. And new biofuels mandates in the U.S. and E.U. are pushing demand for ethanol and biodiesel; this is also boosting demand for agricultural commodities.

As a result, farmers are looking to maximize their yields per acre to improve production and take advantage of higher prices -- MON's products are one of the only ways to boost yields.

MON's triple-stacked corn continues to gain share in the U.S., and that trend should continue over the next few years, as few competitors offer a competing triple-stacked product line. And MON also has room to expand in other key agricultural markets such as Brazil and China where GM seed penetration is lower than in the U.S.

MON is a market leader in the GM seed business, and the firm is at least two years ahead of its competitors with new stacked products. As a result, MON should see growth topping +37% over the next few years. Meanwhile, the company trades at just over 30 times 2009 earnings estimates; it's rare to see a market leader like MON trade at a discount to its long-term growth rate.