Monsanto (MON) is probably the most well known, yet obscure company in the world. And if you know who they are, you most likely have a very personal/intense opinion about them. The reason? A big part of Monsanto’s business is genetically modified crops – and there is controversy about how they grow and supply the seeds for these crops, as well as their dealing with individual farmers who use their products. In fact, if you Google “Monsanto”, the second result is a website entitled “Millions Against Monsanto”.
However, from a finance perspective, Monsanto is a darling. It’s five year return is 16.14%, and it is beating the S&P500 by a whopping 29%. If you look at the run for the last 10 years, Monsanto has returned a huge 683.72% (and that is half of what it was at the peak in 2008 before the financial crisis). So, what does this company offer financially? Well, it happens to be the same thing that many environmentalists are up in arms about.
Monsanto’s Business Model
Monsanto has a very good business model from a financial perspective:
- Make genetically modified seeds that are resistant to many of the problems facing non-altered seeds
- Higher Yields
- More drought tolerant (means less water expense for farmers)
- Resistant to pests and diseases
- Make them resistant to your proprietary brand of pesticides and herbicides (weed killer)
- Dominate 49% of US agricultural production (focusing on corn and soybeans, as well as wheat, cotton, and more)
- Force farmers to buy your “add-on” products like pesticide since it is the only chemical that your seeds are resistant to (otherwise, if you use other products, you have to use more expensive methods to apply the chemical)
As a result of the business model, Monsanto is able to keep farmers as customers through the entire lifecycle of growing crops. And because their seeds yield crops that are more attractive, many farmers can’t justify switching back.
The Environmentalist Objection
There are a myriad of reasons why environmentalists and other organizations worry about Monsanto:
- Propagation of genetically altered crops beyond fields and affecting the food supply
- Possible ill effects from eating genetically modified crops (for both people and feed animals)
- Possible ground and water pollution from Monsanto’s chemicals such as herbicide and pesticides
- Monsanto’s government ties to get favorable laws passed through various government agencies
The bottom line is that many fear that Monsanto’s products, such as genetically engineered seeds and pesticides, could have unforeseen consequences in the future. Since the technology is so new in biological time, who knows what will happen in 5-10 years, or longer? Could the entire food supply be in danger?
The Bottom Line
The bottom line is this: would Monsanto do something to jeopardize its future earnings and profitability intentionally? While not getting into the genetically engineered food debate, I don’t think that any company would willfully do something to ruin its future. A company’s job is to maximize its revenue and shareholder earnings for years to come, not just in the present. As such, I think that Monsanto is poised to do this, and I don’t think that it will do something to jeopardize this.
Do you think that Monsanto can be trusted to continue to develop agricultural products? Is there a different in opinion if your are an investor or consumer?