Monsanto: Need for Seed
By: Brad Wood & Anderson Petergeorge
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
Monsanto is the leading producer of agricultural products designed to increase crop yields and reduce harvest volatility. These products fall into two distinct segments: herbicides and seeds. Like a pharmaceutical company, Monsanto invests heavily in R&D to develop products protected by intellectual property. These products are seeds modified through selective breeding and the insertion of genes from other species to gain traits such as resistance to herbicides and insecticides, improvement in yield, and reduction in water usage. Monsanto then bundles them with the herbicide products they are designed to resist, and sells them.
Genetically modified (GM) seeds benefit farmers by increasing their productivity, with higher yields and less required labour offsetting the premium charged for the seeds. Further, in certain commodities, such as corn and canola, it is not economical to grow unmodified seeds. As with pharmaceuticals, the barriers to entry are high due to IP development costs. Monsanto currently has a competitive advantage over DuPont and Syngenta, the other major crop science firms, who rely on licensing Monsanto patents.
Over the next 20 years, the global population will rise 17% to 8.4 billion people. Demands on agricultural productivity will rise as per capita food consumption in developing countries increases with prosperity. Monsanto is well positioned to deliver solutions to farmers worldwide.
Shifting Soil
Misinformation about Monsanto’s products and enforcement of intellectual property has garnered criticism from environmental and health activists. There is scientific consensus that Monsanto seeds are safe for consumption with regulatory approval from bodies including the Food and Drug Administration. Nevertheless, activists argue the long-term effects of GM foods are unknown, and call for mandatory consumer labelling on all products containing genetically altered crops. This would result in labelling on 70% of items in a typical North American supermarket.The risk inherent in Monsanto’s business can be seen from the EU’s introduction of mandatory consumer labels in 2004. Worried that GM foods would be less appealing to consumers, food manufacturers switched to higher cost non-GM ingredients. For example, Coca-Cola and Pepsi switched from GM high-fructose corn syrup to regular sugar. These decisions decimated Monsanto Europe, and in 2013 they stopped seeking regulatory approvals on the continent.
Monsanto realizes 60% of their revenues in North America, where similar arguments seeking mandatory labelling are currently underway. To prevent this eventuality, Monsanto and their competitors engage in heavy lobbying. However, these decisions are predominantly outside of corporate control, so strategies to alleviate the potential damage a regulatory ruling could cause in the US should be employed. Monsanto should diversify revenues into international markets.
Predicting the Weather
Monsanto has already made moves to increase its competitive positioning. In the fall of 2013, Monsanto acquired Climate Corporation, a Silicon Valley start-up that has developed models to forecast the impact of weather and climate on agricultural development. By integrating these models with soil conditions and historic crop yields, they offer crop insurance to farmers. Their product, called Total Weather Insurance, automatically sends payment to the insured farmers as soon as certain weather conditions occur. This has the advantage of not requiring verification costs, unlike other crop insurance products.
With this acquisition, Monsanto is looking to optimize profits by moving towards offering an integrated bundle of agriculture products and services. First, they provide advice tapping into the Climate Corporation’s expertise, on which crops to plant, and when to plant, fertilize, irrigate, spray, and harvest. Second, they sell seeds genetically optimized for particular climate locations, and herbicides to which these seeds are resistant. Finally, Monsanto offers insurance to reduce the risk of crop loss. The expansion into insurance in particular gives Monsanto the potential to capture market share from its competitors. Understanding its crop technology and advice will minimize the risk of crop loss. Further, a discount can be offered on insurance premiums if farmers plant and spray Monsanto products. The move to integrated services also affords Monsanto protection against patent expiry. The patent for Monsanto’s first generation Roundup soybeans is expiring in 2015. So far, about 50% of farmers have converted to their new Genuity Roundup seeds, but this remains a risk for future patent expiry. The other aspect of this integrated offering is providing seeds that are tailored specifically to the geography and soil of certain regions. Monsanto’s product pipeline includes a number of innovations that could have a substantial impact on agriculture in developing nations. Among the developments are drought resistant corn, and higher yielding wheat crops. These products coupled with this new full service business model have the potential to deliver a high adoption rate for new products. The opportunity for GM crops to improve agriculture in developing economies is substantial, especially because the current production in these countries is far less efficient than in countries with industrialized agriculture practices.
Where to Plant?
High economic growth, foreign direct investment and swelling populations make African countries prime hunting ground for savvy investors. In Sub-Saharan Africa, crop yields are the lowest in the world, creating opportunity for Monsanto’s products to have an enormous impact. Sub-Saharan corn farmers realize 2 tonnes per hectare, while North American growers are able to harvest close to 9 tonnes per hectare. Some of this disparity is explained by inefficient agricultural methods and limited technology in Africa, but part is also due to the lack of GM crops. As an example, the introduction of Monsanto corn in the Philippines, where agricultural sophistication was low at the time of introduction, increased yields by 24%.
Monsanto already has a market share of 40% in South Africa, serving as a solid base for expansion to other countries. In order to spread fixed costs, develop a word of mouth reputation, and establish relationships with government and distributors, Monsanto should cluster its resources and target a specific country. Nigeria has the fastest growing market in Sub-Saharan Africa with a current population of 170 million projected to increase to 400 million by 2050, and current annual GDP growth of 7.6%, making it a prime candidate. Despite 60% of the current population working in agriculture, the country is still a net importer of food. The government estimates that only 10% of the arable land is optimally employed. Nigeria’s government recognizes the problem and Akinwumi Adesina, the Agriculture Minister, is taking an active role to promote rationalization and investment, including construction of a new fertilizer plant. In contrast to neighboring Uganda and Kenya, the government has not taken a stand against GM seeds.
There are many hurdles to overcome in order for Monsanto to succeed in Africa, including the weak intellectual property protections, and an inability for farmers to finance their business needs. In the Indian market, farmers took on debt to purchase Monsanto seeds, and, after crop failures, hundreds of farmers committed suicide. Monsanto was blamed for these deaths. While this issue is far more complex, these accusations have been made because some farmers in the developing world have struggled to pay the higher prices of GM seeds particularly when adverse weather conditions precipitate crop failure. Incidents of this nature hurt Monsanto’s ability to penetrate already skeptical developing markets.
Choosing the Crops
Adoption of GM seeds and the economics of farming in Africa can increase seed costs by 35%, but improved yields lead to an increase in total profits. To successfully create these benefits in Nigeria, Monsanto must adapt to the unique dynamics of the developing African market, address IP risk, find a way to solve farmers’ inability to pay for Monsanto seeds, and ensure that farmers are using methods that facilitate the benefits of GM seeds. Monsanto’s business model in North America cannot simply be transplanted into a fundamentally different business environment.
Funding the Purchase
The first issue that Monsanto will face is overcoming farmers’ inability to pay for Monsanto seeds and related services. Given previous experience with farmer’s taking on debt to pay for Monsanto seeds, they should instead provide seeds to farmers for free. Monsanto would seek to recoup its costs from farmers at the end of the growing season, when they would take a share of the farmers’ revenues.
Ancillary Services
Further, Monsanto should leverage the resources Climate Corporation provides to actively offer farmers advice and best practices to ensure optimal yield. Not only will yield increases improve the revenues that Monsanto sees, but it will ensure that farmers see a clear benefit to the engagement with Monsanto, leading to a sustained relationship.
Repayment Risk
While this new inverted revenue model would help to drive adoption, there is a large repayment risk that Monsanto will be accepting. As such, Monsanto should expect to take losses on some first generation relationships with farmers; however, this will be a short-term pain. Rather than pursue the traditional route of suing these farmers, Monsanto should simply endure the loss and stop doing business with them. Over the long term, farmers will see the financial benefit of allying with Monsanto and unpaid debts will decrease. Monsanto can also decrease the downside risk by implementing a phased pilot approach, where they decrease the overall risk exposure in early stages of expansion by working with farmers that have a lower risk to default (larger farm size, willingness to adopt). This pilot project will set a precedent for neighbouring farmers and increase the amount of farmers wanting to do business with Monsanto.
Payment risk can also be avoided through working with other organizations that buy food from farmers. By inserting itself in the selling process, Monsanto ensures that it can collect its payment by taking its cut out of the food buyer’s payment before passing it on to the farmers.
New Products
The potential value of this solution is furthered by Monsanto’s pipeline of new products, which have the potential to deliver extraordinary value in Africa’s drought stricken growing conditions. Monsanto and BASF are collaborating to produce stress resistant crops, including those, which can be grown with less water and under hot conditions. The current generation of these seeds are not effective enough to be commercially viable, but it is conceivable that within a decade Monsanto could possess a revolutionary new seed technology. If Monsanto establishes a distribution network and relationships now, it will be ideally positioned as these innovations reach market.
Sowing the Seeds
Economic historians argue that it was the advancement of agricultural techniques in eighteenth century Britain that brought about the industrial revolution. The application of enclosure, crop rotations, and selective breeding to farming freed up labour to work in more value added industries. Currently, 41% of Nigeria’s GDP is agriculture based, and by driving improvements in agricultural productivity, Monsanto can be an agent to stimulate economic growth in other areas.
Through simple innovations in its business model, Monsanto has the opportunity to diversify away from its North American regulatory risks, increase overall revenues, and position the company for long-term success in a rapidly growing market.
