Buy, Sell or Hold: Monsanto Will Reap Big Rewards as Demand for Agricultural Products Accelerates
By Horacio Marquez
Contributing Editor
Money Morning
As the U.S. Federal Reserve and other central banks around the world pursue policies of quantitative easing, essentially devaluing their currencies, the specter of inflation is slowly creeping back into the U.S. economy.
And because none of the world’s policymakers seem to know exactly how much monetary expansion will be necessary, or when it will be time to again tighten the reins by raising rates, I have been successfully playing the re-flation trend.
I believe that this trend will be the most important source of profits, not just through this year, but throughout 2010, as well. So, today, I am going to give you one of my preferred plays: Monsanto Co. (NYSE: MON).
There are many important reasons why I love agricultural commodities, and by extension, love Monsanto.
First, on the demand side, there is a natural bottom for them, since we all need to eat. And, as the price of the PowerShares DB Agriculture Fund ETF (NYSE: DBA) that tracks these commodities clearly indicates, the bubble in these prices is already gone and prices are back to long-term base levels.
The correction has been significantly less severe than in equities, due to the nature of the need these commodities fulfill. But remember that the population of the world keeps growing. And populations in emerging markets, particularly those in the densely populated countries of China and in India, have seen their real incomes grow over the last five years, despite the recent bust.
China’s economy, for instance, actually grew at 6.1% in the first quarter. So the drop has been in the rate of demand growth in China, rather than in total demand.
In fact, the drop in commodities prices has been exacerbated by inventory liquidation. While people and businesses are liquidating inventories, they are actually buying less than they are consuming. Inventories were liquidated because, as financing became scarce, commodity buyers wanted to reduce the cost of financing and carrying those inventories, and also to reduce price risks by moving to “just-in-time” (JIT) purchases.
The problem is that, once you’ve liquidated your inventories. you have to hurry to order more as soon as demand for your products accelerates. And that’s already starting to happen as a wide range of global-stimulus measures gain traction. Thus, you see the beginning of a new bull market in commodities.
My strong contacts with agricultural exporters in Argentina, a top wheat and soybean exporter, confirmed to me that the Europeans are buying hand over fist right now, just to fulfill their just-in-time needs. Furthermore, China is using the recent market implosion to secure long-term commodity supplies around the world. Many believe that China’s demand alone is causing strains in the entire system. But the story does not end there.
China, knowing of the strategic nature of these supplies, has implemented huge reforms in its own agricultural sector. China’s legacy of communist agriculture has left the nation saddled with millions of unproductive single-family operations. So, in order to achieve economies of scale, they have:
- Made farming activity tax-free.
- Allowed farmers to sell or lease the agricultural rights to their land. This not only helps the farmers generate income, it encourages them to move into the city, freeing up large tracts of land for agricultural development.
- And allowed corporations to buy or lease farmland. This will result in huge productivity gains from mechanization, intensive farming, use of sophisticated seeds and fertilizers and corporate financing.
China is spending $9.5 billion on infrastructure and services in the poor countryside to help farmers cope with the economic downturn, The Associated Press reported.
And I am not alone in this line of thinking. I recently heard legendary investor Jim Rogers saying he is sticking with his “C.C.” trades: China and commodities.
But rather than buying the DBA exchange-traded fund (ETF), which tends to be volatile, I’d rather turn to the premier supplier of seeds for this global farming revolution: Monsanto.
Monsanto provides genetically modified seeds that are more resistant to specific weather and pest conditions and deliver superior yields. The company also produces the biotechnology and herbicides needed to control insects and weeds.
Monsanto dominates the industry in these very profitable, long-term niches, and therefore enjoys a sustainable competitive advantage that vastly differentiates it from other, “me-too” agricultural companies. This huge technological lead over the competition keeps opening up and will keep leading to increased market share and profit margins. These advantages also open up partnership opportunities for Monsanto.
You see, the unequaled research-and-development capabilities of Monsanto have enticed firms like Cargill Inc. and BASF SE (OTC: BASFY), which have signed on to co-develop new products.
Monsanto just beat earnings estimates, accomplishing record sales and minimal margin erosion. What other business has achieved that kind of success in this environment? Very few, for sure.
What’s more, at a Price/.Earnings to Growth (PEG) Ratio of about 1.0, this company’s stock is a steal. Consider the company’s stellar 25% return on equity (ROE) and similar operating margin.
The stock will likely double over the next 12 months, even without considering the coming commodities bonanza.
Recommendation: Buy Monsanto Co. (NYSE: MON) at market and hold it for at least 12 months (**). Traders should also be rewarded short term.
(**) – Special Note of Disclosure: Horacio Marquez holds no interest in Monsanto Co.
News and Related Story Links:
- The Associated Press:
China to invest $9.5B to help farmers amid slump - Money Morning:
Buy, Sell or Hold: iShares Gold ETF Will Sizzle When U.S. Stimulus Spurs Inflation. - Wikipedia:
PEG Ratio - Wikipedia:
Return on Equity.
Comment by Cee Howard on 27 April 2009:
Thank you for these articles — the politics of the bank bailout and the Monsanto piece — which help me become better informed.
Comment by morgan p. white on 27 April 2009:
mon traded for$13.50 9years ago. today mon trades for $81.12. A 500% INCREASE. THANK YOU
Comment by Jeff Pluim on 27 April 2009:
Living in Canada, and recently moving from the prairies where I lived most of my 56 years, I am acutely aware of the situations surrounding the genetic seed developments of Monsanto, and the controversy surrounding their business practices. I also recently saw a late night program on the Documentary Channel about Monsanto’s business practices.
In short, Monsanto has developed patented seeds for crops that are resistent their own brand of herbicide. If you happen to have a crop in a field neighboring a Monsanto seeded crop, and the pollen from the Monsanto seeded crop blows into the neighbors field, the neighbor’s crop is cross pollinated with the patented genes. Monsanto is taking samples of neighboring crops and suing the neighbors for using their patented seeds. Their deep pockets are making it extremely difficult for the neighboring farmers to fight Monsanto in these matters.
But worse, far, far worse, is that you must have Monsanto’s herbicide in order to make your genetically modified crop (whether or not the modification was intended or accidental) survive the weeds that attack such crops.
The more natural, weed resistant seeds that have been available in the past, are becoming cross pollinated by the wind, with these less resistant Monsanto seeds.
In the Canadian prairies (I believe that this is also the practice in the USA), it is now routine to spray the entire Monsanto seeded crop, with Round-up, a Monsanto herbicide, two weeks before the farmer wants to harvest his crop. That herbicide is going directly into our food. The implications here are of global, castastrophic proportions. The day is coming when we will not be able to grow naturally developed crops to eat. And the crops that we are able to grow, these Monsanto genetically altered crops, will need to be sprayed with cancer causing chemicals such as Round-up, because they cannot survive natures weeds without the chemicals.
The end result will be people dying from Monsanto induced cancers, and from starvation when we try to return to natural crops, because it will take a generation to re-introduce the natural seeds. And that may not even be possible. The media is just now starting to get wind of the forthcoming catastrophy. When it becomes generally known in the public, count on Monsanto’s stocks to hit the gutter.
Comment by James Yamaki on 27 April 2009:
I just got back from a ten day trip to China to Beijing, Xiang, Suzhou and Shanghai and was impressed at what I saw regarding agriculture. One sees miles and miles of flat land already mechanized in agriculture and also many farms under greenhouses. Our tour guides did not mention anything about agriculture, and I didn’t ask, just observed by sight. Thanks for filling me in on land stewardship and how it is done in China. One big difference between capitalism and communism is land belongs to the central government in communistic countries. From your article, I conclude that farmers have agricultural rights to the land which they lease from the government and allows them to sell if they wish with the onslaught of urban encroachment and larger sized agricultural operations becoming a trend. In my own opinion, Chinese are good farmers comparable to our own. Agriculture did not look backward from what I saw. If what you said is true, China is going to take a big leap forward in agriculture like what it is doing in other economic sectors. Like anything else, things work in cylces and looks like agriculture on a global scale has bottomed out and working its way up again. It is a good time to invest in agriculture and buy Monsanto shares.
Comment by Carol Sterritt on 28 April 2009:
Yes, I am sure that Monster Corporate Gene Enslaver Monsanto will make great gains, and that those who have no souls will easily be pleased in investing.
But ask yourself this – when the predictable famine occurs, now that the genetic genie is out of the box, will it matter to you inner self that you’ve made a bundle? Your grandchildren will need to eat, and they will not be nourished by food containing huge percentages of the RoundUp (Formaldehyde based herbicide) Of course, Monsanto never let on to the EPA that it contained Formaldehyde – that little secret was its own, until forensic witness and PhD Dr Bob Simon revealed to this reporter that court opened papers of Monsanto’s contained this dirty secret. Formaldehyde is carcinogenic.
Already poor farmers in India, who did not realize how enslaved that they would be in paying huge prices (relative to the pittances they live on) in order to obtaint he needed herbicide. They didn’t really understand that without the expensive herbicide, the seeds from Monsanto wouldn’;t grow. ANd the agreements that they signed ensure tha they cannot save any seeds!
Maanwhile, in both the USA and in Canada, any farmers whose lands show plants that are RoundUp ready, must be able to prove that they have been purchasers of this seed. If the seed propagates by itself, too bad – Monsanto still puts the farmer into the court system, where the farmer is usually bankrupted. He has two choices – fight Monsanto in court, and hand his farm over to his attorneys in return for their court preparation, or hand his farm over to Monsanto because he can’t afford the fight.
So in essense, Monsanto has toppled the ability of a small individual to own his own land!
Shame on anyone dealing with this company. You are nothing but swine when you do so. Anyone caring to enlighten themselves should watch the following film
ca.youtube.com/watch?v=c_OJc..PKEYDE
Comment by dinesh on 1 May 2009:
plese send me important sare
will be perfom good.plese tell me some good dare name
and daily news tell me what sare by sell hold.
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Comment by Eliphaz Bagarukayo on 22 October 2009:
Hi Haracio Marquez,
Thanks for the excellent work you are doing for the people of this world,I am very happy, now my request is that you send me a sum of $10,000, as my initial capital to join your business activities as an active partner, Haracio send to STANBIC BANK, CITY BRANCH a/c no 0121060145501, and kindly please inform me when you send.
Best regards.
Comment by Ron Smith on 18 November 2009:
To invest in Monsanto is to admit that you don’t care about the future of food, and by extension, the people of this planet. Monsanto has been shown to have a reckless disregard for the safety of their products, and the people who consume them.
You may make a few dollars now, but your children and grandchildren will pay the price. Is it worth it?