Use access key #2 to skip to page content.

NaveenKumar (< 20)

No Lucky Charms earned yet.

Crop Biotech: A Wealth Creation Opportunity

Recs

0

March 09, 2016 – Comments (0) | RELATED TICKERS: FTAG , MON , DD

In 1996, the application of biotechnology in agricultural production became a reality with the launch of genetically-modified (GM) crops. GM crops became an instant success, reflected in the fact that nearly 148 million hectares of GM crops were planted in 2010, a nearly 87-fold increase over the 1.7 million hectares planted in 1996. Although the use of GM crops has remained concentrated mostly in the US, nearly 29 countries used GM crops by 2010, including 19 developing countries. An impact assessment of GM crops indicates that GM crops have increased both crop yields and profitability. For example, since the commercialization of GM crops started in 1996, economic gains of $51.9 billion have been achieved (through 2008). 50.6% of these gains are accounted for via a reduction in production costs and 49.6% via substantial yield gains.[i] With the improvement in yields expected to fulfill 90% of crop demand growth by 2050, the success and growth of crop biotech is critical to achieving food security for future generations.

Crop biotech is highly concentrated field with only three companies - Dupont (DD: NYSE), Monsanto (MON: NYSE) and Syngenta (SYT: NYSE) - having rights to produce and distribute GM seeds. Crop biotech is also used extensively in crop protection (insecticides and pesticides). The top 6 crop biotech companies in the world control nearly 74% of the global crop protection market ($57 billion) and 62% of the global seed market ($40 billion).

With the proposed merger of Dupont (DD: NYSE) and Dow Chemical (DOW: US), which would create a crop biotech firm with a 25% share of the global seed and 16% share of the global crop protection markets, the crop biotech space is on track to become even more concentrated.

 

The strong market positions of these types of companies can be attributed to significant R&D investments made over the last 10 years. For example, over this period Monsanto (MON: NYSE) invested nearly 10% of its sales in R&D on a consistent basis, with its R&D investments totaling $13 billion over the same period.

The success of the R&D efforts of crop biotech companies can be gauged by the fact that yields for corn and soybean in the US have remained nearly double that of China (Figure 4). It is also worth noting that the gap between yields for these two countries expanded significantly in the last 10 years, which can be attributed to the high level of penetration of GM seeds in the US. At present, more than 80% of corn and soybean in the US is produced through GM seeds.[i]

Due to their success and dominance, some crop biotech companies are now acquisition targets as the industry attempts to consolidate and create synergies. In addition to the proposed DuPont-Dow Chemical merger, which would create an entity with more than $100 billion in annual revenues, ChemChina has offered to buy Syngenta (SYT: NYSE) at a lofty valuation of 16.7x EBITDA, compared to the crop chemicals average of just 8.6x.

Due to the fundamentals of the space, crop biotech has become an interesting potential opportunity for investors. Ownership of critical technical know-how, which is pivotal to global food security, has remained with a few listed private corporations, and these companies, which may be attractive acquisition targets, could represent a lucrative investment proposition for investors.

How to Invest

While there are a number of funds available to investors interested in the Agriculture sector in general, the First Trust Indxx Global Agriculture Index ETF (FTAG: NASDAQ) is the only fund in market that provides suitable exposure to the crop biotech opportunity. As of January 31, 2016, the top five companies in crop biotech, including GM seeds and crop protection firms, have nearly a 41% weight in the fund. The ETF seeks to track the Indxx Global Agriculture Index (IGAI), a market capitalization weighted index designed to measure the performance of companies which are directly or indirectly engaged in improving agricultural yields. The index is comprised of farmland companies and firms involved in chemicals & fertilizers, seeds, irrigation equipment, and farm machinery.

For more information on the index, please visit http://www.indxx.com/globalagriculture.php


[i] http://www.ers.usda.gov/amber-waves/2014-march/adoption-of-genetically-engineered-crops-by-us-farmers-has-increased-steadily-for-over-15-years.aspx#.Vtbri_l97IV

 

 

 


[i] http://www.sciencedirect.com/science/article/pii/S1687157X11000266

0 Comments – Post Your Own

Featured Broker Partners