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Monsanto and China: A Match Made in Heaven?

The market opportunity is massive, but questions remain.

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With the North American market nearing saturation,  Monsanto (MON) has increasingly looked outside the United States for growth. Currently, Brazil and Argentina are the major international markets driving gains in the company's top and bottom lines. In fact, for the first time in its history, the company expects that more than half of gross profit growth in fiscal 2012 will come from international markets. There are still substantial opportunities for sales and margin growth in South American markets (biotech trait penetration and moving farmers up the technology adoption curve). However, we see a massive opportunity in China, since Monsanto currently generates very little of its revenue from the seed market there. While the market is indeed intriguing, many questions remain.

According to data from the U.S. Department of Agriculture, China is the second-largest corn grower in the world, with 2010-11 crop year production of 177 million metric tons. That compares with estimated U.S. production of 316 million metric tons. Monsanto projects that about 70 million acres are planted to hybrid corn each year in China, compared with about 90 million acres in the United States. Corn yields per acre are far lower in China than in the U.S., giving Monsanto the opportunity to entice growers with higher-yielding seed technology; corn yields in China are equivalent to what U.S. farmers experienced in the 1970s. We don't think seed technology is the sole contributor to yield variations between China and the U.S., however. Chinese farmers do not apply as much potash fertilizer per corn acre as their U.S. counterparts, and they often plant corn in more extreme conditions, leaving more-fertile land to crops such as rice and vegetables. As the world's fourth-largest producer of soybeans, China also presents an intriguing opportunity for Monsanto's oil seed business, but we think the firm will initially focus more on corn as it looks to develop the Chinese seed market.

Jeffrey Stafford does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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