Monsanto Becomes a Biotech on the Move

Furthermore, the company finally is having success at collecting royalty fees from grain handlers in Brazil, where growers had been purchasing Roundup Ready soybean seeds on the black market. This is an encouraging first step in a market that has very large potential for Monsanto and could add meaningfully to earnings in coming years. The company reportedly also is considering collecting royalty fees in Argentina as well, where roughly 90% of the soybean crop is Roundup Ready, compared with 30% in Brazil.

Near- and Long-Term Promise

The development of new traits, such as YieldGard Plus for corn, which was just approved for sale in Japan, also could provide good news for Monsanto's shares. Beyond enhanced weed and insect control, drought tolerance is the most promising new area. According to a recent report by Merrill Lynch analyst Don Carson, drought and heat account for three-quarters of the decline in yield on U.S. corn and soybean crops, so improved resistance to harsh weather conditions would have a potentially enormous appeal.

But while the company continues to focus on traits that will help the world's crop growers improve productivity, it is increasingly focusing its research and development efforts on what are called output traits, or those that will benefit the consumers of those crops: people and animals. For example, the company is developing corn and soybeans with higher levels of a certain amino acid that currently is added to animal feed as a supplement. In addition, the company is working on the development of soybeans that will contain omega-3 fatty acids, which are beneficial to the heart and could help reduce the risk of cardiovascular disease.

While the long-term picture for Monsanto looks promising, investors can be reassured in the near term by the company's strong financial condition. This should make its ongoing litigation exposure -- such as with Delta and Pine Land(DPL Quote) -- as well as its exposure to certain Solutia pension and health care liabilities much more tolerable. Indeed, on the second-quarter conference call, Monsanto CFO Terry Crews raised the company's expectations for free cash flow this year (before dividends) to $500 million from between $350 million and $400 million. Monsanto's balance sheet remains very healthy with a net debt-to-capital ratio of less than 20%.

While optimism in the farm belt may prove short-lived, investors in Monsanto could have a lot to look forward to for many quarters to come.