US Wheat Woes: Implications

The recent discovery in the US state of Oregon of a rogue strain of genetically modified (GM) wheat meant for export has precipitated a temporary ban on US wheat shipments by several Asian and European countries and prompted lawsuits against Monsanto Co. The company developed the seeds 10 years ago, but discontinued trials due to consumer backlash.

After the rogue strain’s discovery, Monsanto’s share price broke through multi-month support and wheat prices fell. Monsanto is also being sued for negligence. The company is essentially claiming it doesn’t know how the wheat ended up in the field, but has said it will fully co-operate with the US Department of Agriculture (USDA).

The reason for the outcry is that genetically modified wheat remains illegal despite the widespread use of genetically modified corn. We believe this is because corn DNA is relatively homogeneous: there are fewer individual corn species than wheat, meaning the results of safety tests are more robust. Meanwhile, GM wheat has never been approved for use by the US Food and Drug Administration (FDA).

In the short term, we expect to see a minor decline in both US wheat exports and wheat prices as government agencies both in the US and abroad scramble to ensure other US wheat exports were not affected by this rogue strain.

For Monsanto, we expect the share price to recover and bounce off longer-term support around US$98. Earnings prospects remain strong (the company has revised its full-year earnings guidance for 2013 upwards multiple times) and the company is instituting a cash-based share repurchase programme, which should boost the share price.

Over the longer term, Monsanto faces questions relating to the persistence of its earnings growth. Most of its key markets (namely in the Americas) are already saturated and its products are used infrequently elsewhere because of either cost of lack of popularity. We expect Monsanto to be an average performer within the wider agriculture inputs complex over the next 12 months.