GM foods: an unexpected European growth story

Producing higher yields and using less water than traditional varieties, GM crops could be the answer to the world's rising demand for food. Long resisted in Europe, they have now been given a tentative thumbs up by the EU, leading to strong investment opportunities. James McKeigue explains, and tips the best bet in the sector.

By James McKeigue

published 4 June 2010

in Features

Genetically modified organisms (GMO) worry critics. But global food demand is set to keep growing strongly. That means investing in so-called "Frankenfoods" could yet prove very profitable.

Governments were given a sharp warning about the tightening of global food supplies when prices for key 'soft commodities' spiked in 2008. That sparked riots in several countries. Prices have since fallen, but the long-term structural challenges remain. The UN predicts that demand for food will increase 50% by 2030.

This is partly driven by population growth the total could grow from 6.8 billion at present to nine billion by 2050. Rising living standards in developing countries, especially in Asia, are also a key factor. As meat replaces vegetables in the developing world, more animal food, water and land will be needed. Crops also provide fibres, such as cotton and ethanol, for biofuel. So agriculture has to use all the resources at its disposal more efficiently. And that includes GM especially as only 9% of cultivable arable land is used to grow GM crops.

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Since the days of the 'green revolution', biotech has evolved from selective breeding to creating purpose-built genetic blueprints for crops with particular properties. GM crops have been created that can produce higher yields, use less water and survive the harshest environmental conditions. Meanwhile, and more controversially, new strains of GM animals, such as 'super-sized' salmon, are being developed to cater for rising meat consumption.

But the introduction of GM has been far from plain sailing. To date, GM crops have been restricted in Europe due to fears of the long-term effects they may have on biodiversity. There are also complaints that they will leave global food production in the hands of a few corporations critics claim that GM seeds are designed to force farmers to buy replacement seeds after every harvest. Religious objections to allowing humans to re-engineer the food chain have also sparked demonstrations in countries such as India.And despite the success of GM cotton in India, the introduction of GM food crops has effectively been suspended following strong opposition.

However, although progress may be slow in some parts of the world, GM crops are a fact of life in others. They have been commercially applied in the US for 14 years and readily adopted by major developing world producers, such as Brazil and Argentina. Crucially, China has recently acknowledged the benefits of GM crops, albeit Beijing seems determined to sponsor the development of seeds independent of Western-listed seed companies.

However, an unexpected growth story is now emerging in Europe where the number of GM crops actually dropped 10% in 2009. The recent EU approval the first of its type in 13 years of a GM potato seed is the first sign that the European market is about to open up. The UK's chief scientific adviser also threw his weight behind GM methods recently.

Sure, investors are up against regulatory, environmental and even religious risks with GM investing. However, similar headwinds faced the original green revolution. And confronted with rising populations, volatile prices and riots, even politicians in Europe are now giving GM a tentative thumbs up. We look at a firm that should benefitbelow.

The best bet in the sector

Many leading GM firms are either privately owned or small divisions of larger outfits. This leaves only two listed, purely agricultural GM companies: Syngenta (NYSE:SYT) and Monsanto (NYSE:MON). Both split their businesses between crop protection, (pesticides) and GM seeds. Monsanto is the more highly geared to GM, which accounts for 62% of sales, compared to Syngenta's 22%.

Yet Swiss-headquartered Syngenta is the better investment. Its seed business is expanding rapidly, with sales up 13% in 2009. Its latest offering, Viptera, an advanced 'triple-stack hybrid seed', that defends corn from 14 types of insect, has been approved by Canadian, Mexican and US regulators. Meanwhile, a licensing deal with DowAgro Sciences (NYSE:DOW) will allow Syngenta to offer its US customers a more varied seed package. And since roughly half its seed revenues come from outside America, it has stronger links to the fledgling European market than Monsanto.

Most important of all, perhaps, it offers the cheapest way in to a pure play on the biotech/crop science growth story. Trading on a forward p/e for 2010 of 11.3, compared to Monsanto's 19.5, its US listed depositary receipts offers better value for now.

James graduated from Keele University with a BA (Hons) in English literature and history, and has a certificate in journalism from the NCTJ. James has worked as a freelance journalist in various Latin American countries.He also had a spell at ITV, as welll as wring for Television Business International and covering the European equity markets for the Forbes.com London bureau. James has travelled extensively in emerging markets, reporting for international energy magazines such as Oil and Gas Investor, and institutional publications such as the Commonwealth Business Environment Report. He is currently the managing editor of LatAm INVESTOR, the UK's only Latin American finance magazine.