Thursday, May 21, 2015

Thinking unthinkable thoughts...

 Don't ask me why, but I have been struck by two seemingly disparate events the last few days that led to a minor epiphany, or major wild-ass guess - take your pick.

First the DuPont boardroom skirmish.
It turns out that activist investor Nelson Peltz came very close to being elected to DuPont's board of directors, according to vote totals released Wednesday.Peltz, principal at Trian Fund Management, launched a proxy war to gain four seats on DuPont's board. He conceded defeat last week at the company's annual shareholder meeting after DuPont shareholders elected all 12 of the company's nominees.The preliminary vote totals, disclosed in a Securities and Exchange Commission filing, reveal that Peltz received 293 million votes, just 77 million votes behind DuPont Director Robert Brown, who had the fewest number of votes among the company's nominees. Brown, president of Boston University, received 370 million votes.Peltz got 43 percent of the 681 million total votes cast. Although 77 million may appear to be a large gap, DuPont's three largest shareholders own between 25 million and 50 million shares of company stock.Just one of those shareholders could have made a difference, but it is unknown how the company's biggest stock owners voted. Typically, large pension funds that vote in multiple proxy fights disclose their votes in all of them in one report released in August. [More]
This was interesting in and of itself, but the case Peltz made was supported buy an SEC filing which included this slide (apparently all business is now done in PowerPoint):

[Please do click to enlarge]

But...but...the PIPELINE!  We have been promised all kinds of wonderproducts emerging assembly-line-like that will make yields soar and demolish problems like weeds, fertility, rain, and baldness. And here's this guy who owns 20-odd million shares of DuPont suggesting there's nothing there.

So, looking at this from the DuPont POV is unsettling. You have:

  1. an activist shareholder who could conceivably oust/hassle management if performance doesn't improve (came fairly close this time)
  2. not much new coming in ag to dazzle customers, who can barely afford your old products
  3. a meh-economy that isn't showing great results for the non-ag portion of your corporation
It seems to this uninformed layman that DuPont has almost no room to lower seed prices. Corn prices sure seem to indicate no expansion in acres, so a bigger market is not in the cards. They have $5B in sunk costs (research) to recover and they sure as heck aren't going to get it from shareholders. It comes down to how much blood is in the farmer turnip.

Bottom line: even if they wanted to, DuPont would struggle to compete on price.  But that may not hurt them that much. Because of the same licensing fees listed above, other seed companies likely don't have much margin to cut either.  At the very least seed corn has a floor price for stacked varieties and that floor could be over most farmers' heads with <$3 corn.

Now add in this ongoing struggle with fellow giant Monsanto.

So what does Monsanto do? Instead of hiving off Roundup and becoming a non-pesticides seed company, it does the precise opposite. In seeking to take over Syngenta, it looks to double down in agro-chemicals, including many more forms of pesticide and insecticide in Syngenta’s current portfolio, most of them far more toxic than glyphosate.Indeed, according to the Wall Street Journal, Monsanto has pledged to regulators that it would sell off Syngenta’s seeds division, keeping the chemicals instead. It combines this with the usual arrogant corporate PR campaign with soft-focus imagery and warm words – all the sort of stuff that just puts thinking peoples’ backs up. [More]
I have my doubts that Monsanto is overlooking the above author's point. In fact, this move signals to me their pipeline that looks much like DuPont's. Monsanto could be getting back into the pesticide business because they too have seen the RR/Bt Profit Cliff.

My complaint about GM seed has not been about safety - it's been cost. Stacked corn has very high fixed costs for seed companies, which translates into very high variable costs for farmers. Seed companies have no downside flexibility as their customers lose income. While the consumer resistance doesn't help, mostly I think it's a side show used by seed companies to distract farmers from the economic problem.  If GM protests went away tomorrow, a 2B bushel carryover would still be squashing prices. More than anything, this reminds me of Detroit making cars of declining quality and affordability just before Toyota and Honda showed devoured chunks of market share. 

There may not be much of market for $400 seed corn, even if that is what it costs to produce. Maybe it's down to guessing how long low prices can last, but that seems unlikely for companies this sophisticated. Monsanto looks like it is hedging bets on what they can get for seed by getting back into pesticides. DuPont...they look to be in a much tougher position.

While it's possible trait fees between companies could plummet, I'm not sure how long the licensing agreements last (and am too lazy to do the homework). Should stacked hybrids stop selling, I have to believe those fees would be under intense pressure.

Input suppliers seem to be convinced other input suppliers will break first. But they are all competing for a rapidly shrinking income-per-acre. While normally this would mean farmer and landowner returns would bear the brunt, there is an approaching limit there too. Lenders probably won't fund negative cash-flows for long, and there are not many economies of scale left to exploit for massive consolidation.

It is the lack of apparent options that may be deceiving suppliers. Farmers will grow corn no matter what, they may think. To a degree they are right - what else can we do? But gambling with the possibility of a meltdown in farm economics, or betting on government intervention like the extra AMTA payment of the eighties (very unlikely with this Congress, IMHO) seems to be the directions we are heading. 

After watching financial sector collapse in 2008, I am no longer so sure such apocalyptic outcomes are unthinkable. Looking at the seed industry, I'd say one piece of tinder is in place for a wildfire.