The Dow Chemical Company (NYSE:DOW) announced a cross-licensing deal on April 11th, 2013, with the market leader in the global seed market, Monsanto. The deal aims to extend the company’s huge success in the seed business over the past few years powered by SmartStax, launched in 2010 in collaboration with Monsanto. 
According to our analysis, Agricultural Science business makes up more than 15% of the company’s $33 valuation and has been the fastest growing segment of the company over the last few years. Dow’s Agricultural Science Products division contributed over 11% in revenues and 13% in adjusted EBITDA during 2012. Dow reported a 3% y-o-y decline in company-wide prices during the year. Price declines were reported in all the operating segments of the company, except the Agricultural Sciences division (up 3%) which also recorded a volume gain of 10% over 2011. 
What is SmartStax? How Is It Important To Dow?
SmartStax is a brand of genetically modified (GM) seeds developed by Dow in collaboration with Monsanto that takes advantage of multiple modes of insect protection and herbicide tolerance by stacking multiple traits together. SmartStax has eight GM traits combined or ‘stacked’ together, two for herbicide tolerance and six for insect resistance. These traits were combined through the conventional breeding processes instead of the genetic transformation of a single strain.
First commercially planted in 2010, the brand contributed significantly towards increasing volumes by 27% y-o-y in 2011 for Dow Chemicals’ seeds, traits and the oil business. Its success in 2012 was reflected in more than double technology sales as compared to 2011, driven by the introduction of POWERCORE (an extension of the SmartStax family that contains five traits, two herbicide-tolerant genes plus three genes resistant to pests) in Latin America and REFUGE ADVANCED (a blend of 95% SmartStax corn seed and 5% refuge (non-Bt) seed that farmers can plant across their entire field) in North America. 
What Is The Deal And How Does It Impact Dow Chemical?
The deal in essence allows Monsanto to use Dow’s highly anticipated Enlist herbicide tolerance technology on a non-exclusive basis while Monsanto will license to Dow on a non-exclusive basis, its third generation rootworm technology, Corn Rootworm III which is currently under development. With sharing of these latest weed and insect management technologies under a licensing agreement, the two companies can start work on their next generation SmartStax product which is expected to have these new traits stacked into it.
Although financial terms of the agreement were not disclosed, the biggest risk associated with the deal is pending U.S. Department of Agriculture (USDA) approval to Dow’s Enlist weed control system without which launching the next generation SmartStax containing this trait would not be possible. January this year, Dow acknowledged that the regulatory approval process has been delayed, and it expects first commercial use of the crop to begin in 2014 planting season. Earlier, the company was targeting the 2013 planting season. 
There are a lot of harsh opinions against the use of this technology because of the potential harmful impacts on speciality crops that are not genetically modified to tolerate the inadvertent application of 2,4-D chemical used in the Enlist herbicide due to its volatile nature and ‘drift’. There are a lot of health concerns related to the use of Enlist GMO crops as well.  However, it seems that the rapidly growing weed resistance to Monsanto’s glyphosate based Roundup herbicide and increasing focus on yield growth driven by growing food requirements of the world population might drive the market in a direction that would help Dow grow its market share in the agricultural science segment at a much faster pace. According to a third-party research conducted by Dow Chemical, cropland acres with weeds resistant to glyphosate based herbicides increased around 50% in 2012 alone and around 80% over the last two years to reach over 65 million acres. 
It should be noted here that the success of Enlist, if it gets regulatory approvals, will mean incremental revenues for Dow Chemical in more than one way. Firstly, it would mean higher revenues from the company’s seeds, traits and oils segment due to increased adoption of superior crop protection against tough weeds. Secondly, it would mean higher revenues from the sale of its Enlist herbicide that has been engineered to minimize the harmful effects associated with the use of 2,4-D chemical. Thirdly, it would imply addition of proven, effective weed resistance technology to the stacked trait combination in the next generation SmartStax which would further bolster seed revenues. Lastly, it would imply higher licensing revenues as more and more seed companies would want to sell the best technology to their customers.
We currently estimate Dow’s market share in the agricultural science segment to reach close to 8% over the Trefis forecast form around 4.9% in 2012. However, the best case scenario in which Dow chemical is able to grow its segment revenues at a 16.5% CAGR, 4 percentage points higher than almost 12.5% CAGR seen over the last three years, will take its market share in the segment to around 11% by the end of our forecast period. All other estimates remaining constant, it will imply a 10% upside to our current $33 price estimate for the company which is around 5% above the current market price.
EDITORIAL UPDATE (12/6/13): An earlier version of this article mistakenly state that Monsanto was the first company to a license to Enlist. DuPont was the first to license Enlist in 2009 when it received the license for use with soybeans and Monsanto received the licences for corn in April 2013.
- Dow AgroSciences, Monsanto Cross-Lisence Advanced Corn Trait Technology, Designed To Provide Exceptional New Tools For Weed And Insect Management, www.dow.com [↩]
- 2012 Dow Annual Report, Dow Investors [↩] [↩]
- Dow’s Controversial New GMO corn Delayed Amid Protests, www.reuters.com [↩]
- Dow’s new Corn: “Time Bomb Or Farmers’ Dream, www.reuters.com [↩]
- Bank of America Merrill Lynch Global Agriculture Conference, www.dow.com [↩]