The Enlist Weed Control System Holds Huge Growth Potential For Dow

The Dow Chemical Company’s (NYSE:DOW) ‘Enlist’ labeled seeds are a part of the advanced weed control system it has developed. These seeds are genetically modified to tolerate the application of more effective herbicides as weeds in the U.S. are growing increasingly resistant to the glyphosate-based herbicides most commonly used today.

Regulatory approvals have held back the commercialization of these seeds, as well as the associated herbicide developed by Dow. However, the company now expects to launch the advanced corn and soybean seed varieties in the U.S. by 2015, after a delay of almost two years. We believe that timely regulatory approvals for the Enlist weed control system could potentially boost Dow’s market share in the robust agricultural products market significantly.

We currently have a $48 price estimate for Dow, which is ~16x our 2014 adjusted EPS estimate of $3 for the company.

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Herbicide Tolerant Crops

Weeds pose several problems for farmers as they not only compete with planted crops for sunlight, soil nutrients and water, but also give shelter to pests that can harm the crop, and reduce crop yield significantly. Earlier, farmers tackled weeds primarily by tilling the fields before planting the crop. However, due to many economic disadvantages of tilling, no-till farming techniques started gaining momentum during later half of the 20^th Century.

In 1996, Monsanto introduced the most successful and widely adopted technique in the form of Roundup Ready weed control system. It comprised of seeds that were genetically altered to tolerate glyphosate-based herbicides. Modified genetics ensured that the glyphosate-based herbicides, which were effective on a broad spectrum of weeds, did not harm the crop. Since then, herbicide tolerant crops have significantly driven the global market for genetically modified (GM) crops. Today, these crops occupy more than 60% of the total area covered by GM crops globally. ^[1]

Growing Need For Improved Technology

With weeds growing increasingly resistant to the glyphosate-based herbicides, there is a growing need for a more effective herbicide tolerant weed control system, in order to sustain and further enhance crop yields. According to a third-party research conducted by Dow, cropland acres with weeds resistant to the glyphosate-based herbicides increased around 50% in 2012 alone and around 80% over the last two years, to reach over 65 million acres. ^[2]

Enlist Weed Control System

The Enlist Weed Control system includes seeds that are genetically modified to tolerate the new herbicide from Dow, Enlist Duo. This herbicide contains 2,4-D that adds another mode of action to the glyphosate-based herbicides. The technology aims at providing higher crop yields through better protection against tougher weeds, which are growing resistant to the glyphosate. Commercial application of the system requires both the new seed traits as well as the new herbicide to be approved by the regulatory authorities. ^[3]

Because of the sheer size of the herbicide tolerant crops market, a successful commercial launch that can potentially replace the widely used Roundup Ready system can boost Dow’s share in the GM seeds market significantly. Moreover, the fact that Monsanto was the first one to get a license to the Enlist herbicide tolerant trait from Dow indicates that the technology has a huge potential to capture the fast-growing GM seed market. (See: Dow And Monsanto Deal Sets The Stage For Next Generation Of GM Seeds)

Competition And Regulatory Hurdles

In terms of competition, Monsanto, the leader in GM seeds market has developed another herbicide tolerant system called the Roundup Ready Xtend Crop system, which uses the new Roundup Xtend herbicide. The Roundup Xtend herbicide adds dicamba as an alternate action to the glyphosate-based Roundup herbicide. This herbicide will have to be used with Roundup Ready Xtend seeds that can tolerate the application of dicamba as well as glyphosate. ^[4]

There is considerable opposition against the use of both these weed control systems. In the case of Dow’s Enlist system, primary concerns are associated with its potential harmful impact on specialty crops that are not genetically modified to tolerate the inadvertent application of 2,4-D chemical used in the Enlist Duo 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. These issues just add on to the ongoing protests against all the GMO crops with growing demand for labeling of all food items derived from these crops. Critics of GMO foods consider them environmentally suspect and a possible health threat. ^[5]

This opposition is also leading to extended reviews by the regulatory authority in the U.S. In May last year, the USDA extended its review of both, Dow’s Enlist corn as well as Monsanto’s Roundup Ready Xtend soybean. Dow initially planned to launch its Enlist corn for the 2013 planting season, which has now been delayed by almost two years. However, the company is expected to receive all regulatory approvals by the end of this year. The USDA said this January that it was prepared to grant approval and is expected to finalize that decision in the next few months. In addition, the EPA said last month that it too was prepared to grant an approval to Dow’s new herbicide. ^[6]

What Does It Mean For Dow?

We believe that the Enlist weed control system is a very potent product for Dow, as a successful commercial launch after it gets all the regulatory approvals, could result in incremental revenues for the company in more than one ways. Firstly, it would mean higher seed revenues for the company primarily driven by the growing market need for better crop protection against “superweeds“. Secondly, the Enlist Duo herbicide, which the company claims has been engineered to minimize the harmful effects associated with the use of 2,4-D chemical, would also boost its crop protection sales. Thirdly, it would enable the addition of a proven weed resistance technology to the stacked trait combination in the next generation SmartStax, which would further bolster seed revenues. Lastly, it would also generate higher licensing revenues for Dow, as more and more seed companies would want to sell a successful technology to their customers.

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1. Herbicide Tolerant Technology: Glyphosate and Glufosinate, isaaa.org [↩]
2. Bank of America Merrill Lynch Global Agriculture Conference, dow.com [↩]
3. Enlist Weed Control System, enlist.com [↩]
4. Roundup Ready Xtend Crop System, monsanto.com [↩]
5. California Lawmakers Reject Bill Requiring Labeling On GMO Foods, reuters.com [↩]
6. Dow Chemical’s Enlist Weedkiller Preliminarily Approved, bloomberg.com [↩]