A recent published report suggested that some insects are developing resistance to one of agricultural seed and chemical company Monsanto's (NYSE:MON) genetically altered corn seeds, which are a combination of seed and pesticide. Right now, the resistance is isolated, so it's unclear how widespread this could become. Monsanto has been shifting its business from one of chemicals to these genetically altered combination seeds over the last several years.

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Potential Problem
An entomologist at Iowa State University, Aaron Gassman, according to a recent Wall Street Journal report, determined that western corn rootworms in four Iowa corn fields have evolved to develop resistance to a natural pesticide which plants produce when grown from Monsanto's hybrid, or genetically altered corn seeds. While the scientist did not know how extensive the problem could become, spokesman Lee Quarles for Monsanto pointed out that there are potential safeguards in place and that the company's seeds work well in nearly all the acreage they're used. Farmers are required by the EPA to plant conventional seed crops nearby, ultimately to prevent pesticide resistant insects from overtaking an area, as the resistant insects breed with those that aren't, producing non-resistant offspring. (For related reading, see Clean Or Green Technology Investing.)

Agriculture Seeds and Chemicals
Seeds and chemicals form a large and important part of the agricultural business. Monsanto is joined by others on a global scale, such as DuPont (NYSE:DD), Syngenta (NYSE:SYT), Dow Chemical (NYSE:DOW), BASF (OTC: BASFY) and Bayer AG (OTC:BAYRY). The battle for seed and insecticide supremacy among these companies can be fierce. DuPont just received U.S. approval for its new insecticide designed to protect corn crops. DuPont's Pioneer Hi-Bred business produced the first approved single-bag integrated refuge product that targets only aboveground pests. This is part of Pioneer's Optimum AcreMax seed line, a line of hybrids that include characteristics such as drought resistance, pest resistance and herbicide resistance, all with the goal of higher yield.

At stake is substantial revenue. DuPont intends to charge a premium for its new product. For Monsanto, its corn seed sales amounted to $1.1 billion last year, a 10% increase over the previous year. Total revenue for Monsanto's seed and genetically altered seed sales increased from $2.36 billion the prior year to $2.65 billion last year.

Will Monsanto Be Hurt?
The stock initially dropped 4% on the news of the potential corn rootworm problem, though shares rebounded later on the day of the news. Investors should keep in mind that the genetically altered seeds, known as genetically modified organisms, or GMOs, have been controversial and no doubt will continue to be so. Monsanto has been successful in its long-term transition as a company shifting from its herbicide business to the seed and traits business it largely has become. There's little doubt that this won't be the last controversy regarding GMOs. Still, as Monsanto and the other hybrid seed makers contend, the fight for higher yield on crops will continue, as the agricultural sector faces enormous present and future global demand.

Legendary investor Jim Rogers has been very bullish on agricultural stocks, including Monsanto, which has gained around 25% in the last year. Both near term and long-term demand represent potentially enduring trends, and professional investors have taken note. Dozens of hedge funds have positions in Monsanto and many of the other large agricultural stocks as of the last quarter.

The Bottom Line
Investors shouldn't overreact to the potential problem with the pesticide resistant insects, as this will work itself out as more becomes known and the science and the data becomes clearer. Longer term, Monsanto and other companies continue to develop the hybrid seed technology. Given the trends in agricultural science and agricultural demand, Monsanto's transition to a seed and trait company will continue to position it as an important player in the sector. (For related reading, see Harvesting Crop Production Reports.)

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Tickers in this Article: MON, DD, SYT, DOW, BASFY, BAYRY

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