Red Burn

Monsanto
& Syngenta
The Grapes of Wrath
TONY JONES CHEMICALS 12 NOVEMBER 2015

About the team
Tony Jones
Tony read Pure Chemistry at the University of Leeds. He worked in
the chemical industry for 12 years, at Kodak, Hoechst and ICI, where
he undertook a variety of technical and commercial roles in the UK
and Europe. He continued in operational management after the
business was acquired by Croda. Tony joined Redburn after
completing his MBA at London Business School.
+44 20 7000 2128

+44 7912 649 946
tony.jones@redburn.com
Neil Tyler
Neil read Modern Languages and European Studies at the University
of Edinburgh. He qualified as an ACA at KPMG where he held roles
in audit and consulting. He worked as a Chemicals analyst at Credit
Suisse and JP Morgan before joining Redburn.
+44 20 7000 2133

+44 7711 787 661
neil.tyler@redburn.com
Ranulf Orr
Ranulf holds a Masters in Mechanical Engineering from the
University of Bristol. He joined Redburn following the internship
programme.
+44 20 7000 2058

ranulf.orr@redburn.com
Monsanto & Syngenta / 12 November 2015
Monsanto & Syngenta Monsanto (Buy, New)

Price: $93.5
MV: $41.65bn
BB: MON US
The Grapes of Wrath Next news:

R&D Day
17 November 2015
Syngenta (Sell )
Price: CHF351.8
MV: $31.94bn
Thesis: Compressed farm margins herald a new era in farming. BB: SYNN VX
Only essential inputs will attract capital. Emerging technologies will Next news:
FY15 results
add further disruption and crop protection growth will suffer. Seeds 3 February 2016
should be more resilient and we launch Monsanto as a Buy. With

scope for further disappointment, we downgrade Syngenta to Sell.
x Golden era for crop protection is over. Collapsing farm profits are ushering in a
fourth generational shift in agriculture. Studying a century of evolving farm
practices shows scarce capital will be reallocated to emergent technologies. Crop
protection growth in mature regions may struggle to remain positive and credit
constraints in emerging markets will temper investment. Industry consolidation
can help combat challenges, but Syngenta has shunned its best potential partner.
x Structural threats. Six industry trends are combining to redirect farm investment
and these pose a persistent threat to traditional pesticide growth. Reviewing
innovation pipelines for the top six agrichemical companies reveals 139 potential
new products, but the growth benefit for Syngenta appears marginal.
x Divergent outlook. Seeds determine crop yield and are better placed to capture
share of farm costs (Fig 1). New traits can add further value over the cycle.
Monsanto can deliver a 9% operating income CAGR to 2018 and we launch
coverage with a Buy. In contrast, lower crop protection growth exposes Syngentas
ongoing cost inflation. 2018 margin guidance is at risk and we cut 2017 EPS by
17%. FCF has consistently disappointed, suggesting a structural problem. We
downgrade to Sell.
Fig 1: Proportion of US corn RM costs seeds, crop protection and fertiliser: 1975-2017E
80%
Proportion of raw material cost
60%
40%
20%
0%
1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017E
Seeds and traits Fertilizer Crop protection

Source: Redburn, USDA, Economic Research Service
Important note: see regulatory disclosures on page 221 of this report. 3

Monsanto Buy (New)

Bloomberg MON US Free float 99.64% Key shareholders Capital, Vanguard, BlackRock, Fidelity
Price $93.5 Daily traded value (a) $349m Key executives Hugh Grant (CEO)
Market cap $41.65bn Credit rating (b) BBB+ Pierre Courduroux (CFO)
Enterprise value $49.47bn 5-yr CDS spread (bp) 70.00 Key brands Genuity, INTACTA, Roundup Ready, Roundup
Sales by product (2015) Gross profit by product (2015)
Corn seed and traits Corn seed and traits

40% 23% 44%
32% Soybean seed and traits Soybean seed and traits
Cotton seed and traits Cotton seed and traits
Vegetable seeds 5% Vegetable seeds

5% Other crops
Other crops
5%
5%
5% Agricultural Agricultural
3% 15% productivity 18% productivity
Source: Redburn, company Source: Redburn, company
Share price and relative to the US Redburn EPS monitor IDEAS Estimates Momentum (c)
100 160
200
7.00 150
170 80
0% 1% 140
140 60 130
6.00
-1% 120
110 40
5.00 110
80 20
100
Jun 2012
Jun 2013
Jun 2014
Jun 2015
Dec 2011
Dec 2012
Dec 2013
Dec 2014
4.00 0 90
Apr 11
Sep 11
Jul 12
Dec 12
Aug 14
Oct 13
Jun 10
Nov 10
Feb 12
May 13
Mar 14
Jan 15
Jun 15
Nov 15
Aug-16 Aug-17 Aug-18
Monsanto S&P 500 1 STDV Red. Cons.

Estimates Momentum - Sales
Estimates Momentum - EPS
Price Relative
Source: Bloomberg Source: Redburn, Bloomberg Source: www.redburn.com/ideas
Summary financials and valuation

Year-end August ($m) 2012A 2013A 2014A 2015A 2016E 2017E 2018E
Revenue 13,516 14,861 15,857 15,001 14,630 15,491 16,313
Gross profit 7,045 7,653 8,574 8,182 7,845 8,318 8,807
Operating income 3,148 3,570 4,075 3,523 3,021 4,015 4,525
EBIT adjusted 3,078 3,444 3,962 4,115 3,521 4,015 4,525
EPS adjusted 3.70 4.56 5.23 5.73 5.30 6.20 7.24
EBIT margin 22.8% 23.2% 25.0% 27.4% 24.1% 25.9% 27.7%
EV/EBIT (x) 14.4 16.0 16.7 14.1 14.0 11.9 10.2
P/E (x) 22.5 22.8 22.0 18.9 17.6 15.1 12.9
ROCE post tax 16.0% 18.5% 19.2% 20.5% 18.3% 19.5% 21.3%
FCF yield 5.4% 3.6% 3.4% 4.1% 4.1% 5.5% 6.5%
Dividend yield 1.5% 1.4% 1.5% 1.8% 2.1% 2.4% 2.6%
Source: Redburn, company
(a) 12m average daily traded value, (b) S&P/Moodys, (c) relative to IDEAS Europe or UK universe.
4 Important note: see regulatory disclosures on page 221 of this report.

Syngenta Sell
Bloomberg SYNN VX Free float 99.9% Key shareholders BlackRock, Capital Group, Northern Cross
Price CHF351.8 Daily traded value (a) $128m Key executives John Ramsey (interim CEO), Jonathan Parr (COO
Market cap $31.94bn Credit rating (b) A+ Europe/LATAM), Davor Prisk (COO NAFTA/Asia)
Enterprise value $35.5bn 5-yr CDS spread (bp) 38.35 Key brands Solatenol, Acuron, Adepidyn
Sales by region (2014) Gross profit by region (2014)
14%
14%
31%
EAME 35% EAME
North America North America
Latin America 27% Latin America

30%
Asia Pacific Asia Pacific
25% 24%
Source: Redburn, company Source: Redburn, company
Share price and relative to Europe Redburn EPS monitor IDEAS Estimates Momentum (c)
100 150
200 24
-12% 140
22 80
170 -3% 130
20 60
140 120
18 -6%
40 110
110 16 100
14 20
80 90
Jun 2012
Jun 2013
Jun 2014
Jun 2015
Dec 2011
Dec 2012
Dec 2013
Dec 2014
12 0 Dec 12 80
Oct 13
Jun 10
Nov 10
Apr 11
Sep 11
Feb 12
Jul 12
Mar 14
Aug 14
Jun 15
Nov 15
May 13
Jan 15
Dec-15 Dec-16 Dec-17
1 STDV Red. Cons.

Syngenta Stoxx 600 Estimates Momentum - Sales
Estimates Momentum - EPS
Price Relative
Source: Bloomberg Source: Redburn, Bloomberg Source: www.redburn.com/ideas
Summary financials and valuation (including EPS changes)

Year-end December ($m) 2012A 2013A 2014A 2015E 2016E 2017E 2018E
Revenue 14,202 14,688 15,134 13,309 13,472 13,680 13,974
EBITDA adjusted 3,118 2,895 2,926 2,704 2,803 2,916 3,107
EBIT adjusted 2,525 2,265 2,311 2,077 2,143 2,221 2,381
EPS adjusted old 22.30 19.30 19.42 17.09 20.22 22.42 24.79
EPS adjusted new 22.30 19.30 19.42 16.43 18.59 18.61 19.52
EBITDA margin 22.0% 19.7% 19.3% 20.3% 20.8% 21.3% 22.2%
EV/EBITDA (x) 10.9 13.9 12.2 13.1 12.6 12.1 11.4
P/E (x) 15.5 21.0 18.3 21.3 18.8 18.8 17.9
ROCE post tax 21.4% 16.4% 16.4% 14.3% 14.5% 14.5% 15.1%
FCF yield 2.7% 1.6% 4.1% 2.2% 3.3% 3.4% 3.8%
Dividend yield 2.9% 2.7% 3.4% 3.3% 3.4% 3.6% 3.7%
(a) 12m average daily traded value, (b) S&P/Moodys, (c) relative to IDEAS Europe or UK universe.

Contents
Contents
The idea .......................................................................................................................... 8
01/ Farm economics: three phases over the past century .......................................... 20
Raw material suppliers have been the winners ............................................................................................ 21
Consolidation, scale effects and yield optimisation .................................................................................... 24
Share of farm capital allocation has shifted materially ............................................................................... 29
02/ Pressures on growth.............................................................................................. 33

(1) Resistance to existing technology is rising.............................................................................................. 34
(2) Trait substitution of insecticides .............................................................................................................. 48
(3) Patent expiry and regulatory status risk.................................................................................................. 52
03/ A new generation of technology choices .............................................................. 57

(1) Precision agriculture .................................................................................................................................. 58
(2) RNAi............................................................................................................................................................. 69
(3) Biological crop protection ......................................................................................................................... 75
04/ The fourth agricultural phase .............................................................................. 82

Grain is at a cyclical low .................................................................................................................................. 83
Tougher times ahead for fertilisers and crop protection ............................................................................ 88
Corn budget for 2016: saving $50 per acre .................................................................................................100
05/ The last dance: M&A prospects .......................................................................... 108

Eyeing up the competition ............................................................................................................................109
So what happens next? ...................................................................................................................................112
What are the other major industry players thinking? ...............................................................................114
06/ Pipeline analysis .................................................................................................. 118

The winners .....................................................................................................................................................119
Monsanto .........................................................................................................................................................124
Syngenta ...........................................................................................................................................................133
Bayer, BASF, Dow Chemical and DuPont ..................................................................................................140
07/ Syngenta forecasts and valuation ....................................................................... 162

Syngenta forecasts cut and we downgrade to Sell......................................................................................163
Margin stagnation could be structural ........................................................................................................166
Cash flows and returns ..................................................................................................................................169
Valuation .........................................................................................................................................................175
08/ Monsanto forecasts and valuation ..................................................................... 183

Launching coverage with a Buy recommendation ....................................................................................184
Seeds and traits ...............................................................................................................................................186
Cash flows, returns and valuation ................................................................................................................199

Contents
Syngenta financial model and metrics ..................................................................... 207

Monsanto financial model and metrics ..................................................................... 211
Appendix 1: PA technical definitions....................................................................... 216
Appendix 2: Soybean demand versus supply dynamics .......................................... 218

The idea
The idea
Unpicking more than a century of farm economics shows capital is
consistently reallocated to technologies that incrementally raise
yields or lower costs. Farm profits are currently near record lows
and growers are keen to cut spending. However, a deflating cost
curve may serve to lower crop prices further. We are entering a new
era in which only the highest priority inputs will attract investment.
Crop protection demand growth seems likely to suffer as resistance
grows and disruptive technologies emerge. GM seeds are best placed
so we launch coverage on Monsanto with a Buy. In contrast,
Syngenta is entering an era of lower growth. The board has shunned
Monsantos approaches and the company risks being bypassed as
competitors consolidate to combat new challenges. Lower growth
means margins will not expand easily. Restructuring will continue
to consume cash and guidance is at risk. We downgrade to Sell1.
Three phases of farming capital allocation over the last 105 years
Understanding how farmers historically set budgets as technology improved offers a
guide as to how the next cycle will evolve. We have constructed a detailed economic
model for US arable farming dating back to 1910. This enables us to identify three
phases in which capital allocation exhibited major changes.
The first phase (1910-60) saw machinery and fuel consume a materially greater
proportion of farm expenditure, displacing increasingly expensive labour. The bridge
of aggregate farming costs for the second phase (1960-2000) is shown in Fig 2.
Fig 2: US farm cost component bridge: 1960-2000

100%
87.4%
3.2%
Costs % of revenue
90% 4.7%
0% 0.3% -3.4% 2.6%
7.3%
80%
4.7% 1.9%
70% 66.1%
60%
50%
Costs 1960
Costs 2000
Crop pro
Seed
Labour
Equipment
Financing
Fuel
Fertiliser
Services
Land
Source: Redburn, USDA, Economic Research Service, University of Iowa, University of Illinois
1
Our previous Buy reiteration was on 19 May 2015.

The idea
During this phase, scientific advances allowed raw material producers to arrogate the
greatest share of farm costs. The share of total expenditure accounted for by seed,
fertiliser and crop protection increased almost 14% during this period. This was the
golden era for crop protection, with raised usage intensity and adoption of modern
insecticides and fungicides.
Seed suppliers also prospered, with better hybrid varieties improving farm output. As
the potential for crop yield begins with plant genetics, seed selection is the most
important constituent for farmers. This is usually followed hierarchically by crop
protection and fertiliser. These both enable growers to maximise yield, but the primary
route to realise potential farm output is through careful selection of the optimal seed
germplasm for the local climate and soil quality.
The third phase, since 2000, has been characterised by increased mechanisation, which
has enhanced crop intensity and fuel efficiency, and the introduction of guidance
systems. Yet it is the rapid adoption of GM crops that has had the greatest impact.
Grain prices remained low from 2000 to 2006, yet farm managers eagerly switched to
GM soy and corn as the technology allowed further reduction in fuel and labour. This
confirms disruptive technology can be successful during periods of lower revenue in
agriculture as the need to improve economics increases.
This was also the first period when crop protection demand for some herbicide
products demonstrably reduced. According to industry consultants, the value of this
category has contracted c$1.4bn between launch in 1996 and 2015.
The leading seed suppliers also invested to generate the most advanced germplasm.
Available data suggest corn yields increased slightly faster than other row crops. With
GM seed technology offering productivity gains and, arguably, higher yields, the
category took the greatest share of farm spending growth (Fig 3).

100%
Costs % of revenue
95% 2.5% -1.4% 3.0% -2.0%

-1.3% -1.3% 90.3%
3.3% -0.8% 0.9%
90% 87.4%
85%
80%
Costs 2000
Costs 2015
Labour
Equipment
Financing
Fuel
Seed
Fertiliser
Land
Crop pro
Services
A final point on phase three relates to fertilisers. In spite of being undifferentiated and
not benefiting from higher usage, they accounted for a higher share of farming costs.

The idea
Disaggregating the factors behind this shows supernormal pricing was the primary
cause, particularly for potash.
Do farmers reduce inputs when farm revenue drops?

Looking at the period 1980 to 2015, which includes the technological changes to
farming practices most relevant to today, we have examined the annual changes to
farming revenue and spending deviations for the various input categories (Fig 4).
Fig 4: R2 for change in farm revenue YoY vs change in farm spend YoY: 1980-2015
0.80
0.58 0.55
0.60 0.48
0.39
0.40
0.26
R2
0.18 0.17 0.15

0.20
0.00
Fertiliser Labour Services Land Seed Equipment Crop Financing
Protection
Change in farm revenue YoY vs. change in farm spend YoY
We were surprised by the high statistical relationship for fertiliser, given usage
intensity seems to have plateaued since the mid-1990s. Similarly, the historic
relationship appears low for farm revenue and seeds or crop protection costs.
The conclusion is that farmers will almost certainly look to reduce costs by optimising
fertiliser applications, but less so via seed and crop protection. However, this does not
necessarily mean there will be growth.
The present day phase four: cyclical and structural issues to be overcome
We are not bullish on short-term soft commodity prices, given inventory overhang for
some major crops. There could be a weather problem but, barring unusual
meteorological events, our work suggests the grain cycle will remain at current lows
for the next few years.
Fig 5 shows there is statistical significance between the corn price and the stocks-to-
use ratio (grain inventory expected from the current season as a function of total
projected demand). If we assume a relatively unchanged corn yield in 2016 (168
bushels per acre), a price of just under $4/bushel seems likely. At the cyclical peak in
2012 and 2013, corn traded at $6-7/bushel.

The idea
Fig 5: Corn price vs US stocks-to-use ratio: 2000-16E

8.0
7.0 Low-teens stocks-to-use
Farm realized price / $ bu
expected scenario for 2016

6.0
5.0
4.0
3.0
2.0 y = 265.13x2 - 103.04x + 12.011
1.0 R = 0.6784
0.0
5.0% 7.5% 10.0% 12.5% 15.0% 17.5% 20.0%
Stocks / use
Source: Redburn, USDA
As a consequence, we expect belt tightening. Farm cash reserves from the good years
supported capital allocation in 2014 and 2015, but this is unlikely to continue.
However, we do not believe farmers will revert to historic practices as returning to
conventional seed varieties may reduce yields.
Rather, discussion with industry participants raises concerns that some farmers have
over-reached on recent investments and will trim budgets in 2016. Those growers who
rent land (nearly 50% of US arable acres) and have recently invested in expensive
machinery are likely to undertake spending cuts over the next few years.
We have constructed a new corn budget with the potential for around $50/acre
savings, compared to $674/acre total spending in 2015. Our projected savings are
achieved from lower potash usage, cheaper fuel, reduced equipment purchases and
negotiated lower land rent.
We also forecast crop protection spending will decrease 2% to $27/acre, as marginal

fungicide applications are reduced where possible. Of course, these savings may only
flatten the cost curve. Applying the long-run ratio of marginal cost to realised price, at
0.97x, implies that if our $50/acre savings are achieved, the market level for corn could
reduce to around $3.65/bushel in 2016.
Some will also argue seed costs are too high. The problem here is two-fold. Firstly, the
farmer is reliant on planting the best genetics or yield is at risk. Grain prices cannot be
controlled, so the most direct means of supporting revenue is to choose wisely on seed.
Trading down only makes sense for operators in financial distress.
If farm costs are reduced in aggregate over the next few years, then the seeds and traits
division appears most likely to benefit and gain a larger proportion of total spending.
The market for biotech GM traits is concentrated. Combined, Monsanto and DuPont
represent c30% of the seed germplasm market. The latter has few commercial biotech
modifications and licenses most of its technology. Industry consultant data show that
Monsanto has 74% market share in GM traits, with the next five companies

The idea
accounting for the remainder. We show Herfindahl-Hirschman indices (HHI) for

farming participants in Fig 6.
Monsanto should generate over 70% of sales and 85% gross profit from seeds and
traits in 2016. In contrast, we are modelling that 77% of Syngentas sales will come
from crop protection, while the remaining 23% will draw from a diverse mix of
conventional and GM seeds.
Fig 6: Herfindahl-Hirschman Index by farming industry participant

60% 52.1%
Herfindahl Hirchman Index
50%
40%
30%
19.4%
20% 13.8% 12.9% 11.9%
10% 3.4% 3.2% 1.0%
0%
Seed - Machinery Crop Pro Fert - Seed - Fert - Farm land Fert -
Traits Potash Germplasm Phosphate by country Nitrogen
Source: Redburn, companies, Phillips McDougall, CRU, FAO Stat
The US DoJ uses HHI to assess supplier power. The convention is an HHI of 15-25%
suggests a moderately consolidated industry; above 25% points to concentration.
We appreciate crop protection businesses are trying to consolidate, but in many cases
the antitrust barrier is tough and management inflexible. We suspect Bayer and BASF
are keen to increase scale, but an outright combination with Syngenta seems unlikely.
Instead, Dow Chemical and DuPont have operations that may be more easily acquired.
Industry trends set to reshape farming decisions

In addition to cyclical risk in our fourth agricultural phase, there are six industry
trends that may have a structural impact on farm practices and capital allocation.
Some of these technologies are still in their infancy, but farmers adopt new products
and processes rapidly if productivity gains can be realised.
In the case of crop protection, one trend appears helpful and three others make us
fearful pesticide demand could be progressively disrupted in mature markets.
Resistancy to old crop protection chemistry

The argument against reduced usage is based upon rising resistance to ageing crop
protection technology. According to USDA data, the proportion of US arable land
infested with weeds resistant to herbicides has risen from 8% in 2010 to 21% in 2014. It
is not only plants. Resistance also appears to be accelerating for insects and plant
disease.

The idea
Resistance arises when a pesticides mode of action (MOA) is no longer efficacious in

killing the target. Moreover, certain pests have evolved resistance to multiple MOAs.
Yet it is noteworthy crop yields have not been affected thus far, at least for corn.
However, we do accept farmers will consider using more complex combination
products, blending several active ingredients. Whether this translates into higher
prices is moot, so the net impact to suppliers may not be that material.
Greater seed and trait complexity

Five companies are set to launch GM seed varieties stacked with more insect traits. In
addition, to preserve the usage of GM technology and circumvent rising resistance to
glyphosate, more biotech seeds will have multiple-herbicide tolerant effects.
We fear insecticide usage on soy and corn may be impacted as new trait technologies
become widely adopted. Conversely, seed suppliers should enjoy operational gearing
as a result of selling GM seeds stacked with more biotech traits. Since the gross margin
is high, the positive impact to earnings can become material.
Precision agriculture to gather momentum

Precision agriculture (PA), though still in its infancy, could be the real deal. It uses
data analytics to improve farm decision-making and autonomous machinery to reduce
labour costs and crop damage. Variable application equipment is being explored as a
more precise means of applying fertiliser and pesticides.
This is potentially revolutionary and the infrastructure is expanding rapidly. One

consultant suggests 50-60% of new agricultural machinery is sold with GPS units in
the US. However, variable-rate planting mechanisms are only being supplied with
around 15% of new farm equipment. Economic benefits are claimed in studies, but the
technology is probably most suited to large-scale operations in NAFTA and LATAM.
Industry interest is high. A recent Boston Consulting Group paper revealed that the
number of PA patents applied for between 2010 and 2014 exceeded that for GM seeds.
Monsanto has clear ambitions for PA. Rather than being directly involved in large-
scale machinery, the company is seeking to leverage its IP in plant genetics and crop
care via a software interface to disrupt how agronomic advice is channelled.
It is already offering a three-tiered product, FieldView, which allows growers to obtain

free farm-specific climate information in order to excite interest. This may sound
routine, but such a localised service enables the farmer to select and time crop care.
We understand FieldView already has 12% market share of total US acres.
For $3 per acre, advisory services become available that can monitor field conditions
by satellite and optimise mid-season nitrogen fertiliser applications. This is exciting,
and over the next few years we expect PA to have a small but rising negative impact on
how inputs like fertiliser and crop protection are deployed.

The idea
RNA interference (RNAi)

This method of gene silencing uses ribonucleic acid (RNA) to switch off a specific
metabolic process in a targeted insect. It could to be used in two ways to control crop
pests.
Firstly, GM corn varieties are expected to be launched in the next few years stacked
with a trait capable of producing the RNA required to kill corn root worms. USDA
regulatory approval has recently been granted but, prior to commercial launch, sign-
off will also be needed by bodies in various export countries.
Secondly, sprayable RNAi-based crop protection products are under development.

The idea is insect genes could be silenced but delivered via targeted pesticide
applications. Such a product would circumvent existing GM regulations since no
plants are being genetically modified. Proof of concept has been achieved by several
academic institutions and a number of the major pesticide companies. Syngenta made
a $0.5bn acquisition to obtain RNAi competence in 2012. Industry experts believe the
costs are likely to be economically attractive as scale effects take hold. Additional
regulatory scrutiny is likely given this is essentially spraying modifying RNA proteins
in the open, but this is not insurmountable with the right delivery solution.
The appeal to the farmer would be more precise insect control, waste reduction and
lower environmental risks. If widespread adoption occurs, RNAi technology appears
likely to cause cannibalisation of some insecticides.
Biological pesticides
Pesticide products derived from natural sources are not new, but interest is
accelerating. Consultant data suggest the market value is around $2.2bn, modest
compared to the $57bn spent on crop protection. However, sales of biological
producers increased 8% in 2014 and the regulatory backdrop is supportive of
substituting older pesticides.
Biologicals manufactured from bacterial fermentation represent the largest segment

($1.2bn sales in 2014) and almost all are used to control insects through sprays or by
being coated onto seeds. Syngenta and Bayer are major suppliers, but a few of the
active ingredients are not new and generic versions are emerging.
Biological products are being developed by the leading suppliers. However, a recent
collaboration between Novozymes and Monsanto could present an additional threat,
with new products under development for the lucrative seed treatment.
Patent expiry
Over 100 crop protection active ingredients are exposed to patent expiry by 2020.
These had combined sales of $6.6bn in 2013. Filtering this down to those produced by
the top five agrichemical businesses (BASF, Bayer, Dow Chemical, DuPont and

The idea
Syngenta) and with annual sales above $100m, there are 17 products generating
around $5.5bn revenue (Fig 7).
Fig 7: Crop protection product sales patent expiry: 2015-20E

6,000
BASF Bayer 660 90 5,480
5,000 115
110 105
225
750 170
4,000
280 135 130
Sales $m
3,000 470
655 120 160
2,000 375
Syngenta
930 Dow Chemical
1,000 DuPont
0
Spirodiclofen
Picoxystrobin
Picoxystrobin
Pyraclostrobin
Florasulam
Iodosulfuron
Fluoxastrobin
Flucarbazone
Boscalid
Clothianidin
Trifloxystrobin
Mesosulfuron
Foramsulfuron
Prothioconazole
Mesotrione
Patent risk
Methylcyclopropene
Thiacloprid
Source: Redburn, Phillips McDougall
The industry trend towards combination crop protection products and careful
lifecycle management means the risk to sales in agrichemicals is less acute than in
pharmaceuticals. Also, the incumbents and new generic producers must resubmit data
to regional regulatory bodies to ensure commercial approval is granted. This is costly
and maintains barriers to entry.
However, patent expiry is never a positive and given the cycle it seems likely price
pressure will emerge. Syngentas sales exposure, $750m, is c5% of group revenue.
Consolidation conundrum
The competitive landscape in agrochemicals has remained largely unchanged for
nearly 15 years. In the late 1990s, collapsing farm profits prompted industry
consolidation. Another sustained period of low farm margins may again prompt the
next phase of corporate M&A. The industry structure allows for one more round of
consolidation. Management teams will be exploring options for external growth.
The strategic logic of combining seeds and crop protection offers the most compelling
case for value creation. Monsantos approach to Syngenta made a lot of sense. Deals
are likely to follow and Monsanto can achieve many of the same benefits of the
proposed Syngenta deal through combining with another of the major crop protection
players. Syngentas options are more limited. Its boards intransigence leaves it risking
being strategically bypassed as competitors team up to combat the challenging
markets.

The idea
Product pipeline analysis

We have assessed how the top six agrichemical groups are reshaping their innovation
programmes to counter industry pressure. We use a projected peak sales forecast for
each product, dilute for sales attrition and risk adjust based upon the project phasing
status. Peak sales in aggregate for all six companies reach $21bn. This is derived from
139 separate R&D projects. Gross profit potential, split into the two product segments,
is shown in Fig 8. After cannibalisation and risk adjustments, incremental earnings
could exceed $14bn by 2025.
Fig 8: Pipeline gross profit: crop protection and seeds risk adjusted
8,000
Gross profit by 2025 / $m
6,000
4,000
5,507
2,000 2,299 776
606
1,511 973 484
0 358 709 420 654
Monsanto DuPont Syngenta Bayer Dow Chemical BASF
Crop protection Seeds and traits
These sound like big numbers, but the long-term implied gross profit growth does not
appear as exciting as might be expected for some companies. For Monsanto, the scope
for an additional $6bn of gross profit by 2025 implies 6% compound growth from the
$8.2bn generated in 2015. However, for Syngenta, adding $2.3bn to the $6.9bn base
gross income points to just a 3% CAGR. If the crop protection industry begins to
contract in some of the higher margin mature countries, gross profit may hardly rise
at all.
Syngenta: decelerating growth and limited margin expansion

Our previous major report on agrichemicals (Harvest Opportunity, 25 November
2013) suggested usage intensity for crop protection products would increase as a result
of technification and land output optimisation. This view has played out, with the
market expanding at a 17% CAGR in LATAM between 2010 and 2014 and by 5% in
Asia, Middle East and Africa.
Where Syngenta has disappointed, however, has been cost control and cash flow.
Excessive cost inflation has undermined Syngentas anticipated operating leverage.
Emerging market growth has extended the cash cycle and working capital has grown.
The combination has meant earnings and cash flow have fallen short of our previous
expectations.
After a period of demand expansion in the mature regions between 2010 and 2013,
growth has begun to stagnate (Fig 9). In addition, some of the newer technologies that

The idea
we examine in this report, which we expect to gain share of farm investment, were at a
less advanced stage when we wrote our previous report.
Fig 9: Crop protection market value mature vs developing regions: 1991-2015E

35,000
Market value $m
30,000
25,000
20,000
15,000
10,000
5,000
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015E
Mature regions Emerging economies

However, with mounting pressure for farm operators to focus on cost reduction and
the risk that emerging industry trends lead to demand disruption, slower demand
growth seems inevitable over the coming cycle. Market growth in NAFTA seems likely
to turn negative (Fig 10) and we expect consumption in Europe to remain benign.
There is potential for usage intensity to continue rising in emerging regions, but with
lower farm returns we expect new arable land will be brought into operation and
growth rates will decelerate. Constrained credit availability and high interest rates
confer additional risk in some countries and could lead to cutbacks in agricultural
investment. Hence, we now expect the global crop protection market to grow only
2.0% in 2015-18. The combined gross margin in NAFTA and Europe was more than
500bp higher than in emerging regions, so there is potentially a negative mix effect
that will also depress margins.
Fig 10: Crop protection market growth by region: 2010-18E

20% 17.0%
15%
Compound growth
10% 8.3% 8.2%

7.0%
5.2% 4.0% 3.0%
3.7% 3.0%
5% 2.0%
1.0%
0%
-5% -1.3%
NAFTA Latin America Asia Europe Mid East/Africa World
Industry growth 2010 to 2014 Industry growth 2015 to 2018E

Our more cautious growth scenario suggests sales expectations for Syngenta are too
high. There is also another problem. It seems c40% of the companys $1bn savings
programme is partly predicated on generating c4% growth over the longer term. This

The idea
seems more like operational gearing and suggests volume leverage is needed to reach
EBITDA margin guidance (24-26% by 2018, compared to 19.3% in 2014).
Assuming Syngentas operating expenditure continues to inflate by 3.5% over the next
few years (it has been nearer 4-5%), the net gain from the other 60% of planned cost
savings is likely to be limited. We forecast an EBITDA margin of 22% in 2018. In other
words, management targets are at risk.
The CEO has departed and a new management team is likely to reset expectations.
Our forecasts now only imply a 5% EBIT CAGR over the next three years and we
expect a cautious update at the full-year results in February 2016. Cash flow generation
is likely to be burdened by years of restructuring and the negative implications of an
extended cash cycle, with growth mainly arising in emerging markets. As such, we
have reduced our dividend growth expectations to a 5% CAGR in 2015-18.
We realise there is ongoing speculation for industry consolidation in crop protection

and seeds. Ultimately, a deal may come together. Perhaps the biggest barrier to this,
though, is the cultural divide and Syngenta managements reluctance to cede control.
M&A risk is, of course, binary but we see that for Syngenta as more negative than
positive. Our focus on the deteriorating fundamental outlook for the industry suggests
Syngenta is not best placed.
After cutting Syngenta EPS forecasts 8% and 17% for 2016 and 2017, we are 12% below
consensus in the latter year. Old and new EPS estimates are contained in summary
financials on page 5. We lower our fair value to CHF290 and downgrade our
recommendation to Sell.
Monsanto: still disruptive and likely to take greater share of farm cost
Monsanto appears better positioned than Syngenta and should deliver long-term
earnings growth, reflecting its market power and innovative offer to the farmer. It is a
provider of top-quality GM seed germplasm, which farmers will prioritise in spending
decisions, given its potential for crop yields. New traits will likely be commercialised,
conferring productivity gains through partial substitution of other raw materials.
Our view is the historic trend for seeds and traits to acquire a greater proportion of
farm costs is likely to continue as capital is reallocated (Fig 11). We are particularly
downbeat on potash fertiliser, as prices seem likely to fall.

The idea
Fig 11: Corn seeds and traits share of farm cost allocation: 1975-2015E
30%
25%
Proportion of farm costs
20%
15%
10%
5%
0%
1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015E

We are also not expecting any improvement to pricing or margin for Monsantos
Agricultural Productivity franchise, which supplies branded glyphosate herbicide
under the Roundup brand. Management has guided for a big drop in profits next year,
as Chinese generic glyphosate prices normalise. Modelling the revenue, costs and
margin per unit sold allows us to be more confident expectations are now at a sensible
level. Unlike in seeds and traits, owing to the prevalence of generic competition, we
assume zero gross profit growth to 2020.
We forecast Monsantos sales and operating income will grow by CAGRs of 3% and
9% respectively between August 2015 and 2018. The companys track record for
converting earnings into cash appears stable and, as profits grow, we forecast the FCF
yield will reach 6.5% by 2018.
An accelerated $3bn share buyback programme has been implemented for 2016, with
management arguing the share price is undervalued. After underperforming the S&P
Index by 23% in 2015, the share price reflects $0.7bn lower earnings in 2016 from the
Agricultural Productivity business, but does not account for long-term growth in seeds
and traits. The potential for earnings to increase at a strong pace beyond 2016 means
the shares trade on 12.9x 2018 EPS, which seems too low given the quality of the
business. We set our fair value at $115/share, 23% above the current share price, and
launch coverage with a Buy.

01/
01/ Farm economics: three phases over the past century
Farm economics: three phases

over the past century
Analysis of long-term US farm economics indicates that cost
allocation to raw material inputs did not materially weaken with
lower commodity prices. As crop returns have eroded over the long
run, land consolidation has been inversely correlated with
productivity gains. Bridging farm cost components over three cycles
demonstrates that the raw material suppliers have captured the
largest share of farm spending. Seeds did best during the most recent
phase. We conclude that farmers reallocate capital to the most
productive inputs, which either boost yields or lower costs.

Raw material suppliers have been the winners

Most sell-side analysts who cover agrichemical companies will have constructed a
farming economics model of some sort, with historic data going back to the mid-
2000s. This proved to be a useful tool over the past cycle and helped us draw several
conclusions on the major farming raw materials.
However, the limitation is that this time period does not cover a sufficient number of
cycles to conclude how farmers will allocate capital in a period of more subdued
commodity prices. Indeed, the critical question that the market is currently debating is
whether the potential for reduced income will be offset by spending cuts and trading
down to cheaper inputs.
With this in mind, we have spent time with several industry data providers to
construct a detailed US farming economics model that stretches back to 1910. This
region represents around 25% of Syngentas sales, but many conclusions would also be
relevant to other economies.
Clearly, there has been successive technological change over this period and constant
evolution in the range of materials that growers purchase. But we can identify nine
cost categories that have always existed, despite the weighting of each as a proportion
of total cost shifting materially during the last century. We show these nine cost
categories as a percentage of farm revenue in Fig 12.
Fig 12: US arable farm cost structure split by all components: 1910-2015E
100%
90%
80%
Cost as % gross revenue
70%
60%
50%
40%
30%
20%
10%
0%
1910 1925 1940 1955 1970 1985 2000 2015E
Seed Fertiliser Crop protection Fuel and energy Labour
Equipment Financing Services Land rental / tax
We explore three periods during which farm capital allocation has been noticeably
reallocated later in this chapter, as well as presenting our view of how the next phase
will unfold.

However, we must draw attention to several points that we feel are not fully
appreciated.
Firstly, not all farmers will need to spend fully on all the cost components we detail in
the above chart. For example, it has become common practice to phase the capital cost
for major machinery purchases over a longer duration, due to extended life cycles.
Also, low interest rates and more flexible financing can be used to depress costs.
Direct landowners still form a majority in the US and represent nearly 60% of total
farmed acres. This proportion of the industry therefore allocates a much lower amount
of capital to land costs. US taxation will be limited in the absence of realised capital
gains from selling assets.
Therefore, we think it is useful to consider that the annual total spend in Fig 12 is
representative of the marginal cost. This view is further supported by the data shown
in Fig 13. This chart compares the average realised price for US corn to the marginal
cost, both in terms of dollar per bushel.
Fig 13: US corn marginal cost vs average realised price: 2000-15E

8.0
7.0
6.0
$ / bushel
5.0
4.0
3.0
2.0
1.0
0.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E
Realized price per bushel Marginal cost $ / bu
Source: Redburn, USDA, University of Iowa
As appears to be the norm for commodities, the market price tends to reflect the cost
of production for the majority of producers within a given period, but resides slightly
below the actual marginal cost.
Structurally higher production costs

The second point to highlight is that the cost of farming appears to have structurally
increased. It is reasonable to argue that the price of some of the more undifferentiated
inputs may deflate at various points in the cycle.
However, this is not true in every case, given the scarcity value for other costs, such as
land and some of the top-performing seed varieties. Producers such as Monsanto and
DuPont tend to limit production to minimise inventory risk and we suspect this has
been supportive to price increases.

The corollary of progressively higher farming costs over the long term is that net profit
margin has been in decline. In other words, the value realised by the farmer from
arable production has reduced materially and instead transferred to the input cost
providers.
This relationship is particularly evident in Fig 14. This chart shows how the
proportion of cost represented by raw materials (defined as seeds, fertiliser and crop
protection chemicals) has more than doubled, from around 9% in 1920 to nearly 33%
in 2015.
In contrast, operating margin (defined as net profit margin excluding land costs) has
steadily reduced to a level just below 20% in 2015. This rate of decay appears to be
slowing and the long-term trend line for arable farm operating margin has stabilised
(Fig 14).
Fig 14: US arable farm raw material costs vs long-term operating profit trend: 1910-2015E
70% 35%
60% 30%
Raw material cost as % of revenue

Farm operating margin
50% 25%
40% 20%
30% 15%
20% 10%
10% y = 6E-07x3 - 9E-05x2 + 0.0001x + 0.533 5%

R = 0.6808
0% 0%
1910 1925 1940 1955 1970 1985 2000 2015E
Operating margin Raw materials
The compound growth rates for US farm revenue, major cost components and profit
are detailed in Fig 15. Despite the old adage that the industry suffers from prolonged
income erosion, there has been limited evidence of nominal profit contraction over the
long term.
When we compare the data for 2014 and 2015, revenue has decreased 8% due to lower
commodity prices. However, we can also begin to see that farm spending is being
reduced for fertiliser, fuel and crop protection. Capital allocated towards seeds appears
to be more resilient.

Fig 15: Arable farm revenue, costs and profit growth: 1910-2015E
% 1910-2015E 1910-60 1960-2015E 2000-15E 2014-15E
Revenue 4.1% 3.3% 4.8% 5.1% (6.2%)
Raw material costs 5.8% 5.8% 5.7% 5.6% (8.0%)
Seeds 5.9% 4.6% 7.1% 7.5% 0.7%
Fertiliser 5.0% 4.5% 5.5% 6.6% (7.1%)
Crop protection 7.6% 7.7% 7.5% 4.0% (3.8%)
Fuel and energy 7.3% 10.4% 4.5% 4.2% (20.0%)
Gross profit 3.6% 2.9% 4.3% 4.7% (4.9%)
Operating costs 4.2% 3.5% 4.9% 4.9% 4.4%
Labour 3.6% 2.5% 0.7% 4.4% 4.7%
Equipment 4.9% 5.2% 4.7% 7.1% 0.5%
Financing costs 3.6% 2.0% 5.1% 2.4% 24.2%
External services 4.6% 3.9% 5.3% 4.5% 3.1%
Operating profit 2.9% 2.4% 3.4% 4.4% (20.6%)
Land rent and costs 5.1% 3.9% 6.1% 5.9% 4.2%
Net profit 2.4% 2.3% 2.4% 3.3% (33.9%)
Consolidation, scale effects and yield optimisation

A classical industrial strategy to minimise raw material inflation is to gain scale and
absorb fixed costs over larger volume. Chemical companies can do this via
de-bottlenecking effects or minor capacity expansion projects.
This is not a practical option within the farming industry, apart from bringing
marginal land into use. However, the crop output can often be lower than desired and
therefore careful assessment needs to be made on economic feasibility.
One of the major trends to occur in the US agricultural industry has been for smaller
and mid-sized operations to consolidate. Since the 1990s, just over 2 million working
farms have been producing in the US (Fig 16).
However, this total is around 30% of the number of farms in operation in 1910-30. In
the 1940s, worker migration from rural areas into cities coincided with a need to boost
agricultural output as the population growth rate began to accelerate. The result was a
much greater emphasis upon boosting productivity. This has not really changed to
date.
To provide added context on the long-term drive to increase output and optimise
costs, we also show the USDAs Total Factor Productivity index in Fig 16. This data
series captures the value created by benchmarking output (crop yield) against all
measurable inputs (raw materials, capital, labour and land).

Fig 16: Farm consolidation vs productivity improvements: 1914-2014

8.0 180
7.0 160
Productivity Index (1977 = 100)

6.0 140
Number of farms (m)
120
5.0
100
4.0
80
3.0
60
2.0 40
1.0 20
0.0 0
1914 1924 1934 1944 1954 1964 1974 1984 1994 2004 2014
Number of farms Total Factor Productivity
We argue that the drive to improve productivity becomes more important during a
period when crop prices have deflated. Crop growers have never been able to control
this component of gross revenue. Yet, astute capital allocation and adopting
technologies that appear mostly likely to improve crop output seems to us the best
means of optimising income.
We examine the long-term, historic trends for total farm gross income, raw materials
and operating expenditure as a proportion of sales in Fig 17. Over this 105-year
period, farm revenue has expanded materially, along with all other cost categories.
Fig 17: US farm revenue vs raw materials, opex and fixed costs as a % of sales: 1910-2015E
250,000 40%
200,000
30%
Costs as % revenue
Farm revenue $bn
150,000
20%
100,000
10%
50,000
0 0%
1910 1925 1940 1955 1970 1985 2000 2015E
Farm revenue Raw materials Operating expenditure
Since this is a commodity facing industry, it is natural to expect a degree of volatility.

Operating expenditure as a function of farm revenue appears to display greater
amplitude, which we believe is due to more dynamic energy prices.

The uptick in farm revenue in the early 1970s was primarily due to the increased use of
pesticides, and fungicides in particular.
However, the cost category that has not only captured the greatest proportion of
farming capital but also expanded at a more consistent pace is raw materials.
Statistical work shows farm raw material spend does not get cut materially
There can be problems with comparing multiple sets of data over the long term.
However, while there may appear to be a relationship or some type of visual
correlation, this does not necessarily mean there is causation.
For this reason, we have conducted a series of statistical analyses that aim to probe
deeper and help us conclude whether reduced revenue might lead to material farm
cost cutting. After all, this is a critical debate point for many readers and we are at that
point in the cycle when growers will be budgeting for reduced gross income in 2016.
We detail our farm budget forecasts for 2016 on page 100, and identify some scope for
cuts. But first we examine what actually happened to farm capital allocation when
revenue dropped sharply compared to the previous year.
Our starting point is to perform numerous regression analyses between the change in
farm revenue and the YoY adjustment to costs. Fig 18 shows this exercise for the total
raw material group (including seeds, fertilisers and crop protection chemicals).
Fig 18: Annual change in farm revenue vs change in raw material spend: 1911-2015E
50%
40%
Change in raw material spend YoY
30%
20%
10%
0%
-10%
y = 0.537x + 0.0408
R = 0.3517
-20%
-30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70%
Change in farm revenue YoY

Note: we have excluded the depression period of 1930-32, when farm revenues collapsed by 40%
At 0.35, the R2 output is low and we would not argue for any statistically significant
relationship between reduced farm revenue and lowered spend on raw materials.

Such a result will come as a surprise to many, given the commonly held view that
spending on major costs must naturally be cut as farming revenue falls.
The 105-year period we use for our industrial analysis in Fig 18 excludes the years
1930-32. Over this period, farming revenue declined by nearly 40%. To prevent
extreme financial distress and the risk of bankruptcies, spending on all inputs was cut
materially. This had as much to do with a high proportion of land not actually being
farmed as with reducing costs.
However, we would argue that a 1930s-like macroeconomic scenario is

unrepresentative of the current agricultural cycle. Therefore excluding these three data
points as outliers seems defendable.
For completeness, if we do include the distortions from exceptionally high cutbacks as

farmers neared bankruptcy, the R2 still only reaches 0.46. This is still not statistically
significant.
Fertiliser, labour and external services costs appear most at risk

Secondary analysis of the statistical relationship between change in farm revenue and
budget allocation for all major cost components shows which would be most at risk.
We accept that some commercial operations may have overstretched financially and
must seek to lower expenditure in the coming year. For ease of comparison, we show
this work in bar chart format in Fig 19.
0.60 0.56
0.49
0.50
0.40
0.31
0.28
0.30
R2
0.20
0.20
0.14 0.12
0.08
0.10
0.00
Labour Services Fertilizer Seed Equipment Land Financing Crop
Protection
There appears to be no statistical relationship at all between change in revenue and

crop protection spend, at least not over this 105-year period. Modern synthetic
herbicides were first commercially introduced in the 1940s and the initial wave of

insecticides came a decade later. However, pesticides of some kind have always been
used over the past century, as is shown in early farm budget data.
There is always scope for external effects, such as bad weather, to shorten the farm
season. Indeed, a short NAFTA season in 2015 and low pest pressure in Europe has
lowered demand for pesticides, which has affected suppliers over the past year.
However, on an underlying basis, almost all growers will need to continue applying
crop protection chemicals or face a heightened risk of lower yields and reduced
income. There is also limited evidence here that leads us to conclude that farm spend
on seed and equipment also changes materially when revenue decreases.
There has been significant technological change over this 105-year period, so we are
mindful that other effects may be masking important underlying statistical
relationships.
We have therefore performed the same exercise, but this time focusing on data from
1980 to 2015, on the basis that this period fully captures the adoption of GM seeds, the
introduction of modern combination crop protection chemicals and major advances
for farm machinery.
Those cost components that displayed no statistical significance during the initial
work are little changed. However, there has been a material step-up in the importance
of fertiliser and land costs as a function of changing farm revenue.
Our main observation from Fig 20 is a much greater statistical relationship between
farm revenue and YoY changes in fertiliser spending. Whereas the R2 was 0.31
between 1910 and 2015, it increased materially to nearly 0.60 for 1980-2015, a period
that is more relevant.

0.70
0.58
0.60 0.55
0.48
0.50
0.39
0.40
R2
0.30 0.26
0.18 0.17
0.20 0.15
0.10
0.00
Fertiliser Labour Services Land Seed Equipment Crop Financing
Protection
In the case of land, the lack of many instances when this cost element actually
decreased during a year of declining farm revenue has constrained the R2 coefficient in
Fig 20 to 0.39. However, this has increased significantly from 0.14 in Fig 19.
Clearly, this is due to the significant increase in land asset values over the past decade
or so. According to the Federal Reserve, US arable land inflation has averaged 10%
between 2000 and 2014. However, the latest data indicate 3% deflation in 2015. Some
will argue this provides scope for land values to mean revert and offer growers some
much-needed cost relief. It seems reasonable for renting farmers to negotiate for
savings, but we note that around 50% of arable land is managed by the owner.
Share of farm capital allocation has shifted materially

There are constraints on farm spending each year and budgeting for how to apportion
cash to each input category can be a critical decision.
Not only must the added cost of new technological innovations be fully considered,
but visibility on the complete season is also limited. For example, provision should be
made for additional crop protection chemicals if the weather and pest pressure
demands it. Extreme rainfall may leach the soil of nitrogen fertilisers, so the farmer
must weigh up whether to reapply or to get by without an additional dose and risk
much lower yields.
Our view that farmers generally embrace new value-creating technologies has been
well-documented in previous research. Broadly, those inputs that boost output or
productivity should capture a greater share of farmers capital over the long run.

So we thought it interesting to examine whether there have been noticeable changes

over time to the proportion of farm revenue each major cost component represents.
We have broken up the 105-year duration of our data sets into three periods:
x Phase 1 1910-60: we examine cost allocation during a period in which farmers

began to consume materially more fertiliser, replace labour with machines and, in
turn, consume more fuels.
x Phase 2 1960-2000: crop protection usage intensity increased materially, hybrid

seeds became the norm and farmers began to outsource certain external services.
Land prices also began to rise.
x Phase 3 2000-15: this period captures the most recent technological change, i.e.
widespread adoption of GM seeds for corn, cotton and soybeans.
In Fig 21, we bridge the cost elements for Phase 1 as a function of farm revenue.

75%
70%
-3.1% 2.8% 1.1% 66.1%
7.4%
65% -4.3%
Costs % of revenue
10.6%
60%
55% 1.7%
3.8%
50% 1.5%
44.6%
45%
40%
35%
Costs 1910
Financing
Costs 1960
Fuel
Crop pro
Labour
Equipment
Seed
Fertiliser
Services
Land
Over this 50-year timeframe, all costs took additional share, apart from labour and
financing costs. In particular, spend on equipment and fuel increased materially.
The relief to financing costs arose from declining interest rates and, as we stated
earlier, US labour continued to migrate from rural to urban regions.
In Phase 2 (Fig 22), the greatest proportion of capital captured was by crop protection,
underpinned by more widespread usage of insecticides. This was followed by adoption
of fungicides, which once more became commonly commercially available in the
1970s.

Farming spend on seeds also began to rise, due to the introduction of single-cross
hybrids. Our prior work on emerging market farming technification (Harvest
Opportunity, November 2013) pointed out that the use of single-cross hybrids helped
boost corn yield, rising at a 3.5% CAGR between 1960 and 1980.
The change in spending on raw materials as a group (seeds, fertiliser and crop
protection) nearly doubled by the end of Phase 2 in comparison to the prior period,
exceeding 14% of total farm spending.
Operating costs (labour, fuel and energy) gained no material share of farmers cost
allocation, whereas fixed costs continued to be a cost burden. However, it is interesting
to note that cash directed towards machinery declined as a function of total spending
and we attribute this to price deflation passed onto the grower, as a result of mass
production. Land cost especially increased more strongly than in Phase 1.

100%
95%
3.2% 87.4%
90%
4.7%
Costs % of revenue
85% 0% 0.3%
7.3% -3.4% 2.6%
80%
1.9%
75% 4.7%
70% 66.1%
65%
60%
55%
50%
Costs 1960
Costs 2000
Equipment
Labour
Seed
Fuel
Financing
Services
Crop pro
Fertiliser
Land
Linking with our view that US arable farm operating margins have plateaued, we
thought it interesting to show that the total proportion of revenue formed by all cost
elements remained broadly unchanged over Phase 3. This can be seen in Fig 23.
Raw materials as a group have continued to expand as a share of farm capital

allocation, with an additional 4.4% share captured over the past 15 years. Seed and
fertilisers have both expanded in terms of budget importance.
However, crop protection chemicals have decreased in value, at least in terms of the
ratio to farming revenue. In Chapter 2, we make the point that the introduction of GM
seeds has been a major issue and eroded demand for some herbicide products.

The share of farm budget represented by operating expenditure and fixed costs has not
increased particularly. Additional capital has been allocated to equipment and land,
with an offset from cheaper financing and lower spending on labour and external
services.
Fig 23: US farm cost component bridge: 2000-15E

100%
98%
96%
-1.4%
Costs % of revenue
94% 2.5% 3.0% -2.0%

-1.3%
92% -1.3% 0.9%
3.3% -0.8% 90.3%
90%
87.4%
88%
86%
84%
82%
80%
Costs 2000
Financing
Costs 2015
Labour
Crop pro
Equipment
Seed
Fuel
Fertiliser
Services
Land
In the next chapter of this report, we explore some of the major trends that are
emerging in agriculture and have the potential to impact how farmers allocate capital
over the next cycle.
A detailed look at over a century of US arable farm economics highlights long

cycles during which capital is reallocated towards the innovations of the time. First
came mechanisation, then the chemical companies had their heyday and most
recently seeds did best.

02/
02/ Pressures on growth
Pressures on growth
Three industry trends have combined to slow traditional crop
protection growth. These trends show no sign of abating. Resistance to
ageing crop protection actives is on the rise. Progress in seed trait
technology threatens further substitution of chemical insect protection.
The rate of truly new innovation has slowed as the industry has
matured. 112 patents will expire by 2020 exposing $5.5bn of industry
sales to the chasing pack of newly formed super-generics. Regulatory
tightening could lead to more product restrictions. Farmers are once
again challenging how investment decisions are made.

(1) Resistance to existing technology is rising

Pesticide resistance is not a new phenomenon, but it is now growing rapidly. Until
recently, farmers have been able preserve crop yields by paying up for the top-
performing seed germplasm and an ad hoc extra application of herbicide.
But the outlook for the control of invasive weeds, pests and plant disease appears more
challenging. The evolution of intensive, modern farming has improved productivity,
but appears to have raised the tolerance of pests to tried and tested yield protection
chemicals. This has been exacerbated by a lack of innovation from agrichemical
companies no new herbicide mode of action has been introduced since 1984.
The proportion of US land infested with weeds resistant to herbicides has increased
from 8% in 2010 to 21% in 2014 (Fig 24). Practically all industry participants,
including leading agronomists and suppliers, expect this trend to continue.
Fig 24: Proportion of US arable land infested with resistant weeds

25%
21%
US arable land infested
20% 18%
15%
15%
10%
10% 8%
5%
0%
2010 2011 2012 2013 2014
However, this is not just a weed control problem. By the end of 2014, 586 insect
species were deemed resistant to at least one insecticide2. Five were found to have
evolved tolerance to the bt11 seed trait, stacked in GM corn and cotton to protect
against root pests. Commercially relevant resistance to fungicides appears to be in its
infancy, but studies already highlight diseases that cannot be controlled by a single
pesticide active ingredient.
Efficacy appears in decline for old technology and the use of simple generic products
may gradually reduce. As resistance pressure builds, farmers exposed to this problem
will likely apply greater quantities of pesticide, or trade up to higher value products
containing multiple active ingredients and different modes of action. Companies with
an extensive toolbox of chemistries should do well, including Bayer and Syngenta.
2
Sparks et al (2014), IRAC: Mode of action classification and insecticide resistance management, Pesticide Biochemistry and Physiology,
Volume 121, June 2015, pp122-128.

Over the longer term, those true innovators in the agrichemical industry able to
launch novel chemistries will be well-placed to capture market share and improve
margins, as mix trends upwards. Velcourt (a leading agricultural consultancy)
estimates that from the first detection of insensitivity to a chemical by a pest, the
product has six years left, on average, before market failure.
Resistance is mode of action failure

The US Environmental Protection Association classifies crop protection products as
important pest management tools, despite continually raising the barrier to approving
new chemistries. But there is a natural tension now forming, with the association
making it more challenging and costly for suppliers to launch new products.
Nonetheless, industrial demand for more effective active ingredients is rising.
The mechanism through which herbicides, fungicides and insecticides work is known
as mode of action (MOA). In practice, this tends to be a disturbance to the metabolic
system of the pesticides target. This is often manifested as a functional or anatomical
change at the cellular level, which is irreversible and leads to permanent harm.
The problem is that despite new branded pesticides and active ingredients being
launched, many are product extensions or reformulations. In the case of herbicides, no
novel chemistry designed to exploit a new MOA has been commercialised since 1985.
Developments for fungicides and insecticides have been only marginally better, with
one new targeted pathway discovered in the last 15 years.
The industry has become a victim of its own success. The best performing products
have been well-integrated into modern farming practices and arguably overused.
There are c260,000 plant species globally, of which 1,000 are recognised as weeds.
Including older molecules that are now off-patent and some materials that are now
banned, there are around 290 herbicide active ingredients. However, across this entire
product category, only 20 MOAs (depending on classification scheme) are used as the
mechanism to kill plants. We rank these by the number of pesticide active ingredients
(AI) targeting each site in Fig 25.

Fig 25: Herbicide active ingredients with specific mode of action as of 2014
60
Number of AIs targeting mode of action
50
50
40
30 26 24
21 20 19
20 17 17
14
8 7 6
10 5 4 3 3 2 2 2 2 1
0
HPPD inhibitors
Membrane disruption
EPSP inhibitors
Auxin transport
ALS inhibitors
PDS inhibitors
DHP inhibitors
Microtubule assembly
Glutamine synthetase
Lipid synthesis
Carotenoid inhibitors
Mitosis inhibitors
Photosystem I
Photosystem II (C1)
VLCFAs inhibitors
Photosystem II (C2)
Photosystem II (C3)
ACCase inhibitors
Synthetic auxins
PPO inhibitors
Cellulose inhibitors
Note: EPSP inhibitors includes glyphosate

Source: Redburn, HRAC, Phillips McDougall
With numerous active ingredients often targeting the same MOA and crop protection
usage intensity rising in many regions, prolonged exposure has, to some extent,
accelerated this resistancy trend.
To be clear, plant resistance to herbicides is not an entirely new phenomenon. As we

show in Fig 26, the problem has been around for some time. In the case of pesticides
targeting the Photosystem II MOA (inhibition of photosynthesis), the number of
weeds developing a tolerance has been rising for most of the past 40 years.
Fig 26: European weed resistance to herbicide modes of action cumulative
120
100
Cumulative count
80
60
40
20
0
1977 1981 1985 1989 1993 1997 2001 2005 2009 2013
Photosystem II (C1) PSII inhibitor (C2) ACCase inhibitors
EPSP inhibitors ALS inhibitors VLCFA inhibitors
Synthetic auxins Cellulose inhibitors Photosystem I
Auxin transport Microtubule assembly Carotenoid biosynthesis
Source: Redburn, Weedscience.org

From 1980 to around 2005, weeds displayed no other meaningful resistance to other
MOAs. However, this has changed in recent years, with the ALS (inhibition of
acetolactate) and ACCase (inhibition of acetyl CoA carboxylase) pathways no longer
proving effective.
Monsantos Roundup herbicide (active ingredient glyphosate) which is likely to be

the product most well-known to many readers is an EPSP inhibitor and dominates
this subsection, at least in terms of sales ($6bn globally, including generic versions).
Even in Europe, which is not a major market for Roundup, given the lack of a major
GM seed industry, weed resistance has begun to rise over the last few years.
The question is: if the effect has been around for some time, why have crop yields not
collapsed?
Resistance of a pest species to a single MOA is not in itself a problem. The

agrichemical industry currently has sufficient tools to combat such an event, by simply
including in the final product another active ingredient that uses a different MOA to
kill the plant. However, this approach does not provide a near-endless arsenal of
chemicals to combat resistance trends, since not every MOA works to kill every weed.
What the agricultural industry is most concerned by is the more recent evolution of
plants that have developed resistance to more than one herbicide MOA.
Resistance to multiple modes of action

Multi-MOA resistance is of increasing concern to the agricultural industry. In the near
term, crop protection suppliers are actively developing more complex combination
products that can contain up to six active ingredients to combat this. Yet the more
numerous chemistries could mean more cost to achieve complete market approval.
Farmers will have to wrestle with forced obsolescence of ageing, one-MOA products
and instead will have to trade up. Some will try to stick with mostly generic active
ingredients (representing around 30% of the market in NAFTA and Europe), but as
efficacy seems likely to erode, such a strategy may prove ineffective over the longer
term.
One interesting line of debate is whether the cost of more numerous raw materials,
together with the added formulation and toxicological expense for more complex
combination crop protection products, can be completely passed onto the farmers. We
have put this question to various leading suppliers and their response was that we
should not be overly concerned.
However, we are mindful that in a period of subdued farming returns, fully recovering
all additional costs may prove more difficult, unless the final product is highly
differentiated and generates unique value in use.

Compelling data that highlight the prevalence of multi-MOA resistance have been
collected by a non-profit organisation, with submissions from hundreds of scientists
across 80 countries.
The unique incidence for each different combination of weed resistance to multiple
MOAs in the NAFTA region is shown in Fig 27, from 1990 to 2014.
Fig 27: Unique incidents of multisite herbicide resistance in NAFTA: 1990-2014

100
Incidents of multisite resistance
79
80 74
67
62
56
60 50
39 42
40 28 29 32 36
24 27
16 18 21
13
20
4 5 8 12
1 2 3
0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
At the end of 2014, 79 plant populations were resistant to more than one MOA in
NAFTA alone. Of these weed outbreaks, over 70% are resistant to glyphosate and 30%
are tolerant to four or more herbicide MOAs.
Amazingly, one species of annual ryegrass (Lolium rigidum) is resistant to 11 MOAs

out of 20 possible groups.
The evolution of weed resistance from one MOA to multiple pathways is a worrying
trend as it rapidly begins to deplete the options for pest control.
A rather eye-catching chart is shown in Fig 28, which compares the recent step-change
in the rate of multi-MOA resistance against the number of new herbicide active
ingredients launched. The latter is now at a historic low.
Noting that these are global data and encompass the entire crop protection industry, it
does lead us to consider that long-term growth prospects for the major suppliers will
become more binary than in the past.
In addition, these are not new MOAs (there have been none over this timeframe),
rather incremental improvements to established herbicidal pathways, and thus
susceptible to the resistance mechanisms already evolved in weeds today.

Fig 28: Unique multisite herbicide resistance in US vs new active ingredients: 1990-2014
15 80
Crop protection AI launches
60
Weed species
10
40
5
20
0 0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
New crop protection AI launched (LHS) Weeds resistant to multiple modes of herbicide action (RHS)
How farmers are coping

If weed resistance to crop protection MOAs is on the rise, then it should follow that
industry test data will begin to identify risk to efficacy for some active ingredients.
This appears to be the case. In Fig 29, we compare the number of plant species globally
that have developed resistance to 15 common herbicide ingredients, in 2000 and 2015.
Those products that demonstrate the most notable change in resistance include
glyphosate (Monsanto), iodosulfuron (Bayer), tribenuron (DuPont) and imazamox
(BASF). Collectively, global sales of these four active ingredients totalled $6.7bn in
2014, although heavily skewed to Roundup (AI is glyphosate).
Fig 29: Number of weeds resistant to specific AIs: 2000 vs 2015

70
60
Resistant weed species
50
40
30
20
10
0
Tribenuron-methyl
Glyphosate
Thifensulfuron-methyl
Imazamox
Atrazine
Imazethapyr
Chlorsulfuron
Metsulfuron-methyl
Iodosulfuron sodium
Simazine
Bensulfuron-methyl
Fluazifop-p-butyl
Pyrazosulfuron-ethyl
Fenoxaprop-p-ethyl
Paraquat
2000 2015

Crop protection suppliers have begun to offer more combination products, which
contain active ingredients targeting multiple MOAs. We expect these materials will
form the majority of branded product launches from 2016.
Encouragingly, there is clear evidence that farmers have begun to use these products.
For example, the USDA has gathered data since 1996 showing how the herbicide mix
being applied to total corn acres has developed.
As we show in Fig 30, it is only in the past decade that glyphosate herbicides have
begun to be blended with other ingredients. In 2010, they formed the largest
component of the market.
Fig 30: Glyphosate product combinations for US corn farming: 1996-2010

Planted acres (millions)
80
60
40
20
0
1996 1997 1998 1999 2000 2002 2005 2010
Glyphosate Only Glyphosate plus other herbicides Other herbicides No herbicides
Active ingredients that are now more commonly blended with glyphosate include 2,4-
D (sold by Dow Chemical under the Enlist brand) and pinoxaden (Axial supplied by
Syngenta).
Examining a similar data set for US soy farming since 1996 (Fig 31) shows that
herbicide mixtures have been a feature of the industry for some time. In addition,
glyphosate has taken market share consistently from 1996 to 2006.
However, the major step-up in farmers spraying more acres of soy with glyphosate
combination products only began to occur from 2006.
The last available data point was from 2012, which indicated that around 40% of total
US soy acres were still treated with glyphosate-only herbicide. We would be very
surprised if this has remained the case and, by the end of this decade, mixtures with
two or more active ingredients will likely be the norm.

Fig 31: Glyphosate product combinations for soy farming: 1996-2012

Planted acres (millions)
80
60
40
20
0
1996 1997 1998 1999 2000 2002 2006 2012
Glyphosate Only Glyphosate plus other herbicides Other herbicides No herbicides
We detail all major suppliers product pipelines in Chapter 4. Almost all companies
appear well-positioned in herbicides and have new products in late-stage
development. Those with large product-specific peak sales targets include Syngenta
(Acuron), Dow Chemical (Arylex), Bayer (Adengo) and Monsanto (Roundup Ready
Plus blends).
Unhelpful farm practices and the risk to yields

It is probably obvious to the reader that over-application of pesticides leads to plants,
insects and disease developing resistance. So rather than farmers reallocating a higher
proportion of capital to pay for more complex ingredients, perhaps the answer lies
with changing how farming is done?
We are not sure this is likely, mainly since heightened use of crop protection has
preserved improved yields, but also because modern products have lowered other
operating costs, such as labour and fuel. The fact that older products no longer work
makes this a moot point.
Taking the assumption that all crop protection applied in 2015 to farm corn totalled
around $28 per acre (4% of total expenditure), then a 10% increase in cost (from mix)
will still be worthwhile, if rising yields (from seed) are protected.
In our 2016 corn budget scenario, for each incremental bushel per acre of corn
generated, operating profits rise by 1.3%, which is $4 per acre.
This implies that a 10% increase in crop protection cost would be fully absorbed by
producing just one extra bushel per acre in 2016.
However, there are some practices that have made things worse:
x Herbicide rotation. Farmers in some regions are only just adjusting to resistancy
and have historically applied herbicides with a single MOA. Another common
practice is to switch to another product with the same MOA, and then alternate

each year. The end result is for plants to still develop resistance to this single
pesticide pathway, due to continual exposure.
x No tillage farming. A long-term trend in agriculture has been for farms to

consolidate, gain scale effects and better cover fixed costs. Field sizes expanded,
marginal land was farmed and the prevalence of hedgerows reduced as a
proportion of land, but there was a concern that soil erosion would worsen.
The use of GM seeds and a heavy application of herbicides before the emergence of
the crop allowed for no tillage practices to gain momentum. The industry view is
that the lack of churn to the soil bed means the weeds seeding in the prior season
will continue to remain the most exposed to crop protection sprays and amplify the
chance of resistancy.
x Reduced crop rotation. Not all herbicides can be used with all crops. Repeated
planting of the same crop limits the range of different pesticides that can be used
and so carries the risk that the grower opts to apply the same product each season.
x Lack of awareness. Some agronomists argue that there is a lack of awareness of the
resistance problem, especially among the older generation of farmers. Although the
industry is often perceived to be conservative and only slowly adapts to change, we
are less in agreement. Our work shows that growers will adopt new technologies as
needed, in response to shifting economics and the potential to improve returns.
Agronomists and farm management companies are trying to establish what the
negative impact would be to crop yields were farming practices to fail to adapt to
resistancy issues. More recently, academic research has begun to examine which
categories of crop protection products exhibit least resistancy. However, different
testing regimes make comparing the various studies a challenge.
A paper prepared by DEFRA, UK in 1999 sought to examine the impact on wheat

yields, at various degrees of field infestation. In the UK and most of north-western
Europe, the weed farmers are struggling most to contain is Black Grass. Fig 32
highlights the wheat yield losses that would be expected to result from Black Grass
infestation.

Fig 32: Effect on crop yield from herbicide resistant Black Grass infestation
Plants per m2 % crop yield loss Range of % crop yield loss
12 5 <5-15
25 10 <5-25
50 15 <5-35
100 20 5-50
250 35 10-65
500 50 20-70
3
Source: Redburn, Blair et al
Separately, an academic study conducted by University of Bonn in 2004 (reference in

footnote) aimed to establish the existing underlying impact to farm production for
various crops, arising from weeds, insects and plant disease. Fig 33 details the total
potential loss of crops globally to various pest pressures. We would highlight that there
is significant scope for variation between regions, due to climate, soil quality and
regulatory barriers to technology usage.
Farmers will be well aware that crop productivity is always well below optimal levels.
Only through progressive improvement in growing processes and input selection will
the gap between the theoretical maximum and real-world yields slowly converge.
Although not directly related to resistancy trends, we think it is worth making the
point that a farmers job may begin to become gradually more challenging. If
investment in more expensive inputs results over the longer term, then either farm
expenditure will erode or the cost of production will structurally increase.
Fig 33: Total loss potential of crops to pests

100%
Total loss percentage
80%
60%
40%
20%
0%
Wheat Rice Maize Barley Soybeans Cotton
Weeds Animal Pests Pathogens Viruses
Source: Redburn, Oerke et al.4
3
Blair et al (1999), Proceedings of the Brighton International Weeds Conference 1999, pp753-760.
4
Oerke et al (2004), Safeguarding production losses in major crops and the role of crop protection, Crop Protection Vol. 23, pp275-285.

Fungicide and insecticide resistance also rising

Unfortunately for the grower, resistance to MOAs for some fungicides and insecticides
is also said to be rapidly becoming a problem. Our work suggests that data are much
less readily available, at least outside the crop protection companies.
However, we have found a number of research papers that have sought to begin
scoping out the magnitude of the problem. A series of studies by the College of
Agriculture and Life Sciences at Arizona University has concluded that tolerance to
commonly used insecticides is rising.
There has been a significance response to the introduction of commercially available

insecticides. Fig 34 shows the cumulative number of insect species that have displayed
resistance to insecticides.
Fig 34: Insect resistant to pesticide active ingredients (cumulative): 1910-2015

600
Commercial introduction and early
Resistant insect species
500 adoption of first generation

400 synthetic insecticides
300
200
100
0
1910 1925 1940 1955 1970 1985 2000 2015
Source: Redburn, Tabashnik et al5
As of 2013, the Department of Entomology at Michigan State University claims to

have identified 11,254 unique instances of insect resistance globally, including
tolerance to 325 insecticides.
This number is substantially higher than for plants. We think this can be attributed to
a much higher fecundity for insects and increased genetic variation, due to their ability
to travel long distances.
Fungicides have also been found to suffer from resistance issues, although, as for
insects, the data are less consistent and are available over a much shorter timeframe.
In addition, Velcourt has been conducting field trials for some of the new SDHI
fungicide products in France and the UK, in order to benchmark performance to
combat plant disease. Materials under evaluation have included Bayers Aviator Xpro,
BASFs Adexar and Syngentas Seguris.
5
Tabashnik et al. (2014), Defining terms for proactive management of resistance to Bt crops and pesticides, Journal of Economic
Entomology, Vol. 107, pp.496-507

Although the work has only been conducted over a narrow region in Europe, it is
considered to be representative and, surprisingly, is already highlighting early
tolerance to recently launched fungicides.
Innovation required
More complex combination crop protection mixtures may suffice to address the
resistancy problem over the shorter term. Indeed, almost all leading suppliers plan to
launch new products over the next five years.
However, thanks to consolidation, a smaller number of companies are dedicating

resources to genuinely innovating new chemistry, with a new MOA. Our assessment is
that only Syngenta, Bayer and BASF are rising to this challenge.
The long-term trend for new herbicide innovation can be seen in Fig 35.
Fig 35: Crop protection companies developing new herbicides: 1970-2010

50
Number of companies
40
30
20
10
0
1970 1975 1980 1985 1990 1995 2000 2005 2010
Source: Redburn, Appleby6
The problem is that new chemistry has been a long time coming. All of the herbicide
MOAs that are used today were discovered between 1934 and 1984, at a rate of
approximately one every two years.
There has not been a new MOA introduced since 1984. This is the key to why there is
a resistance problem. A lack of innovation and persistence of poor farming practices
has led to decades of repetitive selection pressure with no disruption.
The barrier to herbicide innovation has come from an industry move to allocate
resources to fungicides and insecticides, which normally generate higher gross margin.
Some companies, such as Syngenta, have strategically opted to diversify into GM
seeds, which has split R&D expense even further.
However, we think that a major reason for the industry developing and
commercialising fewer herbicides is the success of glyphosate.
6
Appleby (2005), A history of weed control in the United states and Canada a sequel, Weed Science Vol. 53, pp.762-768

As the adoption of GM seeds gathered pace, farmers had the perfect weed control
system at their disposal for the first time. Application was easy, the technology package
reliable and productivity improved.
Glyphosate was so successful that it accounted for around 40% of global herbicide sales
at its peak in 2008. Currently, over 90% of GM crops planted are stacked with a
glyphosate-tolerant trait.
To some extent, researching new herbicides has been disincentivised, since on rising
arable acres, farmers would only spray glyphosate, no matter what was discovered.
Shortly after glyphosate-tolerant crops were commercialised in 1996, the annual count
of herbicide patent applications rapidly dropped (Fig 36).
Fig 36: GM seed market success disincentivised innovation: new patents vs AIs launched
160 1996 intro of glyphosate 500
resistant crops 450
140
400
Cumulative AIs launched

120
Patents submitted per year
350
100 300
80 250
60 200
150
40
100
20 50
0 0
1980 1985 1990 1995 2000 2005 2010 2015
New Herbi AIs (cum.) US Herbicide Patents
Source: Redburn, Gerwick7
Against the backdrop of rising innovation costs, it is no wonder that crop protection
companies assigned capital elsewhere to maximise returns.
The total cost of researching, developing and gaining full regulatory approval for a
new crop protection product has increased at a 3% CAGR between 1995 and 2015
(Fig 37).
It is therefore surprising to us that, in general, global pricing for crop protection has
increased by less than a 2% CAGR. If the cost to develop new products has expanded
by a 3% CAGR, then this implies a declining return. It makes no sense to us that
pricing power is not being fully realised when the industry structure is so consolidated.
7
Gerwick (2010), Thirty years of herbicide discovery: surveying the past and contemplating the future, Agrow:VII-IX

Fig 37: Total R&D cost for herbicide R&D: 1995-2020E

300
250
Total R&D cost $m
200
167
150 146 148
79
100 67
50 94 85 90 102
72
0
1995 2000 2008 2015E 2020E
Total research cost Total development cost
Source: Phillips McDougall, Redburn
It seems evident that the raw material suppliers for the agricultural industry are
seeking to consolidate, be it for fertilisers, crop protection or seeds. There are clear
barriers where market power is high, but workarounds to get deals done seem possible.
Like in the pharmaceutical industry, a good means of coping with rising innovation
cost is to dilute it over a larger supply position. Consolidation could also be used to
enhance market power and support the ability to raise prices. Yet, progress in large
companies combining has been slow.
In contrast, some of the mid-sized crop protection businesses have begun to

consolidate over the past year and it may be that there is more to go for in this area.
Fig 38 highlights companies that have less than 5% market share. Further market
concentration in this second-tier group could begin to introduce greater market
pressure for the leading crop protection businesses.
Fig 38: Crop protection sales by supplier in 2014

14,000
11,847
12,000 11,142
Crop protection sales $m
10,000
8,000 7,232
5,686
6,000 4,897
3,690 3,300
4,000 3,026
2,322 2,238 2,050
1,755 1,599
2,000 1,126 1,008
0
BASF
FMC
Dow
Platform
Arysta
Nufarm
Albaugh
Bayer
Monsanto
DuPont
Adama
Syngenta
UPL
Cheminova
Sumitomo

(2) Trait substitution of insecticides

Our R&D pipeline work suggests that four companies will launch insect protective
traits over the next three years. GM crops cover only 13% of all arable acreage (in
2014) and there may be great potential for expansion over the longer term (Fig 39).
Fig 39: GM crop acreage as a proportion of all global arable land

14%
GMO market penetration
12%
10%
8%
6%
4%
2%
0%
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Global GMO acres as % of all arable land
Source: ISAAA, FAO Stat
However, the scope for partial demand substitution does seem likely to have a negative
impact on crop protection growth prospects, particularly in LATAM markets, where
insect pressure is high. It seems possible to us that growers will begin to opt for built-
in measures to address pests, in the form of stacked traits.
An additional problem is that Brazil and Argentina have become a disproportionate

part of global growth (Fig 40). Although market growth has been solid in most
regions, LATAM has led the way, expanding at a 9% CAGR since 1995.
Fig 40: Regional crop protection market growth: 1980-2014

10.0% 9.0%
9.0%
8.0% 7.3%
6.8%
7.0%
CAGR %
6.0% 5.4%
4.8% 4.6%
5.0% 4.4% 4.1%
3.6%
4.0%
2.8% 3.0%
3.0%
2.0% 1.0%
1.0%
0.0%
CAGR 1980-1995 CAGR 1995-2014
Source: Redburn, Philips McDougall

We can also examine the global market growth for crop protection in terms of the
three main product categories, from 1980 to 2014 (Fig 41).
At least on a global basis, all crop protection product segments have realised market
value expansion over the long run. Even with frequent weather events, farming
profitability at much lower levels than today and new innovations being launched, the
industry has delivered 4.4% compound growth over this 34-year period.
Fig 41: Crop protection market value development by product segment: 1980-2014
60,000
50,000 Global market growth: 4.4%
Market value $m
CAGR between 1980 and 2014

40,000
30,000
20,000
10,000
0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Herbicides Insecticides Fungicides Other

However, if we examine the pace of growth development before and after the initial
launch of GM seeds around 1995, we can see a difference in market expansion for the
most affected product category: herbicides.
Compound growth for herbicides practically halved, from 5.4% in 1980-95 to 2.9%
between 1995 and present (Fig 42).
Fig 42: Crop protection growth by segment, before and after GM seed commercialisation
8.0%
6.6% 6.3%
6.0% 5.4% 5.1% 5.4%
4.5%
CAGR
4.1%
3.6%
4.0% 2.9%
2.0% 0.9%
0.0%
Herbicides Insecticides Fungicides Other World
CAGR 1980-1995 CAGR 1995-2014
To be fair, a component of this step-down in herbicide market growth can be

attributed to glyphosate coming off patent and suffering price erosion.

However, this product is thought to represent only c20-25% of the total herbicide
market. Therefore, associated price deflation for this material alone cannot fully
explain the complete extent of the slowdown.
Crop protection loses out in soy farm spending

Another means of looking at the potential implication of GM traits threatening crop
protection market value is to examine what has happened to the proportion of total
spend that crop protection represented historically.
Taking GM soy as a suitable proxy, Fig 43 shows that shortly after the technology was
launched in 1996, the value of crop protection supplied to growers began to represent
a declining proportion of total farm cost.
Fig 43: US farming raw material cost allocation for corn, soy and wheat: 1977-2013
60%
First commercial
Pesticide cost as % total raw materials
introduction of
50%
GMO seeds
40%
30%
20%
10%
0%
1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
Corn Soy Wheat
Soy is perhaps most helpful in observing this trend as GM soy was stacked with only a
single trait tolerance to the herbicide glyphosate from 1996 until 2014.
Corn, by contrast, has seen evolving complexity and is now stacked with multiple trait
combinations.
To some extent, wheat can be thought of as a control. Despite being the largest cereal
crop globally, it is still unmodified genetically, and no noticeable loss in farm share of
wallet can be detected in Fig 43.
For this reason, we now assume that the market growth potential for insecticides could
be lower than the high rates seen in the past decade. Although Fig 42 shows that this
product segment generated market value expansion at a 4.1% CAGR between 1995
and 2014, to some extent this masks the recent material step-up in usage in LATAM.

Commercialisation of novel crop protection materials designed to help farmers in

Brazil and Argentina combat high insect pressure were eagerly purchased and we do
not expect to see any significant reversal.
Therefore, we think that the nearly 7% compound growth rate by which the global
insecticide segment expanded between 2004 and 2014 is likely to be lower over the
next five years. We can reconcile this with more upbeat expectations for the fungicide
segment, given plant disease problems in many regions are still prolific. However, the
prevalence of plant disease is often weather-dependent and therefore consumption of
related pesticides can be volatile.

(3) Patent expiry and regulatory status risk

The final major industry issues we think investors should be considering include the
potential risks associated with chemistry patent expiry and the scope for some
ingredients to lose regulatory sales approval in Europe.
Surprisingly, there has not been much market debate on the magnitude of crop
protection sales derived from products facing likely patent expiry over the next five
years. Our calculations show that sales of these materials totalled $6.6bn in 2013.
We have identified 112 active ingredients that are subject to this status change.
Although many are immaterial, at least in terms of sales generation, all companies are
exposed, apart from Monsanto. For Monsanto, the patent relating to the major
chemistry used in crop protection products (glyphosate) has already expired, back in
2000.
Cross-checking the associated sales, as collected by industry consultant Phillips

McDougall, suggests 31 chemical ingredients generated over $100m sales in 2013.
Filtering the list further to screen for sales at the top five agrichemical companies gets
us to 17 active ingredients, which in aggregate yielded industry sales of $5.5bn in 2013.
This number represented around 10% of the global market in that year.
We bridge the sales at risk from patent expiry in Fig 44.
Fig 44: Crop protection product sales patent expiry: 2015-20E

6,000 90
660 5,480
BASF Bayer
5,000 105 115
110
170 225
750
4,000
280 135 130
Sales $m
3,000 470
655 120 160
2,000 375
Dow Chemical Syngenta
930
1,000 DuPont
0
Fluoxastrobin
Spirodiclofen
Pyraclostrobin
Florasulam
Picoxystrobin
Picoxystrobin
Flucarbazone
Boscalid
Patent risk
Trifloxystrobin
Clothianidin
Mesosulfuron
Iodosulfuron
Prothioconazole
Methylcyclopropene
Mesotrione
Thiacloprid
Foramsulfuron
Chemistries with the largest sales include:
x Pyraclostrobin, which is a BASF broad spectrum fungicide primarily used to

target rust and blight on soybeans and cereals. The main branded products it is

used in are Cabrio, Headline, and Opera. BASF licenses pyraclostrobin to

Monsanto for use in its Acceleron seed treatment system. We expect the active to
become off-patent in 2017.
x Trifloxystrobin, Bayers fungicide active, was introduced in 2000 and has been
competing with pyraclostrobin for acreage and targeting many of the same
diseases. It is also registered for use in NAFTA, LATAM and the EU. We
understand that the patent will expire by the end of 2015.
x Clothianidin is principally manufactured by Bayer, but is also made by Sumitomo

and Arysta. A nicotinamide insecticide, it was initially launched in 2002 and
appears to come off patent in 2017. It protects a wide variety of crops including
maize and cereals from biting and sucking pests with broader scope than
neonicotinoids.
x Prothioconazole is a fungicide produced by Bayer and used to formulate into

branded products Proline, Input, and Prosaro. The end use is to target a broad
variety of diseases on cereals and canola across NAFTA, LATAM and the EU.
Since 2010, Bayer has released several new combination products containing
prothioconazole, which should help preserve the product value. The active is
expected to come off patent in c2019.
x Mesotrione is an HPPD inhibitor manufactured by Syngenta used primarily in the

Callisto, Lumax and Luxar products. The major crop use is for corn, to target
broad leaf weeds. Syngenta has licensed mesotrione to DuPont and it is also
included in the companys latest combination herbicide, Acuron. We anticipate
that mesotrione will come off patent next year.
It is hard to estimate the implications when a crop protection active ingredient loses IP
protection. The progressive move across the industry towards combination blends and
product lifecycle management appears to have helped preserve industry market value.
Unlike pharmaceuticals, there is no one global body in the agrichemical industry that
states that an active ingredient is safe and regulated for use. Each supplier must
resubmit data to regional departments to permit commercial approval, whether on-
patent or not. This is costly and has formed a significant industry barrier to entry.
We are not claiming any major change to the industry structure or imminent sales
collapse from product patent expiry. However, it is not a positive change and within a
period of lower commodity prices, there may be added pressure to moderate pricing
on occasion.
The good news is that new active ingredients are set to be launched by all the major
companies over the next ten years. However, the number of chemicals subject to
patent expiry outnumbers new materials by a multiple of 2:1.

Candidates for substitution in Europe

European Commission Regulation 1107/2009 became effective on June 2011 and
sought to harmonise the rules for approval of crop protection products, as far as
possible. Materials that were felt to carry acceptable risk in use, to people or the
environment, would be given regulatory approval that permitted sales over 15 years.
At the end of this 15-year period, regulatory status can be renewed but may be subject
to additional conditions. Substances that demonstrate a less favourable topological
profile but still satisfy the criteria for approval may be approved as candidates for
substitution.
Once this status has been granted, the products involved can be subject to comparative
assessment against alternatives. If the conclusion of this work shows that significantly
safer methods of control are available, then regulatory approval for commercial use
can be withdrawn.
Frankly, although Regulation 1107/2009 sought to establish consistency and better

address product risks (instead of the actual hazard), we understand that many industry
participants find the framework rather vague. Although the process of screening active
ingredients for risks and putting these onto the list of candidates for substitution
sounds very clear, it seems that the potentially safer alternatives do not always work as
well as pesticides in practice.
Therefore, we are reluctant to claim that there will be yet another negative impact on
sales for the various crop protection suppliers, since we do not know for sure whether
each active ingredient will still be permitted for use in farming.
We understand that, as of January 2015, 74 materials are listed on the candidates for
substitution list. As is the case for patent expiry, many of these active ingredients
appear to generate small sales.
Of these, 35 ingredients generated over $100m global sales in 2013, according to

Phillips McDougall data. However, Regulation 1107/2009 only relates to European
sales. To help gauge the magnitude of company revenue at future risk, we have
implemented the assumption that Syngenta, BASF and Bayer derive 30% of global
sales for each listed product in Europe, with Dow/DuPont deriving 20% and Asian
companies deriving 10%.
Our calculations for European company sales generated by active ingredients listed as
candidates for substitution are shown in Fig 45. We appreciate this chart looks at
potential losses on a gross basis and actual losses to sales will probably be lower as sales
in other products pick up to fill the space. However, it is impossible to reapportion the
sales between companies accurately; hence we display the gross potential loss as an
indicator of total risk.

Fig 45: European sales generated by active ingredients listed as candidates for substitution
1,200
1,004
1,000
747
800
615
Sales $m
600
400
172 170
200 86 41
0
Syngenta BASF Bayer DuPont Dow Chem Sumitomo Others
Source: Redburn, European Commission, Phillips McDougall
To be clear, we have assumed no impact to sales from either patent expiry or active
ingredient substitution in our base case forecasts.
Nevertheless, it would be surprising if existing sales from the base businesses of the
major crop protection companies experienced no detrimental impact over the next few
years.
Finally, we recently came across some interesting data that highlight considerable
variation between companies in the number of novel active ingredients introduced
between 1999 and 2014 (Fig 46).
Fig 46: Crop protection active ingredients launched between 1999 and 2014
50 45
Products launched
40
31
30
20 16 16
11 13 11
10 5
1
0
BASF
Dow Chem
Sumitomo
Bayer
Monsanto
Other - ROW
DuPont
Syngenta
Other - Japan
We were surprised to find that Bayer appeared to be in such a strong position, at least
with respect to the number of actives launched over the past 15 years. It is perhaps
worth noting here that the companies do not necessarily have consistent strategies
with regard to R&D development. For example Syngenta specifically state that they are
more focused on producing blockbuster active ingredients than developing a high
number of products.
With the cost of developing new chemistries on the rise, it seems likely companies will
only focus upon a select number of new major innovations. It may be that the

strongest organic growth will be generated by those suppliers with not only new
ingredients but also the most diverse number of tools available to blend into new
combination products.
The three industry trends described above are not new. But this does not mean that
they no longer present a threat to demand growth in traditional crop protection.
On the contrary, each of the trends appears to be gaining momentum. The first
chapter of this report demonstrated how global agriculture investment has been
defined by major generational trends. Our work in this chapter provides evidence
that suggests the golden age of chemical crop protection growth is now behind us.
Technology (and yield) gains from this source are now much more marginal than
in the past. The tectonic plates that dictate farm investment choices continue to
shift. The result for the crop protection industry will be lower growth.

03/
03/ A new generation of technology choices
A new generation of
technology choices
Over the next cycle, three trends will gather pace and have the
potential to reshape how farm investment decisions are made.
Precision agriculture remains in its infancy and economic gains are
under debate, but infrastructure is becoming established and this
could become the next big productivity tool. RNAi technology is
emergent, but offers the potential to solve many problems currently
addressed through chemical crop protection. Microbial pesticides
could also be disruptive.

(1) Precision agriculture

Industry publications are filled with views on the potential for precision agriculture
(PA) to change how farmers make decisions on inputs, crop care and major
investments. Put simply, the precision agriculture concept is to apply the right
treatment, in the right place, at the right time. In other words, it is a productivity
investment to reduce waste and maximise yield. There are also associated
environmental benefits.
Under the umbrella of PA, many innovations and technologies compete to become an
established component (of which we detail the most relevant in Appendix 1). For ease,
we divide these into three categories, each at a different stage of adoption:
x Machinery and infrastructure. A fleet refresh in North America and Europe

between 2007 and 2012 led to stronger uptake of equipment controllable by GPS
(either OEM-installed or suitable for aftermarket upgrade). Apart from the high-
end systems, which come complete with a suite of crop monitoring units, the
additional cost is relatively low in comparison to standard tractors (Fig 47).
Adoption of variable planting technology has also finally begun to gather pace,
which offers the user the freedom to vary how much fertiliser and crop protection
is applied. Seed density can also be better controlled to help exclude weed
development. We understand that US market adoption is around 50% for GPS
systems, whereas variable planting penetration was just under 20% in 2014.
Fig 47: Precision agriculture equipment: aftermarket cost vs standard farm machinery
160,000 150,000
140,000
120,000
Retail cost US$
100,000
75,000
80,000
60,000
40,000
40,000
20,000 2,000 5,500 7,000
0
Mid-level: 5cm
Tractor: 100 to 150hp

High-end with yield
Entry-level: 8cm
Tractor: 80 to 100hp
Entry-level: 15cm
monitoring - 2cm
accuracy
accuracy
accuracy
accuracy
Source: Redburn, Trimble, AS Communications
x Field monitoring. Less advanced in market adoption is the use of monitoring

systems for crop health, soil quality and weed infestation. The range of technologies

being experimented with appears diverse, with drone use and satellite imagery in
particular being employed to both prevent yield losses and alert the grower to act.
x Data science. Software and mobile app platforms offer farmers access to location-
specific weather data (accurate, hourly), agronomic advisory services and input
selection tools to best optimise crop yield.
A few of the major seed producers are developing such an IT platform offering, to
leverage experience in seed selection, but are increasingly also developing data-
driven advisory software for fertiliser and crop protection applications.
When we began to look into PA and data science software usage, we expected
adoption to be firmly in its infancy. However, it appears to be capturing farmers
interest at a faster pace than we expected.
Many farm operators are experimenting with free and lower tier versions as a means to
become comfortable with the concept prior to greater adoption. It seems to us that the
business model for the agronomic software platform could be similar to how the
disruptive music providers started out. Once the offer became established, a period of
maximising scale followed by offering both free and subscription services. Quickly,
only a select few providers remained.
If this advisory aspect of precision agriculture gathers pace, it seems likely to be

disruptive, potentially replacing the need for separate external agronomist services.
The seed purchasing decision is typically critical in farmers minds, so we wonder
whether crop care advisory services delivered dynamically and by the seed supplier
will lead to further reallocation of farm budgets away from other input providers.
It could be that these platforms can become established farm management tools over
time, with the potential to change how farmers make decisions. The whole concept
sounds compelling to us and fits with our view that growers will migrate towards
productivity tools. In the coming pages, we review how adoption of some of the major
technologies in the US and Europe has developed.
We appreciate it is early days for crop monitoring and farmer-friendly IT solutions.

However, it seems clear to us that as the machinery and infrastructure becomes
established (and it is already there in some cases), this could provide the means for
stronger uptake in crop yield and disease monitoring systems. For those already
invested, more optimal usage of fertilisers and crop protection chemicals seems
feasible.
What is more uncertain is which crop monitoring and data science platforms will
dominate over time. Critical mass to yield profits is still to be reached in many cases,
although we understand that Monsantos newly launched FieldView Pro offer is
targeting a major upgrade in 2016. This is set to offer detailed advisory components,
with fertiliser, field health and soil mapping services (Figs 48 and 49).

Fig 48: Field Health Advisor Fig 49: Script Creator
Source: Monsanto Source: Monsanto
Major innovation push

We have examined the fertiliser, crop protection and seeds industries in some detail
for many years but failed to appreciate just how much interest there is in making PA
work in practice. It is clear when talking to industry participants that this will be an
ongoing process, and many point to the early years of GM seeds in the US.
This took a while to catch on, but once the industry had consolidated, more informed
decisions would be made on which germplasm and seed platform to buy into. It took
five years for US GM seed market penetration to exceed 30%, but then only another
five to reach 90% adoption.
A recent report published by Boston Consulting Group highlighted that between 2010
and 2014, a total of 10,206 patents were published covering the biotech seeds, crop
protection and fertiliser industries.
Over the same period, the number of patents associated with PA was 5,338. This is a
large number for an industry that we had mostly ignored. Also, our sense is that only a
minority of investors consider the disruption potential to business models for the
existing input suppliers.
As we show in Fig 50, activity remains centred on North America, which seems
reasonable given the scale of farms in this region. We do review the state of play in
Europe, however, and although PA adoption is still in its infancy, economic benefits
appear attractive for those farms with a degree of scale.

Fig 50: Patent registrations by product segment and region: 2010-14
8,000
7,000
477
Number of patents
6,000
1,567
5,000 374 Other: 24
427
4,000 801 China: 48
2,385 Other: 148
3,000 Europe: 39
2,000 457 China: 523
3,736
1,000 2,385
1,877
0 276
Crop Protection Precision Ag equipment Seeds Fertilizer
NAFTA Europe China Other
Source: Boston Consulting Group
North America: infrastructure becoming better established

As is common with new technology, consumers in the US tend to be early adopters.
Although the new components of the PA technology offering appear to be evolving, it
seems that much of the infrastructure is in place.
Most large farming operations have already invested well in new machinery over the
past cycle (Fig 51). In addition to the fleet being refreshed, we understand from
discussions with industry participants that the mix has shifted upwards, with new
tractors, planters and sprayers often including variable rate systems and GPS guidance.
Fig 51: Tractors units supplied in NAFTA, EU and Brazil: 2005-14

500,000
400,000
Units sold
300,000
200,000
100,000
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
NAFTA Europe Brazil
Source: Redburn, Agricultural Engineers Association
However, for more prolific adoption of PA to occur, smaller and mid-sized farms must
be able to access the various technology platforms. With this in mind, we thought it
useful to assess the potential for external agriservice companies to fill this void, instead

of smaller businesses being exposed to the risks associated with larger capital
purchases.
One of the best guides to how the PA offering has both evolved and been adopted over
time is a period survey conducted by the Department of Agricultural Economists at
Purdue University, Indiana. We have examined this work from 2004 to 2013 (the latest
published) and highlight some interesting trends.
The university conducts an annual survey of 2,500 farm service dealerships across 34
US states. The aim is to assess how various PA technologies are being used, discover
firms intentions to increase the offer for a particular service and track if this is
profitable.
Farm usage is quite high for dynamic methods of soil quality testing (precision
agronomics), GPS auto-steer machinery and GPS-controlled crop spraying equipment.
Usage by farming customers exceeded 50% of all services (Fig 52).
Fig 52: US survey precision agricultural services used in 2013

70% 65.5% 60.8%
60% 52.6%
Services used
50% 39.2%
40% 31.6%
30% 20.5%
20% 12.3%
10%
0%
Precision GPS auto GPS-enabled Field satellite Field GPS logistics Soil
agronomics steer spraying imagery mapping conductivity
mapping
Source: Redburn, Department of Agricultural Economics, Purdue University, Indiana
We have extracted the historical reports back to 2004 to establish which technologies
have increased in popularity over time. As can be seen in Fig 53, soil agronomic testing
has been keenly adopted since the mid-2000s. More recently, the use of GPS self-
driving farm machinery has increased significantly.
The service category that has not really increased in usage, at least until the last few
years within this data set, is GPS monitoring.
A new US survey for 2015 is underway and although the detailed report is not
available, we understand that drone use for field monitoring and subscriptions to big
data for agronomy services have stepped up strongly.

Fig 53: US survey results precision agricultural services used: 2004-13

70%
60%
Service usage
50%
40%
30%
20%
10%
0%
2004 2005 2006 2007 2008 2009 2011 2013
Precision agronomics GPS auto steer Field satellite imagery
Field mapping GPS monitoring
We have looked at the data behind some of these PA services, and more deeply
examined the trends for the specific technologies that are on offer to farmers.
Firstly, we show the long-term trend for PA crop monitoring services, together with
industry expectations out to 2017 (Fig 54). All categories have shown a progressive
increase since 2004.
Interestingly, after a period of limited change between 2009 and 2011, an upwards
trend has returned, in spite of a decline in soft commodity prices.
It is perhaps difficult to claim farmers are embracing new technologies in a

deflationary environment. However, there is no obvious reduction in the services on
offer, which one might expect if farm interest was waning.

Fig 54: US survey results PA field monitoring and data analysis technology: 2004-17E
70%
60%
Technology usage
50%
40%
30%
20%
10%
0%
2004 2005 2006 2007 2008 2009 2011 2013 2014 2015E 2016E 2017E
Soil sampling with GPS Field satellite imagery Yield monitor data analysis
Field mapping with GIS Drone crop monitoring
There is no long-term history available for variable rate planting/spraying services.

However, Fig 55 highlights that there appears to be greater supply of service coming
on-stream for multi-nutrient fertiliser application and crop protection spraying.
If these views prove to be correct, then this trend seems likely to cause a negative
demand effect for pesticides and fertilisers, as the inputs are applied in doses that are
more correlated to actual need.
To be clear, we are not claiming that the industry is about to go into an imminent
demand collapse. However, it does play to our view that growers will typically seek to
lower costs and boost productivity, especially when revenue is reduced.
As a consequence, it seems likely that volume growth will become increasingly hard to
capture in mature economies where PA is gradually becoming adopted.
Advisors state that the actual impact to yield should be negligible when applications
are more targeted, providing that soil nutrient content is accurately monitored (which
the data suggest is the case) and replenished appropriately. However, waste and
unnecessary applications will be reduced.

Fig 55: US survey results PA variable rate application of farm inputs: 2014-16E
70%
58.5% 56.1%
Variable rate application service
54.4% 52.1%
47.5%
50%
38.2%
32.1%
28.1%
30%
10%
-10% Fertilizer - single Fertilizer - multiple Crop protection Seeds with GPS
nutrient nutrient
2014 2016E
With the PA industry still in the early ramp-up period, at least in terms of offering the
full range of technologies (GPS control, field monitoring and variable input
application), not all service providers will find all services profitable.
In fact, only around 50% of agriservices companies are making a profit for their
respective packaged PA product offer (Fig 56).
Fig 56: US survey service providers making a profit from total PA package: 2004-13
55% 51.0%
50%
Making a profit
43.5% 42.5% 43.1%

45% 42.0%
39.2%
40% 37.2% 37.5%
35%
30%
25%
20%
2004 2005 2006 2007 2008 2009 2011 2013
We initially thought this rather surprising, but then wondered whether the barrier
simply came from the fact that farmers did not really have to worry too much about
productivity optimisation for years, with returns high until the end of 2012.
A scramble to refocus on cost management over the past few years could explain why
the outlook for profits improved somewhat in 2013 (Fig 56).
Historic survey data that highlight which PA technologies offer generated profits over
time are shown in Fig 57.
It seems that the products valued most by farmers (at least until end-2013) are those
associated with soil nutrient content and the variable application of fertiliser.

No data are available at this time on usage optimisation from variable spraying of crop
protection products, but perhaps this is the next opportunity.
Field crop quality and yield monitoring services have appeared less likely to generate
profits for the service provider over this nine-year period.
Fig 57: US survey service providers making a profit by product offer: 2004-13
70%
60%
Making a profit
50%
40%
30%
20%
10%
0%
2004 2005 2006 2007 2008 2009 2011 2013
Soil sampling with GPS Fertilizer - single nutrient Fertilizer - multiple nutrient
Field satellite imagery Yield monitor data analysis
Although much investor focus is upon NAFTA and, potentially, LATAM as

opportunities for PA to change how farming is done, there is also strong interest in
Europe, where scale permits.
PA is still lagging in Europe

Despite evidence that end-user demand for PA services is on the rise in the US and
Canada, this does not appear to be the case so far in Europe.
We have taken data from the Agricultural Engineers Association that quantifies the
number of farm machines sold in NAFTA and Europe and compared it to the number
of GPS units supplied in each region.
Because of the huge growth in GPS units sold into the NAFTA agricultural channel in
recent years, this implies a big step-up for market penetration (Fig 58). However,
whereas the data suggest that 65% of all tractor units sold in NAFTA contained GPS
systems, the trend has been broadly flat in Europe.

Fig 58: Proportion of farm machinery sold with GPS systems installed: 2007-13
80%
Ratio of GPS units to machines
65%
57%
60%
40% 31%
17%
20% 12% 14% 11% 15% 14% 12%
11% 11%
8% 5%
0%
2007 2008 2009 2010 2011 2012 2013
Europe NAFTA
Source: Redburn, Agricultural Engineers Association
The installed base for GPS units supplied globally to the agricultural industry, split by
region, is shown in Fig 59. NAFTA represented 56% of the world market in 2013,
materially up from 42% in 2010, whilst demand in all regions expanded.
Perhaps surprisingly, the GPS installed base in Asia Pacific is larger than in Europe,
despite (on average) much smaller farm scale. However, the reason for the recent
strong growth is that this region also includes Australia, which is the sixth largest
producer of wheat globally, with vast areas suitable for PA use.
Fig 59: Installed base for GPS units in agricultural machinery: 2006-13
1,000
900
800 140
700
Installed units (1,000)
600 125
500
90 500
400
80 350
300 60 230
45 170
200 35 150
30 120 60 70
95 45 55
100 75 30 40
20 25 110 130 140
50 65 70 80 95
0
2006 2007 2008 2009 2010 2011 2012 2013
EU28 E EU NAFTA Asia Pac LATAM MEA
Source: EU Commission, European Global Navigation Satellite Systems Agency
However, perhaps all is not lost. A recent major study conducted by the EU
Commission reviewed the potential for PA to become a more significant opportunity
within European farming.

Arguments were made including potential for input cost savings and more efficient
labour usage. Additionally, greater use of autonomous guided farm machinery is said
to lower crop damage, due to more precise plant care regimes.
Economic justifications for farmers to embrace PA have been provided in several other
studies8. However, the EU Commission report highlighted that assumptions were
highly varied in external assessments and therefore the conclusions were not
comparable.
We think it is worth summarising some of the economic justifications for PA being

adopted in Europe, subject to farm scale and crop choice:
x Wheat in Europe. For a grower with around a 1,000-acre farm, the minimal
economic benefit from autonomous guiding machinery was calculated to be
$6.7/acre. Noting that our farm profits model indicates that generic operating
profit per acre in 2016 stands to be around $200/acre, then the investment appears
worth investigating for long-term savings potential.
x Nitrogen fertiliser savings. Using Variable Rate Application for urea or

ammonium nitrate in Europe (Germany was specified in the report) would lead to
savings of between $30/acre and $70/acre.
This is a significant saving and, if proved correct, would stand to transform the
economics of crop protection. It was estimated that more targeted application, in
addition to improved nitrogen efficiency by dynamically adjusting the dose, could
lower total consumption by 10-15%.
So far, we have not seen any published time series data on the savings potential and
economic gains from optimising crop protection sprays. Perhaps this is because the
proportion of total cost this category represents is lower, so it stands to reason that
the initial move to lower cost would be focused on fertiliser.
However, it seems to be just a matter of time before usage of fertiliser is affected.

This could result in attractive savings for cash crops, which are dosed heavily with
pesticides.
8
For example, Biermacher et al (2009) Economic feasibility or site-specific optical sensing for managing nitrogen fertiliser for growing
wheat.

(2) RNAi
Ribonucleic acid interference (RNAi) is a method of gene silencing used to decrease
plant cell production of specific gene products, such as proteins. This technique has
become a major area of research for pharmaceuticals and, more recently, innovation in
agrichemicals.
Put simply, RNAi proteins are being designed as a means to inhibit specific critical
metabolic processes, thereby killing off an insect pest. We understand there are two
methods of applying RNAi technology to arable farming:
x GM seed stacked with an RNAi insect protecting trait. The plant can be
genetically engineered to produce a double-stranded RNA molecule that matches
the product of a specific gene in the target insect. One application under advanced
development will target corn rootworm.
As shown in Fig 60, the insect ingests the double-stranded RNA molecules, whilst
initially biting into the plant root. The RNA causes an autoimmune response that
disables a specific gene being expressed, effectively silencing the pathway, resulting
in the death of the insect.
Fig 60: RNAi in-plant insect protection process diagram

1. Genetically modified corn cell 2. Genetically modified corn plant 3. Rootworm cell
RNA
RNA
SNF7 gene
Western corn is turned off
rootworm ingests and worm
Double-stranded RNA synthesised RNA dies
Scientists design a type of When the rootworm ingests the The cell defends itself by turning
double-stranded RNA that matches corn, the double-stranded RNA of f the targeted gene. This gene,
part of an essential gene in the enters its cells. The cells react as if called snf7, is essential for moving
western corn rootworm. Corn is the RNA were a virus and act to proteins around in the rootworm.
then genetically modified to defend themselves. Turning the gene off causes the
product the RNA. worm to die.
Source: Redburn, Phillips McDougall, New York Times
x Sprayable RNAi-based crop protection products. The second approach is to

deliver RNAi via a targeted spray mechanism. The idea is that gene expression is
controlled, but without the need for modifying the plant genetically. This would
theoretically circumvent the existing regulations on GM modification.
It seems that proof of concept has already been established. Universities have been
involved in pioneering the work, including at Cambridge in the UK and Cornell in
the US. A research paper was published early in 2015 that showed foliar

application of dsRNA is a highly effective means of controlling the Colorado

potato beetle. A single application protected the plant for just over 28 days.
The potential advantage over traditional crop protection products is that farmers
would apply the RNAi spray in a much more targeted fashion. Despite a likely
higher cost per unit volume, the scope for the total applied dosage to be reduced
significantly is still expected to deliver net savings.
A second positive effect is that the impact on the wider environment would likely
be reduced, adding external support to get the technology commercialised.
Intensifying pressure from regulators, in terms of more onerous toxicological
hurdles to the approval of new crop protection chemistry, and the banning of
older active ingredients is leaving farmers with fewer options to combat pests.
Our initial thoughts were that a reduced range of pesticides to protect some crops
would imply that European Commission bans would come to an end. However,
discussion with industry consultants suggests this is not the case. Around 70 chemicals
are at risk of having approved status removed if safer alternatives can be identified.
We have identified the available global sales data for each active ingredient (2013 is the
latest period) by company and made an assumption on European exposure to reach
the revenue at risk. This has been summed up by company in Fig 61.
Fig 61: Crop protection sales in Europe at risk from regulatory change: as of end 2013
1,200
1,004
1,000
747
800
615
Sales $m
600
400
172 170
200 86 41
0
Syngenta BASF Bayer DuPont Dow Chem Sumitomo Others
Source: Redburn, European Commission, Phillips McDougall, Velcourt
Regulatory perspective supportive for biological pesticides

We would not expect any meaningful change to regulatory intervention for approving
seeds that have been genetically modified to produce RNA molecules designed to
interfere with an insects metabolism. Ironically, all plants already employ RNA
proteins as mechanisms to control internal processes, but it is the fact that external
modification has taken place that will ensure regulatory approval needs to take place.
In the case of sprayable RNAi insecticides, the outcome may be more favourable. Since
there is no heritable change to the plant genetics, the technology may not become

regulated, as is the case for biotech-modified seeds. Because the RNAi process uses
protein sequences that specifically match the gene pattern, the product should leave
other species unaffected when used.
However, there is some concern that commercially available RNAi products should
not target any shared genes that enable critical metabolic pathways for multiple
species. A study by Cornell University showed that although Colorado potato beetles
can be controlled with RNAi sprays, the protein targeted actin production in the
insect. This material is used to form structural microfilaments in the skeleton, but is
common to many species.
Best practice would be to precisely apply the RNAi spray to minimise waste, but there
is a perceived risk for some that contamination would affect other insects. A team at
the John Innes Centre in the UK has work underway to identify a different gene that is
specific only to this beetle.
However, the USDA may have already established a likely standard, with a paper
published in August 2013 (RNAi-Based Insecticidal Crops: Potential Effects on Non-
target Species). The paper argued that sprayable RNAi pesticides posed potential
hazards, including off-target gene silencing, risks to unintended organisms and also
immune stimulation.
This latter point is an interesting one, with reference to a claim made that the injection
of small fragments of RNA could stimulate an immune response in mammals
(Robbins et al, 2009). Another paper from a Japanese research institute similarly
questioned cross-species implications.
Our sense is that GM-seed delivery of RNAi to confer added insect protection will take
hold first and perhaps introduce added pressure on the insecticide industry.
Product cost not as bad as feared

It is normal to find that the cost of producing a new innovation is prohibitive in the
early stages, especially prior to commercial launch, when the scale effects are more
difficult to assess.
It has been suggested by Monsanto that the cost of producing pure RNA has dropped
from $200m per tonne only a few years ago to c$50m per tonne in 2015.
Whilst this sounds unfeasibly expensive to be spraying onto crops, the companys
global head of R&D has indicated that one-tenth of a gram of RNA is sufficient to
cover an acre of land with a high success rate.
However, there is clear interest in developing similar technology amongst innovation

centres, universities and the crop protection companies themselves. We show the
number of patents filed that primarily relate to RNAi in Fig 62.

Fig 62: RNAi-related patents granted by technology or crop: 2008-13

80
70
70
60
Number of patents
50
40
30 28
30 23 22 21
18
20
8 8
10
2 2
0
Rice
Wheat
Technology
Sugarbeet
Corn
Soybean
Fruit & veg
Others
Canola
Barley
Cotton
The price versus cost model for the RNAi modified seed will likely follow that for
other major trait innovations; an incremental fee will be charged to the grower in
return for enabling productivity gains.
Which companies are involved and what are the plans?

All the major crop protection companies have some kind of involvement in RNAi
research, including Syngenta, Bayer, BASF, Monsanto and Dow Chemical. Patent
searching shows that most are focused on sprayable pesticides or formulating seed
treatment products, often to target nematode control or pests plaguing citrus crops.
It is also thought that gene silencing can be used as either a research tool to screen for
plant responses to shutting down or redirecting specific metabolic pathways. For
example, Bayer is exploring techniques to direct the biosynthesis of desired
compounds in plants. This could be to improve the nutritional composition, via a
more optimal balance of fatty acids.
Another opportunity is to use RNAi as a means of better understanding the role of

specific genes in regulating plant growth. Shutting down a single gene may highlight a
previously unknown function via observing the impact to visual or biochemical
characteristics.
A major step in this direction was made by Syngenta in late 2012, when the company
acquired Devgen for $0.5bn. The rationale was partly to gain access to the companys
hybrid rice seeds but also to acquire competence in RNAi technology.

Remarkably little has been published on this technology over the past year, although
we understand that further collaborations have been established, such as a joint
research project with Nexgen Plants based in Australia.
We are optimistic that new RNAi insecticides will be commercialised, but discussion
with some industry participants suggests technological hurdles remain. Therefore, it
may be some time before many of the sprayable products become available to farmers.
There is also the issue that once these pesticides are launched, sales cannibalisation of
existing products may result.
From a GM seed product perspective, we understand that three products are under
development with RNAi capability. Two are scheduled for launch in 2017, whilst the
third is still in early-stage R&D.
Monsantos Smart Stax Pro is expected to be launched in 2017. This is a GM corn

platform that will see the first seed stacked with six insect-protecting genes, combined
with RNAi modes of action. Data from field testing conducted in 2013 show a material
improvement in root damage resulting from corn rootworm (Fig 63).
Fig 63: Root damage benchmarking: X vs RNAi stacked GM corn

1.2 1.1
Root damage rating
1
0.8
0.6
0.4 0.3 0.27
0.18
0.2
0
Control RNAi trait - 1st gen RNAi trait - 2nd gen RNAi trait - 2nd gen
Version 1 Version 2
Source: Redburn, Monsanto
The product falls within phase four of development. We model the pipeline
contribution in Chapter 4, showing the potential for $0.5bn of incremental sales. In
October 2015, the US EPA gave approval for commercial seed production and
breeding. Complete deregulation has now also been granted.
Dow Chemical will also market the same stacked trait combination, mostly under
licence from Monsanto. A second generation RNAi-enabled GM corn product is also
under development, albeit at an early stage.
An offset to insecticide growth potential

In recent years, crop protection companies have benefited from market expansion and
particularly high gross margin fungicides and insecticides, as growers struggle with
plant threats.

The problem is that if new means of protecting crops do become more widely
available, then long-term opportunities for the likes of Syngenta may become more
moderate. The market value for insecticides has increased at a 7.0% CAGR since 2009,
reaching $2.2bn in 2014 (Fig 64).
Fig 64: NAFTA crop protection market split by product category: 2009 vs 2014
6,000 5,386
4,932 Insecticides: 7.0% compound growth
Market value $m
5,000
4,000
3,000 2,168 1,923
2,000 1,546
1,150
1,000 301 334
0
Herbicides Insecticides Fungicides Other
2009 2014
We understand that only GM corn will be launched with added RNAi insect
protecting traits, initially in SmartStax Pro. Ultimately, it may be that this innovation
does little to reduce the total value of the insecticide market, as new pests evolve over
the long term.
However, because corn represents around 25% of total US arable acres, we expect that
insecticide market growth will be impeded. It may also be that other GM crops such as
soy and canola begin to be stacked with the same technology over time.
We realise that 23 insecticide products are set for launch between 2015 and 2025.
Against the backdrop of emerging competing technologies, it may be that the potential
for mix and price gains from new products becomes pressured.

(3) Biological crop protection

Interest is accelerating for pesticide products that are derived primarily from natural
sources, such as bacterial fermentation. The microbials category comprises
microorganisms, usually a bacterium, fungus or virus, which are directly applied to the
plant to kill pests.
At $2.2bn, the market value of this product category is still quite small when compared
to all crop protection materials ($57bn in 2014). However, the growth rate appears to
be much higher and sales increased by 7.4% in 2014. In contrast, demand for regular
pesticides expanded 4.5%.
Regional regulators are supportive of use and we would expect volume expansion to
continue as biological products are being promoted within integrated pest
management programmes. However, we are less confident as to whether pricing for
some of the leading materials will continue to hold up, as generic competition
emerges.
More recently, strong interest in biological products has been building at Novozymes
and Monsanto, with the two companies forming an alliance known as BioAg. This
combination seeks to leverage the former companys technological capabilities in
microbials. As an industry leader, enzymes, fermentation products and fungi are
supplied to a range of end markets.
Monsanto has also dedicated R&D resources to help further growth prospects.
Existing sales are currently small but expanding (Fig 65) and come from the supply of
yield enhancers, biological insecticides and products that optimise fertiliser usage.
Fig 65: Monsanto/Novozymes BioAg sales development: 2003-14

140 128 132
120
120 102
90 95
100 80
Sales $m
80
52 55
60 48
40
40 30
20
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Note: sales generated by the BioAg alliance will be split with Monsanto from 2014, which we highlight in grey
For clarity, Novozymes no longer reports biological crop products separately, instead
consolidating sales together with animal feed enzymes. To obtain a sales estimate for
2013, we have grossed up the 2012 revenue at the same rate as the companys Ag/Feed
segment.

Favourable regulatory backdrop

The main argument for greater usage of biological pesticides stems partly from
sentiment and partly from a more favourable regulatory environment.
European Commission Regulation 1107/2009 points to comparative assessment

between similar farming inputs, with the potential for recommending substitution by
safer alternatives. This was a new addition to the regulations that came into force in
September 2013. It could mean that some ageing chemicals are banned, as new
biological alternatives are developed and launched.
Unlike many other crop protection products, there is also a reduced requirement for
application withdrawal prior to harvest. The concern has been that residues could
remain on crops due to late application of traditional crop protection products
although product-specific and subject to regional regulations, usage tends to be limited
at the end of the growing season.
Some industry consultants suggest that the residues left on the crops are much lower
for biologicals than for traditional crop protection products. It also seems possible that
food processing companies will prefer organically derived materials. Many farm
advisors recommend using biological pesticides in combination with existing chemical
solutions. A big push from the major incumbent pesticide suppliers has helped sustain
growth.
What are biological products?

The idea is to take organic products, often extracted from bacterial fermentation, as a
means of combating plant pests and to formulate the active ingredient into a crop care
system that can be easily used in practice. The origin is therefore quite different to
traditional crop protection products, which are usually complex petrochemically
derived active ingredients and face increased regulatory scrutiny.
The market can be split into five segments (Fig 66).
Fig 66: Biological pesticides market value split by product category: 2013-14
1,500
1,240
1,155
Market value $m
1,000
598 642
500
144 155 103 111
62 66
0
Fertmentation Microbials Macrobials Biochemicals Natural products
products
2013 2014

By far the largest is fermentation products, with the leading product first introduced
by Merck in 1985 and subsequently sold to Novartis (now Syngenta) in 1997. The
targeted active ingredients are cultivated via fermentation of specific bacteria, for later
isolation use in crop protection and animal health applications.
In pesticide use, the modified fermentation product active will release an inhibitory
neurotransmitter, resulting in paralysis of the insect pest. These products are used
both directly as insecticides and for coatings, to provide added protection to high-
value seeds during storage or in the early stages post planting.
However, there appears to be no major new product innovation underway, with only
one new active ingredient introduced in the past five years. Some industry consultants
believe growth could begin to stagnate for the major existing fermentation products,
once the seed treatment market becomes more saturated.
The microbials segment generated over $0.6bn sales in 2014 and is forecast to increase
at much higher rates than traditional crop protection insecticides over the coming
years. Microorganisms, such as a bacterium or fungus, are applied directly to the plant
and have a specific activity against a particular insect pest. The product is therefore
targeted in application and tends not to cause harm to other species.
With fermentation products and microbials representing over 85% of the total market,
it should not come as a major surprise to note that biological insecticides form the
largest group of end applications (Fig 67).
Fig 67: Biological pesticides market value split by product function: 2013-14
2,500
2,063
1,914
Market value $m
2,000
1,500
1,000
500
88 97 60 55
0
Insecticides Fungicides Others
2013 2014
Macrobial products are made up from living organisms that prey on the pests that
affect crop production. Currently, the main products are predatory wasps that protect
crops from caterpillars and aphids. Mites are also used to prey upon other mite
species.
We show that high-value cash crops, such as fruit and vegetables, represent by far the
largest end market when split by crop (Fig 68).

Fig 68: Biological crop protection market value split by crop use: 2014
1,500
1,240
Market value $m
1,000
532
500
199 155 89
0
Fruit & veg Cotton Rice Corn Other
Biological pesticide sales by crop - 2014
Time for some new blood

Some of the big sellers in biologicals are beginning to age. A number of existing
biological crop protection materials already generate strong sales and the near-term
outlook for added growth seems positive, with volume still expanding for seed
treatment usage.
However, some of the fermentation product ingredients with the most sales were
developed and launched in the 1980s and it seems that generic interest is building. We
list the top six products by sales, together with the original launch year, in Fig 69.
Syngenta has done particularly well, with Abamectin marketed under the Avicta brand
as a combination nematicidal seed treatment, mixed up with thiamethoxam. We
assume that superior performance compared to generic versions should continue, but
we are aware that Adama and Rotam both offer simpler formulations.
Fig 69: Top biological crop protection products as of 2014 ($m)

Product type Active ingredient Main company Brand Launch Sales 2014
Fermentation product Abamectin Syngenta Avicta 1985 440
Fermentation product Spinosad Dow Chemical Tracer 1995 300
Fermentation product Emamectin Syngenta Proclaim 1998 195
Fermentation product Spinetoram Dow Chemical Delegate 2007 190
Microbials Bacillus thuringiensis Sumitomo Dipel 1970 180
Microbials Bacillus subtilis Bayer Votivo 2010 80
Total - - - - 1,385
Recently launched microbial combination products from Bayer are doing well,
marketed under the Poncho and Votivo brands and targeting nematode control for
corn, soy and cotton. Peak sales are estimated to exceed $250m.
A number of products from the crop protection industry leaders are set to be
commercialised and, in aggregate, we calculate that $0.5bn of incremental sales from

biological products could result by 2025. However, the main components of this are
from Bayer and BASF.
The Novozymes/Monsanto current major biological products are focused on

optimising plant uptake of phosphate and nitrogen fertiliser, together with a selection
of yield-boosting additives. With a differentiated offering, opportunities still appear
robust and the companies are guiding for mid-teens compound growth, albeit from a
low base.
Aspirations are already in place for the BioAg alliance to begin penetrating the high
margin seed treatment segment, which is currently heavily occupied by Syngenta and
Bayer. With Novozymes strong footprint in biological products and Monsantos
leading commercial franchise, it is worth considering the risk of market fragmentation
for this area of the crop protection industry.
Buying growth
Outside of the major insecticides and seed treatments we detailed in Fig 69, the degree
of fragmentation in the biological crop product industry is high.
Start-up companies continue to play a major role in innovation. As such, we would

expect the major crop protection businesses to make further acquisitions, as a means
of acquiring growth opportunities.
We list the major acquisitions related to biological pesticides in Fig 70.

Fig 70: Acquisitions in biological crop protection: 2010-15

Company Acquisition Year
Plant Health Care Myconate IP from Bayer 2010
MAI Plant growth regulator Talent from Formuchem 2010
Becker Underwood Biological Control Products 2010
Bayer Biofungicide Shemer from AgroGreen 2010
Bayer Varroa mite control product from Exosect 2010
Tessenderlo Kerley Crop sun screen protection from Purfresh Inc 2011
Syngenta Pasteuria Bioscience 2012
Novozymes Natural Industries, a US biological pest control business 2012
MGK Biological insecticide Veratran-D 2012
Koppert Brazilian bioproducts company Itaforte Bioproducts 2012
CBC Group Italian biopesticide company Intrachem Bio Italia 2012
Bayer US-based biological crop protection company AgraQuest 2012
BASF Becker Underwood, US-based biological products 2012
Andermatt Biocontrol 24.9% stake in Germany biopesticide company Abitep 2012
De Sangosse Equity stake in the UK-based company Alpha Biopesticides 2013
Bayer Prophyta German biological crop protection 2013
Amvac US-based biological insecticide company TyraTech 2013
Novozymes TJ Technologies 2013
FMC Acquired CAEB, a US agrichemical research company 2013
Koppert Biological Systems Welte-Nutzlinge 2014
Arysta LifeScience Goemar, a French plant nutrition company 2014
Bayer Argentinian biological seed treatment, Biagro Group 2014
Koppert Biological Systems Manejo Agricola distribution 2014
Terramera PlantScience Plasma Power, producing biological ingredients 2014
Valent BioSciences Mycorrhizal Applications, a microbials company in US 2015
DuPont Taxon Biosciences, a microbial genetics business 2015

History shows that farmers will adopt new technology if it offers the opportunity to
improve yield or returns. Precision agriculture has made inroads in several markets
but its true impact on altering the amount of fertiliser and sprays applied is yet to
be felt. RNAi technology and microbial pesticides will further broaden a farmers
armoury to tackle pest pressure and improve yield. Farm margins are close to all-
time lows and budgets are under pressure. The amount available to invest in yield
remains finite. Some older technologies will have to make way.

04/
04/ The fourth agricultural phase
The fourth agricultural phase

The soft commodity cycle is at a low, but prices may not improve for
years. The good news is that further major acre shifts away from corn,
one of the most valuable crops to the input suppliers, appear unlikely.
We fear that growth prospects for fertilisers and crop protection will be
less exciting in mature economies, as potentially disruptive industry
trends become more widespread. Complex seed trait combinations
and the highest performing germplasm seem most likely to offer the
farmer higher yields. As such, we expect seeds to dominate in the
battle for capital allocation, as crop budgets are squeezed.

Grain is at a cyclical low

No review of the agrichemical industry would be complete without an examination of
where we are in the cycle for the major row crops. Arable farming is a short-cycle
business and eventually there will be a supply response when surplus inventories are
reached.
We review the dynamics of corn demand and supply in detail below and the same
work for soy can be found in Appendix 2. The ratio of US corn inventory to demand is
shown in Fig 71, compared to the long-term average. This measure of excess supply is
just peaking in 2015 and is expected to gradually reduce over the coming year.
Fig 71: US corn stocks-to-use ratio vs historic average: 2000-16E

25%
20%
Stocks / Use
15%
10%
5%
0%
2000 2002 2004 2006 2008 2010 2012 2014 2016E
Corn stocks to use ratio Long-term average
Source: Redburn, USDA WASDE
The planted acreage is reasonably stable and only shifts +/-5% in years when projected
growing returns are more favourable for soy or cotton. This was the case in 2015, with
the US corn area reducing by 5%. A further 2% move towards soy is forecast for 2016.
Perfect growing conditions, the use of productive technology and top-quality seed
genetics have all contributed to record crop yields (Fig 72).
Fig 72: US corn yield vs long-term average: 2000-16E

180
170
160
Yield / bu acre
Long-term average
150
140
130
120
110
100
2000 2002 2004 2006 2008 2010 2012 2014 2016E

The yield generated in 2015, at 171 bushels per acre is over 2x standard deviation from
the mean since 2000.
It is hard to say whether US corn yields will always remain within the 165-175 bushels
per acre level, when investment to boost production appears to be working.
Expecting continued ideal weather conditions does seem optimistic, however. We have
calculated that for each five bushel per acre yield change for corn, the stocks-to-use
ratio would move by 3%.
This means that if the corn yield in 2016 reverted back to the historic mean, then all
inventory would be more than consumed in one year by expected demand.
With investment in more productive technology, perhaps this assumption is too

extreme. A drop in corn yield to 160 bushels per acre would be enough to reach the
worryingly low levels of stock to use seen in 2012. At that time, the corn price
increased to over $6 per bushel.
The demand side is quite stable in comparison to many other commodities, with
limited change in recent years (Fig 73). Use for food and seed has hardly changed and
the move away from using corn for animal cultivation in 2012-13 only occurred
because of supply constraints. The crop can be substituted for wheat, with a time lag.
Fig 73: Corn demand split by use: 2004-16E

20,000
15,000
Use / m bu
10,000
5,000
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E
Food & seed Feed Ethanol & DG Exports
The major change has come from using corn to produce ethanol between 2007 and
2014, compound growth was 13.4% (Fig 74).
In recent years, growth has disappeared, with the US government implementing fixed
annual levels of bioethanol to be manufactured for blending into transportation fuels.
The EPA has set this at 13.4 billion gallons for 2015 and 14 billion for 2016.
Our view is that the US administration is highly unlikely to change this policy, and if it
does, it will at least preserve the amount of grain channelled into biofuel production.
Nine states rely on agriculture as a major source of income, with the industry

representing over 3% of GDP in each. For South Dakota, farming contributes 10% to
the economy.
It may be that the incumbent government would find it a challenge to remain in office
if policy on biofuel materially deteriorated and local GDP eroded.
Fig 74: Corn consumption compound growth: 2007-14

15% 13.4%
9.3%
10%
CAGR
5% 3.5% 2.6%
0%
-1.5% -1.4%
-5%
Food & seed Feed Ethanol & DG Domestic use Exports Total use
Some speculate that substitution could occur over the long term, as a result of newer
means of producing bioethanol from non-food grade crop sources and waste
materials. This has been under debate for a decade now, with 3.4 billion gallons of
biofuel already mandated to be manufactured in 2016. However, the growth rate is low
and our understanding is that the economics are not always as attractive as for existing
routes. A further disincentive may now come from lower energy prices.
Statistical analysis of corn stocks-to-use ratios against the US price realised by farms
over time is shown in Fig 75. An R2 at nearly 0.7 is high and suggests the grain price
would likely inflate materially if the yield in 2016 or beyond were to trend downwards.

Fig 75: Corn stocks to use vs farm realised price: 2000-14

8.0
y = 265.41x2 - 103.11x + 12.014
7.0 R = 0.6784
Farm realized price / $ bu
6.0
5.0
4.0
3.0
2.0
1.0
0.0
5.0% 7.5% 10.0% 12.5% 15.0% 17.5% 20.0%
Stocks / use
We detail the components of corn consumption and production since 2000 in Fig 76.

Fig 76: Corn demand vs supply components: 2000-16E
Units 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E
Acres planted m acre 77 80 76 79 79 81 82 79 94 86 87 88 92 97 95 91 88
Acres harvested m acre 71 72 69 69 71 74 75 71 87 79 80 81 84 87 88 83 81
% harvested % 91.1% 91.0% 90.8% 87.8% 90.2% 91.0% 91.8% 89.8% 92.5% 91.4% 92.0% 92.3% 91.4% 89.8% 91.7% 91.7% 91.3%
Yield bu/ac 133.8 136.9 130.0 129.3 142.2 160.4 148.0 149.1 150.7 153.9 164.7 152.8 147.2 123.4 158.8 171.0 168.0
historic avg bu/ac 145.4 145.4 145.4 145.4 145.4 145.4 145.4 145.4 145.4 145.4 145.4 145.4 145.4 145.4 145.4 145.4 145.4
Open stocks m bu 1,787 1,719 1,901 1,599 1,089 957 2,113 1,967 1,304 1,625 1,674 1,708 1,128 989 821 1,232 1,732
Production m bu 9,431 9,915 9,507 8,967 10,086 11,807 11,114 10,531 13,038 12,092 13,110 12,447 12,360 10,780 13,829 14,216 13,555
Imports m bu 15 7 10 14 14 11 9 12 20 13 9 28 29 160 36 32 30
Total supply m bu 11,233 11,641 11,418 10,580 11,189 12,775 13,236 12,510 14,362 13,730 14,792 14,183 13,517 11,929 14,686 15,480 15,317
Food & seed m bu 1,913 1,957 2,046 2,340 2,537 2,686 2,981 3,490 4,364 5,025 5,938 6,426 6,438 6,039 6,493 6,566 6,630
Feed m bu 5,664 5,842 5,868 5,563 5,795 6,158 6,141 5,591 5,938 5,182 5,159 4,795 4,547 4,339 5,041 5,318 5,275
Ethanol & DG m bu na na na 996 1,168 1,323 1,603 2,119 3,026 3,709 4,568 5,019 5,009 4,641 5,124 5,207 5,250
Domestic use m bu 7,577 7,799 7,914 7,903 8,332 8,844 9,122 9,081 10,302 10,207 11,097 11,221 10,985 10,378 11,534 11,884 11,905
Exports m bu 1,937 1,941 1,905 1,588 1,900 1,818 2,147 2,125 2,436 1,849 1,987 1,834 1,543 730 1,920 1,864 1,850
Total use m bu 9,514 9,740 9,819 9,491 10,232 10,662 11,269 11,206 12,738 12,056 13,084 13,055 12,528 11,108 13,454 13,748 13,755
Ending stocks m bu 1,719 1,901 1,599 1,089 957 2,113 1,967 1,304 1,625 1,674 1,708 1,128 989 821 1,232 1,732 1,562
Stocks/Use % 18.1% 19.5% 16.3% 11.5% 9.4% 19.8% 17.5% 11.6% 12.8% 13.9% 13.1% 8.6% 7.9% 7.4% 9.2% 12.6% 11.4%
Important note: see regulatory disclosures on page 221 of this report.

historic avg % 13.1% 13.1% 13.1% 13.1% 13.1% 13.1% 13.1% 13.1% 13.1% 13.1% 13.1% 13.1% 13.1% 13.1% 13.1% 13.1% 13.1%
Realised farm price $/bu 1.8 1.9 2.0 2.3 2.4 2.1 2.0 3.0 4.2 4.1 3.6 5.2 6.2 6.9 4.5 3.8 3.8
Usage split:
Food & seed m bu 20.1% 20.1% 20.8% 24.7% 24.8% 25.2% 26.5% 31.1% 34.3% 41.7% 45.4% 49.2% 51.4% 54.4% 48.3% 47.8% 48.2%
Animal feed m bu 59.5% 60.0% 59.8% 58.6% 56.6% 57.8% 54.5% 49.9% 46.6% 43.0% 39.4% 36.7% 36.3% 39.1% 37.5% 38.7% 38.3%
Ethanol & distillers grain m bu na Na na 10.5% 11.4% 12.4% 14.2% 18.9% 23.8% 30.8% 34.9% 38.4% 40.0% 41.8% 38.1% 37.9% 38.2%
Domestic use m bu 79.6% 80.1% 80.6% 83.3% 81.4% 82.9% 80.9% 81.0% 80.9% 84.7% 84.8% 86.0% 87.7% 93.4% 85.7% 86.4% 86.6%
Exports m bu 20.4% 19.9% 19.4% 16.7% 18.6% 17.1% 19.1% 19.0% 19.1% 15.3% 15.2% 14.0% 12.3% 6.6% 14.3% 13.6% 13.4%
Note: DG is short for distillers grains.
87
Tougher times ahead for fertilisers and crop protection

Raw materials have acquired the greatest share of farming capital over the past century
and now represent over 30% of total farming revenue. Yet farming budgets will be
under great scrutiny in 2016 so capturing additional share will be tough in the short
term. This presents added cyclical risk, in addition to the emergence of the structural
trends we outlined in Chapter 2.
With deflationary trends widespread across almost all areas of the chemical industry,
historic gains made to capture value may have the scope to partly reverse, if the
current lower commodity price scenario is prolonged.
To help assess which components of farming raw materials may experience further
risk or further opportunity, we try to examine the levers behind historic value growth.
We break this down into volume and price trends.
Fertiliser growth has been price driven we expect a reversal

Our suspicion has been that the higher proportion of farming costs represented by
fertilisers was mostly due to higher prices, rather than increased volume.
Data on US demand from industry consultants and the main trade association tend to
support our view (Fig 77). Although there has been increased consumption of cotton
and soy, these crops are less intensive and need a much lower fertiliser dosage per acre
than corn and wheat.
Fig 77: US fertiliser consumption by major crop and nutrient: 1974-2014

3.0% 2.1%
2.2%
2.0% 2.0%
2.0% 1.4%
1.2% 1.1%
1.0% 1.0% 1.0%
1.0% 0.5% 0.5%
Consumption CAGR
0.3%
0.1%
0.0%
-0.1% 0.0% -0.1%
-1.0% -0.4%
-1.1%
-2.0%
-3.0%
-2.8%
-4.0%
Corn Cotton Soy Wheat Other
Nitrogen Phosphate Potash Total
Source: Redburn, International Fertiliser Industry Association, CRU
We have taken the sum of published data for nitrogen, potash and phosphate demand
from 1974 to 2014, and then generated the usage intensity per acre (Fig 78). This

highlights that there has been no material increase in fertiliser consumption, in terms
of volume per acre, since the mid-1980s.
This is in contrast to management ambitions in the industry to invest in long-term

volume growth. Especially in the potash industry, we worry that capital is being
misallocated.
Fig 78: US fertiliser usage intensity per acre all crops: 1964-2014E
80
Usage intensity kg / acre
60
40
20
0
1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014E
Fertiliser usage per acre

Source: Redburn, International Fertiliser Industry Association, FAO Stat
The above work suggests that volume expansion is not a major component of the
increased share of farm spend that fertilisers now represent.
Given the risk of oversupply on a global basis (which we have detailed in our work on
K+S and Yara), we believe there is an argument to be made that fertiliser costs will
reduce in importance for farmers over the next few years.
We also thought it may be useful for investors to consider whether fertiliser usage can
be volatile. The data would certainly suggest this and, as we show in Fig 79, farm
consumption does frequently decrease YoY, often materially.
Fig 79: US fertiliser usage per acre growth YoY: 1964-2014

20%
10%
Growth YoY
0%
-10%
-20%
1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014
Total US fertilizer usage per acre - YoY change

Source: Redburn, International Fertiliser Industry Association, FAO Stat

Our work shows that fertiliser usage intensity has reduced by a 1% CAGR over the
past ten years. Since 1974, there have been 20 years when nutrient consumption
decreased compared to the prior year, or during nearly 40% of this time period.
When we also consider that greater adoption of precision agricultural techniques

could further reduce demand for fertilisers, it seems likely to us that share of farm cost
allocation stands to fall over this cycle.
Crop protection growth to decelerate

Our work has previously shown that much of the crop protection market growth has
been generated by higher usage intensity in emerging markets. This is especially the
case over the past decade (Fig 80). However, growth has not been linear, with the
market value for emerging economies only starting to gather pace in 2004.
Since then, the value of the crop protection market has increased by a 7.5% CAGR, to
exceed $35bn by 2014. The LATAM market alone has expanded by $10bn in the past
decade and now represents the top sales market for many suppliers.
Fig 80: Mature vs emerging market pesticide market growth: 1994-2014

35,000
30,000
Market value $m
25,000
20,000
15,000
10,000
5,000
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015E
Mature regions Emerging economies
In contrast, mature markets have expanded by a more subdued 2.5% CAGR since
2004. Where there has been growth, it has predominantly been generated in Europe,
with improved mix for cash crop markets in Western regions and rising usage
intensity in Ukraine and Russia.
The offset to growth, aside from unpredictable weather effects, has been mostly due to
the introduction of GM seeds. Tolerance to glyphosate, which is built-in to almost all
corn, cotton and soy varieties, caused demand for selective herbicides to fall as biotech
seed market penetration increased.

We can see this effect in Fig 81, since the only region where herbicide crop protection
market value contracted between 1995 and 2014 was in North America. Volatile
pricing for glyphosate may have played a part, but lower prices post-patent expiration
would have been offset by higher volumes.
However, since resistance to glyphosate is now quite prevalent in NAFTA, there may
be scope for the herbicide market to benefit from mix improvement. Although farmers
will continue to spray Roundup, combination products mixed with other herbicide
active ingredients could lead to mix gains.
Fig 81: Herbicide market value bridge by region: 1995-2014

24,000 3,143 -187 23,027
22,000
Sales change 1995-2014 / $m
907
20,000 903
4,227
18,000
15,415 -1,381
16,000
14,000
12,000
Herbicides North Latin West East Far East Rest of Herbicides
1995 America America Europe Europe World 2014
Source: Redburn, Cropnosis, Phillips McDougall
Perhaps surprisingly for an industry with a consolidated supplier base and high IP-
related barriers to entry, product pricing has not expanded at a pace much above
inflation. Between 1983 and 2015, long-run YoY price gains for crop protection in the
US market increased by a 1.7% CAGR (Fig 82).
There have been periods when market price levels have increased more materially and,
as we show in Fig 82, these tend to be related to new product category introductions
and glyphosate. Because this active ingredient is often supplied unblended with
another ingredient and used by farmers in simple diluted form, the industry has little
ability to discriminate pricing.
However, it is evident that the price of glyphosate is more volatile than for other active
ingredients. The first major price drop occurred post-patent expiration in 2000.
Generic competition has increased over time, leading to periodic excess capacity and
we understand that around 50% of global production is located in China. Local pricing
is based on input cost movements, rather than any value-in-use strategy.

The impact that China can have on the glyphosate industry can be seen clearly in the
short period from 2008 to 2009, when major output constraints caused market levels
to increase by over 30%. However, higher returns attracted incremental supply within
a few years and prices subsequently decreased.
Fig 82: US crop protection pricing: 1983-2015E

Long run average: 1.7% Glyphosate shortage
15% High priced fungicides
10%
US crop protection price YoY
5%
0%
-5%
Glyphosate goes off-patent Glyphosate price cuts

-10%
1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015E
Price YoY Long-run average
Source: US Labor Bureau
Supply of glyphosate from China at low prices has increased over the past few quarters
and we therefore expect deflationary effects to impact the crop protection market over
the next year.
Apart from partially offsetting cost inflation, pricing does not appear to play a material
role in generating market growth over the long run.
Our statistical work has shown there is little evidence of farmers cutting back
meaningfully on crop protection usage when revenues decline. However, this does not
necessarily mean there should be any underlying volume growth.
It seems possible that usage intensity will continue to rise in emerging markets over
the long run, but there are credit availability issues in LATAM especially and this
country now represents around 29% of group sales. As such, less land seems likely to
come into arable farming in LATAM. Although volume growth for pesticides also
seems possible, we expect this to be at a slower pace of expansion.
We are also concerned that LATAM demand in the 2016 to 2017 season is lower than
some expect, with inventories still to be worked through.
Demand in Asia should rise as usage and mix improves. However, weather effects are
frequent and arable farming in many Asian countries tends to be more focused on rice,
fruit and vegetables.

We are more pessimistic for crop protection growth opportunities in mature

economies. Our forecasts for market growth split by region are shown in Fig 83.
Fig 83: Crop protection market value growth: 1980-2018E

20%
17.0%
Compound growth
15%
10% 8.3% 8.2%

7.1% 7.0%
5.2% 4.6%
5% 3.7% 4.0% 3.9% 3.9%
3.1% 3.0%
2.3% 3.0% 2.0%
1.0%
0%
-1.3%
-5%
Industry growth 1980 to 2010 Industry growth 2010 to 2014 Industry growth 2015 to 2018E
We conclude there will still be market growth potential for crop protection. However,
this will be at a less exciting rate than in the past, with the market only expanding by a
2.0% CAGR from 2015 to 2018.
Seeds market penetration is high in core markets, but optionality remains

We have taken data from leading industry consultant Phillips McDougall on the value
of the global GM seeds industry, since it was first collected in 2005.
Using the assumption that volume growth will only be driven by a rising acreage for
biotech varieties (thereby taking share from conventional seeds), we can calculate the
change in market value associated with volume over time.
We have used this methodology to split market growth into the contribution from
volume and that from price/mix (Fig 84).

Fig 84: GM seeds revenue development split into volume and price: 2005-14
3,000
2,500
Value change vs. prior year / $m
2,000 1,577 1,488
1,265
1,500
1,363
723
1,000 482 948
227
114 1,238 1,322
500 120 1,035
725 725 882 727
499 646
472
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Value from volume growth Value from price / mix
There are a few points from this chart that we believe are worth debating. Firstly,
market value was almost entirely driven by volume growth from 2005 until 2007.
In the subsequent five years, $6.6bn market value was generated from incremental
pricing. This was a period when GM corn began to be commercially available for more
numerous traits per seed. Since each carries a price surcharge, material extra value was
yielded.
However, the chart suggests that the good times are over and scope for market
expansion is becoming more limited. Indeed, some now believe that value for the seeds
and traits industry is reaching a plateau.
There is logic to some aspects of this argument. For example, the market penetration
for GM seeds in NAFTA and LATAM is reaching a high for corn and soybeans.
The productivity boost provided by adopting GM seeds has been widely embraced.
Market penetration in the US, Argentina, Brazil and Canada for corn now exceeds
80% (Fig 85).

Fig 85: GM corn seed market penetration NAFTA and LATAM: 2003-14
100%
GMO market penetration
80%
60%
40%
20%
0%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
USA Argentina Brazil Canada
Source: Redburn, ISAAAS
Remarkably, adoption by farmers in Brazil has boosted GM penetration as a ratio of

total corn acres from no sales to 85% in six years.
Does this mean that growth potential will be only be predicated upon higher pricing?
The answer is that it depends upon the crop. Collectively, the NAFTA and LATAM
regions represent around 90% of global acreage for GM soybeans and 75% for biotech
cotton. This provides some room for growth, but volume expansion seems likely to be
at a slower pace than in the past.
However, we think there is further volume growth potential for GM corn, where
global market penetration was only just over 30% in 2014 (Fig 86).
Fig 86: Global GM seed market penetration: 2003-14

100%
Global market penetration
80%
60%
40%
20%
0%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Corn Soybeans Cotton

Source: Redburn, ISAAAS
To be clear, we are not expecting a material jump in global GM acres in the coming
year, since additional market penetration will need to come from new country-specific
approval of genetic modification.

This remains a thorny issue in some major farming regions, with consumer sentiment
mixed, political views clouded by misinformation and supply chain segregation
complex.
The other issue is that the majority of the existing target market is already using GM
technology and concentrated into few countries (Fig 87).
Fig 87: GM farmed area split by country: 2014

200
181
180
160
GMO farmed area / m acres
140
120 104
100
80
60
60
40 29 29
20 10 10 7 7 4
2 2 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0
0
India
Argentina
Pakistan
Sudan
Chile
China
Myanmar
Bangladesh
Australia
Mexico
Columbia
Cuba
Costa Rica
Brazil
Spain
US
Burkina Faso
Canada
Honduras
South Africa
Uruguay
Bolivia
Philippines
Czech Rep
Romania
Slovakia
Paraguay
Portugal
Source: Redburn, ISAAA, Phillips McDougall
But that does not mean that there is no growth potential. Before Brazil deregulated
GM seed use in 2003, investors were worried that volume expansion opportunities
would only arise in North America.
If we consider some of the major farming nations and examine the current proportion
of arable land that uses GM seeds, it appears there will be continued growth
optionality if adoption gathers pace.
India could also present a much bigger opportunity. GM cotton is grown there, but
opposition from the prior government killed the hope of market opportunities for
biotech seed suppliers. However, we may be at a turning point, with Modi supportive
and assessing measures to incentivise market adoption.
Although widespread volume growth feels unlikely in some of the nations shown in
Fig 87, due to political or consumer barriers, there are opportunities. For example, oil
seed crop farming in Eastern Europe represents around 18 million acres, yet less than
1% is GM. Given much of this crop is being used for industry applications, there could
be scope for market growth.
Even though GM market penetration is high in the US, Brazil and Argentina, the
proportion of total arable land is still low (Fig 88). We are certainly not expecting that

produce directly consumed in the food chain will become biotech any time soon;
instead, hybrid seed varieties of cereals offer significant growth potential.
It is important to note there is a difference between GM and hybrid seeds. Whereas the
biotech group has genetics that are directly modified to enable a desired effect, hybrids
are developed through cross-breeding. This means that the latter are not classified as
genetically modified seeds and are therefore not restricted by the various regional GM
regulations.
Fig 88: Countries with GM as percentage of total arable crop acreage

100%
90%
80%
GMO as % of all arable acres
70%
60%
50%
40%
30%
17.6%
20%
10%
0%
Sudan
Chile
Pakistan
Australia
Bangladesh
Argentina
India
Columbia
China
Myanmar
Costa Rica
Average
Mexico
Cuba
Czech Rep
Uruguay
Honduras
Bolivia
US
Philippines
Burkina Faso
Romania
Paraguay
Spain
Brazil
South Africa
Portugal
Canada
Slovakia
Furthermore, support for GM corn and soy appears to be building in South East Asia.
It is easy to dismiss the 3 million acres farmed in 2014 as immaterial, yet market
penetration is in its infancy and government support is now in place.
Wheat and rice also provide some optionality for growth, with global consumption of
both similar to that of maize. This is likely to provide a boost over the longer term. For
instance, the first major commercial hybrid wheat is not expected before 2020.
Limited seed pricing gains have been a function of fewer new traits
The other lever of growth that is under scrutiny is price and mix development. There
is added concern that fewer new trait innovations will be launched, given the high
gross margin per biotech modification and drop-through to earnings.
But rather than expecting that price and mix-related growth for the industry will fade
to obscurity, we believe less exciting revenue expansion has mainly been due to
phasing effects for new product launches.
We detail the global acreage for GM seeds in Fig 89, together with the number of traits
launched per year since 1995.

Fig 89: Global GM seed acres planted vs new traits launched per year: 1995-2015
500 14
450
12
400
Global GMO area / m acres
New seed traits launched

350 10
300 8
250
200 6
150 4
100
2
50
0 0
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
New GMO seed traits launched (RHS) Global GMO seed area planted (LHS)
We argue there is potential for seed trait commercialisation to reaccelerate, as new

innovations are approved and offer value in use to growers.
In Chapter 2, we have already stated that GM seeds with more insect traits should be
expected. This should be supportive of price and mix for the major suppliers. Over the
medium term, we also envisage that more seed traits will be launched, as we detail in
the various company R&D pipelines in Chapter 5.
Why ditch the technology which boosts yield?

There is a concern that some farmers will opt to abandon the use of biotech seeds or
will trade down as a means to lower input costs in 2016. There will always be some
operations that have become excessively indebted, with more extreme cost cuts
needed, and seed choice could be compromised. However, we would expect these cases
to be in the minority.
For most farms, the use of GM seeds seems likely to remain supported by productivity
gains that have resulted from reduced labour, fuel and herbicide usage.
Savings achieved over the past decade by reducing operating expenditure would likely
reverse if growers returned to conventional seed use. In addition, farming practices in
the NAFTA and LATAM regions have become highly mechanised and fixed cost
absorption could become a problem if farmers switched to more numerous, intensive
crops.
There is also evidence that since the introduction of GM technology in 1996, the rate
of corn yield increase has accelerated.

We have tracked the compound growth for corn yield in Fig 90 and show how the rate
of crop output has improved over three periods of technological change. The strongest
improvement was realised once farming began to consume more optimal levels of
fertiliser (which have now peaked) and insecticides were introduced.
From 1980 to 2000, the more widespread commercialisation of modern fungicide

chemistries, in addition to better hybrid seeds, helped increase yields further.
However, the heightened corn yield growth from 1995 to 2015 coinciding exactly
with the introduction of GM seeds provides some support to the argument that the
technology provided more value than just raising productivity.
Fig 90: US corn yield CAGR during periods of technological adoption: 1965-2015E
4.0% Fertiliser ramp up, GMO seed adoption
3.5% insecticides launched
Fungicide introduction
3.0%
Yield CAGR
2.5%
2.0%
1.5%
1.0%
0.5% 2.8% 1.2% 2.1%
0.0%
CAGR 1965-1980 CAGR 1980-2000 CAGR 1995-2015E
Corn yield compound growth
Source: Redburn, USDA, Phillips McDougall, IFA, ISAAA
There also appears to be a statistically significant relationship between corn seed cost
and the yield. We show these data in Fig 91, from 1965 to 2015.
We have applied several mathematical best-fit trends. Of these, the result that
produced the highest R2 value, at 0.75, was an exponential function. This may seem
odd, but could imply that eventually there will be a limiting effect on the additional
value created per additional seed trait.
However, despite the diminishing returns, the slope of the chart suggests that we are
still far from that point and therefore investing in higher price, premium genetics and
traits will lead to increased output for the foreseeable future.

Fig 91: US corn yield vs seed cost per acre: 1965-2015E

120 y = 1.7169e0.3563x
100 R = 0.7457
Seed cost $ / acre
80
60
40
20
0
4 5 6 7 8 9 10 11 12
Corn yield bu/acre
Source: Redburn, USDA, University of Illinois, University of Iowa, Economic Research Service
It therefore seems reasonable to believe that most farmers would be unlikely to reverse
investments made to capture the highest yield. As a result, if farming returns stay
depressed for a prolonged period, we would expect that trading down to less complex
GM trait combinations or potentially conventional seeds will be limited to a
minority.
Corn budget for 2016: saving $50 per acre

If corn futures contracts remain below $4/bushel during the end of 2015 and in early
2016, we would expect some growers with a cost base approaching the margin to seek
to trim expenditure.
Farm revenue has increased dramatically in recent years, supported by the dual effects
of rising commodity prices and rising yields (Fig 92).
As growers cannot control selling prices for crops over the near term, the only means
of protecting income directly is to ensure that yield is maximised.
Fig 92: Components of corn farm revenue: 1975-2014

180 8
160 7
140 6
Yield bushels / acre
120
5
Price $ / bushel
100
4
80
3
60
40 2
20 1
0 0
1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014
Corn yield Realised corn price
Source: Redburn, USDA, Bloomberg
We argue this means not all inputs are exposed to the risk of declining capital
allocation, as we have outlined in this chapter. Of the three categories of raw materials,
the one we believe has the greatest risk of cutbacks is fertilisers.
In particular, after five years of healthy potash application, it seems possible that usage
could be moderated significantly in 2016, which would put further downward pressure
on prices.
Additional capacity ramped up in recent years, leaving global utilisation rates at just
under 75%. Brownfield expansion and new mines are expected to add another 10
million tonnes of potential output by 2018. This implies world potash operating rates
could decline further to around 67%.
Market prices have already begun to reduce, with considerable downside to the
marginal cost at $245/tonne (Fig 93).
Fig 93: Potash price vs marginal cost: 1995-2015

900
800
700 Vancouver price at $58/t premium to marginal cost
600
Price or cost $ / t
500
400
300
200
100
0
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Price per tonne Current Marginal Cost
Source: CRU
We see no major reason for market prices to begin rising in 2016, due to this industrial
backdrop. Given the potential for potash deflation and the fact that this would quickly
provide cost relief for the farmer, it is worth considering the sensitivity.
We estimate that for each $10/tonne change to potash prices, corn farmers would
realise a $5 saving per acre. This implies that if potash prices were to drop back to
marginal cost levels, farm costs would fall by nearly $30 per acre.
There may also be a longer term gain to farmers, resulting from the potash cost curve
flattening, as the marginal cost capacity is replaced with more efficient assets.
Nitrogen prices are also falling as input cost (natural gas and coal) deflation is being
passed through. The US domestic price for ammonia has dropped by nearly 25% since
the start of 2015, to around $420/tonne. However, there is a lag before this retail price
reflects the upstream cost and we would expect a more material cut to develop.
The development of raw material cost for seed, fertiliser and crop protection, as a
proportion of total farm costs, is shown for corn in Fig 94, with the data stretching
back to 1975.
Raw material farm spend to polarise

The share of farm cost allocation for crop protection has migrated towards seed, traits
and fertilisers since the late 1990s. However, this time period coincides directly with
the commercial introduction of GM technology. Therefore, it seems reasonable to
argue that a greater shift in spend has occurred from pesticides to seeds.
In recent years, the proportion of total cost allocated to crop protection appears to
have stabilised at the low level of around 4%. With growers facing added pressure to
combat more invasive weeds and plant pests, it seems hard to call for continued
declining share for the herbicide products, which represent around 40% of the total
market.
Yet, pressure on demand for the other product categories seems at best to hold crop
protection spending flat, as a proportion of total farm cost allocation. It could even
begin to decline further over the cycle.
The weighting of expenditure allocated to fertiliser appears high to us, well above
historic levels and still around 20% in 2015, despite a more challenging environment
for growers. When one considers that the usage intensity is now stagnant and all
recent major gains to share of farm cost have been price led, it seems fair to anticipate
mean reversion.
Fig 94: Corn farming raw material spend, as a function of all costs: 1975-2015E
30%
25%
Proportion of farm costs
20%
15%
10%
5%
0%
1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015E
We conclude that demand for undifferentiated inputs that generate limited

incremental yield seems more likely to be curtailed by those farmers seeking to trim
costs in 2016. In the case of potash, there is an added risk of price deflation that will be
directly positive to farmer returns.
Cross-checking our views against those of leading agronomists leads us to form our
corn cost budget for 2016, which we compare to 2015 spending in the cost bridge
shown in Fig 95.
Fig 95: Corn farm cost bridge: 2016E vs 2015

700
690
3.5 -21.0
680 674.0
Corn cost $ / acre
670
-0.7 -3.8
660 -2.1 -0.2 -0.5 0.0
-7.7
650 -18.8
640
630 0.5 623.1
620
610
600
Financing
Equipment
protection
Other fixed
Fuel
Labour
Total cost
Total cost
Seed
Fertilizer
Other opex
Services
Land
2016E
2015
Crop
cost
Source: Redburn, University of Iowa, University of Illinois, USDA, Economic Research Service
This work is in keeping with our core assumptions that for those farmers keen to
reduce corn cost per acre in 2016, the major savings will be derived from reduced
spending on fertiliser, fuel, machinery and land rent. Collectively, these four
components could results in savings of around $51 per acre, which is an 8% reduction
on total spending in 2015.
The mechanics behind this cost bridge can be found in the more detailed farm budget
breakdown for 2015, 2016 and the 20-year average shown in Fig 96.
For 2016, we have assumed no improvement to yield, but have taken the forward price
for corn, as of December 2016 ($4.05/bushel), as a sensible proxy for selling conditions
for next years marketing season.
Projected revenue (a function of crop price multiplied by yield) net off against all costs
(so reflecting a marginal cost producer) generated no income in 2015, at -$31 per acre.
Applying our cost savings would imply a return to low levels of positive earnings, at
$42 per acre in 2016. If there is no improvement in the corn price, which would mean
$3.8/bushel by December 2016, then net profit would be $9 per acre.
To be clear, although these net profit outcomes sound low, these include a fully loaded
cost base that most farmers will manage to circumvent. For a start, over 50% of
growers own land and others will reduce machinery expenditure.
Aside from a small amount of marginal land, which generates lower than average
yields, almost all US arable acres will be farmed.
As we show in the Fig 96, the scope for selective cost cuts while maintaining yields
should deliver a level of operating income that is well above historic levels.
Fig 96: US corn farming budget: 2016E vs 2015 and 20-year average
$/acre 20-year average 2015 2016E Diff YoY %
Revenue 440.8 642.8 665.4 18.6 2.9%
corn price 3.1 3.8 4.0 0.2 5.3%
corn yield 143.0 168.8 166.0 (3.8) (2.3%)
silage income 1.7 1.4 1.4 0.0 0.0%
Raw materials 188.1 289.1 267.0 (22.1) (7.6%)

Seed 50.3 101.6 105.0 3.5 3.4%
Fertiliser 84.3 136.0 115.0 (21.0) (15.5%)
Crop protection 26.6 27.7 27.0 (0.7) (2.4%)
Fuel and energy 26.9 23.8 20.0 (3.8) (16.0%)
Operating expenditure 60.8 78.2 75.4 (2.8) (3.6%)

Services 30.4 45.2 43.1 (2.1) (4.6%)
Labour 3.3 3.2 3.0 (0.2) (5.7%)
Financing 12.1 9.8 9.3 (0.5) (5.1%)
Other 14.9 20.0 20.0 0.0 0.0%
Operating income (pre fixed cost) 191.9 275.6 323.0 43.4 15.7%
Fixed costs 201.9 306.7 280.7 (26.0) (8.5%)

Equipment 71.5 103.0 95.3 (7.7) (7.4%)
Land 104.5 178.8 160.0 (18.8 ) (10.5%)
Other 26.0 24.9 25.4 0.5 1.9%
Total costs 450.8 674.0 623.1 (50.9) (7.5%)
Net income (marginal return) (10.0) (31.1) 42.3 69.4 n/a
Marginal cost per bushel corn 3.2 4.0 3.8 (0.2) n/a
Corn price : marginal cost ratio 0.97 0.95 1.07 0.1
As a sense check, our corn price assumption fits well with the historic relationship
i.e. around the same level as the total cost per bushel. Given our framework allocates a
magnitude of cost per component, which sums up to represent the economics of the
marginal producer, it should be that the ratio of the corn price to total expenditure is
around 1x.
This is a critical point to note, since this suggests that the commodity price is
reasonably well-supported, in the absence of a material demand shock (which we
doubt occurs).
The other side to this, however, is that we are not bullish on the long-term corn price.
We are expecting cost relief to marginal farmers over the near term but this may result
in a flattening of the cost curve over time.
With this in mind, we have also considered the potential for input cost deflation to be
passed onto the consumer and reflected this in a corn budget for 2017 (Fig 97).
We have assumed that the realised price for corn could be $3.7/bushel in 2017, to
reflect lowered production cost from the prior year, but also that the yield remains
unchanged (at 166 bushels per acre). This suggests that farm revenue could drop by
$50/acre in 2017.
It seems likely cost relief would come from further cuts to spending on fertilisers, land
rent and, to a lesser expect, crop protection.
Fig 97: US corn farming budget: 2017E vs 2016E and 20-year average
$/acre 20-year average 2016E 2017E Diff YoY %
Revenue 440.8 665.4 615.6 (49.8) (7.5%)
corn price 3.1 4.0 3.7 (0.3) (7.5%)
corn yield 143.0 166.0 166.0 0.0 0.0%
silage income 1.7 1.4 1.4 0.0 0.0%
Raw materials 188.1 267.0 258.5 (8.5) (3.2%)

Seed 50.3 105.0 107.0 2.0 1.9%
Fertiliser 84.3 115.0 105.0 (10.0) (8.7%)
Crop protection 26.6 27.0 26.5 (0.5) (1.9%)
Fuel and energy 26.9 20.0 20.0 0.0 0.0%
Operating expenditure 60.8 75.4 75.7 0.3 0.4%

Services 30.4 43.1 43.5 0.4 0.9%
Labour 3.3 3.0 2.9 (0.1) (3.3%)
Financing 12.1 9.3 9.3 0.0 0.2%
Other 14.9 20.0 20.0 0.0 0.0%
Operating income (pre fixed cost) 191.9 323.0 281.4 (41.6) (12.9%)
Fixed costs 201.9 280.7 275.0 (5.7) (2.0%)

Equipment 71.5 95.3 95.0 (0.3) (0.3%)
Land 104.5 160.0 155.0 (5.0) (3.1%)
Other 26.0 25.4 25.0 (0.4) (1.6%)
Total costs 450.8 623.1 609.2 (13.9) (2.2%)
Net income (marginal return) (10.0) 42.3 6.4 (35.9) n/a
Marginal cost per bushel corn 3.2 3.8 3.7 (0.1) n/a
Corn price : marginal cost ratio 0.97 1.07 1.01 (0.1)
Under this scenario, net income would also reduce in 2017 but remain positive,
reaching $6/acre. The ratio of marginal cost per bushel (dividing total cost at $609/acre
by the yield, at 166 bushels per acre) is calculated to be $3.7/bushel, which is at parity
with the assumption for realised farm price.
Major crop prices have been depressed for some time, but are unlikely to recover
quickly as structural yield improvements and easing demand growth have allowed
inventories to be replenished. Farm costs will face further scrutiny and investment
in inputs should polarise. Fertiliser prices have already fallen, but potash has
historically proven to be the most discretionary of the nutrients and hence appears
most vulnerable. The price can fall further. Crop protection demand growth will
decelerate as the yield response is more marginal. Investment in seed technology
should remain a focus, however, as yield gains are clear.
05/
05/ The last dance: M&A prospects
The last dance: M&A prospects

Prompted by squeezed farm margins, five years of deal-making
between 1997 and 2002 formed a competitive landscape that has
remained largely unchanged. That is until now. Farm margins are
under pressure again. Monsantos approach for Syngenta has been
rejected, but other combinations are possible. Monsanto can achieve
many of the same benefits through combining with another of the
major crop protection players. Syngentas options are more limited. Its
intransigence leaves it risking being strategically bypassed as
competitors team-up to combat the challenging markets.
Eyeing up the competition

The competitive landscape in crop protection and seeds, as we know it today, was
formed in a relatively short space of time. Fig 98 lists how, between 1997 and 2002, five
of the six industry leaders emerged from pharmaceutical industry parents whose
pursuit of growth was leading them to allocate capital elsewhere.
Fig 98: Leading crop protection and seeds companies major formative events
Company Year Major formative event
Dow Agrosciences 1997 Acquisition by Dow agricultural products activities of Elanco Plant Science
business from Eli Lilly
DuPont Pioneer 1999 Dupont purchased remaining 80% of Pioneer seed company
BASF Agricultural 2000 BASF bought Cyanamid agriculture products business from American Home
Solutions Products Inc
Syngenta 2000 Formed through the merger of the agriculture businesses of Zeneca and Novartis
Monsanto 2002 Spun off from Pharmacia
Bayer Crop Science 2002 Purchased Crop Science business from Aventis
Our work in Chapter 1 of this report shows that farm margins have been gradually
shrinking over the past century. However, closer scrutiny of the data reveals that the
late 1990s saw the rate of decline accelerate as crop prices fell and input costs rose.
Between 1996 and 2000, farm margins fell to very low levels (Fig 99).
Fig 99: Farm operating profit vs raw materials spend

70% 35%
60% 30%
Raw material cost as % of revenue
Farm operating margin
50% 25%
40% 20%
30% 15%
20% 10%
10% y = 6E-07x3 - 9E-05x2 + 0.0001x + 0.533 5%

R = 0.6808
0% 0%
1910 1925 1940 1955 1970 1985 2000 2015E
Operating margin Raw materials

It was probably no coincidence that this challenging industry backdrop was

immediately followed by a wave of merger and acquisition activity that created the
crop protection and seeds leaders that we are familiar with today. It seems probable
that executive boards at the then-owners of these businesses, weighing capital
allocation demands, saw more worthy candidates for capital among their
pharmaceutical businesses. One after another, agrochemical businesses were placed in
the hands of chemical industry management teams, which saw themselves as more
adept at navigating commodity cycles.
Farm margins have reached new lows once again and our work on the grain cycle
concludes that a sharp recovery in margins seems unlikely. The challenging outlook
has prompted some industry participants to act. Among the generic crop protection
manufacturers, M&A activity has already increased.
x In April 2014, Platform Specialty Products paid $1bn for Chemturas

agrochemicals business in order to combine this with its existing agrochemicals
operations.
x In April 2015, FMC completed its $1.8bn acquisition of Denmark-based

Cheminova.
We contend that these deals reflect a boardroom response to slower growth: to pool
both products and costs in order to remain competitive.
Why did Monsanto need to approach Syngenta?

The logic behind Monsantos plan to combine with Syngenta is slightly different, but
the fundamental motivation is probably similar; namely, the belief that value growth
becomes harder to achieve in an industry where technology is maturing and in an
environment of sustained low crop prices.
x Capturing more of the value chain. A combined Monsanto/Syngenta entity would

have been the undisputed global leader in seeds and crop protection. Syngenta has
consistently highlighted the value of a strong seeds offering in allowing greater
penetration onto farms, which in turn paves the way for selling more crop
protection products.
While we have always agreed with the logic of this integrated strategy, in
Syngentas case it has fallen short in regions where its seeds offering has proven too
weak to act as an effective door-opener. The gradual share loss in the US corn seeds
market over the last three years provides evidence of this shortcoming.
Our work highlights the consistently rising importance placed by farmers on their
choice of seed. In the mind of a farmer, superior crop protection cannot
compensate for an inferior seed offering. So although Syngentas integrated strategy
has stuttered, combining the global leader in both seeds and crop protection is
much more likely to generate revenue share gains and value growth.
x Diversification of growth. We highlight in Chapter 8 that market saturation has

meant volume growth potential for Monsantos core seeds business has slowed.
GM seeds account for more than 90% of the total NAFTA market, and penetration
in Brazil is catching up. New trait technology is expected to improve mix
progressively, but this needs farmers to pay more for seed. In the case of GM corn,
the price per acre has already inflated by a 13% CAGR between 2001 and 2014.
x Agricultural Productivity pressure. Away from seeds, Monsantos other

Agricultural Productivity business faces the challenge of rising resistance to
glyphosate, its most significant product. This resistance is still creating something
of an opportunity for the leading crop protection suppliers. Roundup will still be
sold, as the product remains effective on many weeds, but combinations with other
actives are now needed. In US herbicides, Syngenta is the market leader.
Combining with Syngenta would dilute the relative importance of this lower
quality business within the overall portfolio.
x Cost synergies. Syngenta already has a $1bn cost savings programme in place, but
additional synergies would have emerged in a Monsanto/Syngenta combination. At
the time of the initial bid, we wrote that sharing distribution platforms in the
NAFTA region would reduce direct costs by up to 30%, releasing up to $300m of
additional savings. The current Syngenta SG&A cost ($0.7bn) would surely have
been lowered. Potential in Europe for asset rationalisation may have also boosted
profitability for Monsantos weaker franchise. Global R&D ($1.4bn) would be
trimmed as overlapping GM seeds research is optimised.
Why did Syngenta reject Monsantos approach?

Despite the apparent strategic logic of the combination, the Syngenta board
unanimously rejected Monsantos approach. The statement issued by the Syngenta
board on 26 August 2015, rejecting the final revised offer from Monsanto, stated that
it significantly undervalued the company and was fraught with execution risk.
Certainly, some divestments would have been necessary to appease antitrust
authorities, but we did not view the antitrust hurdles as insurmountable.
In its rejection, Syngenta commented that Monsanto had not provided sufficient
clarity on the following four issues:
1 Its estimate of total cost and revenue synergies.
2 Its assumptions regarding net sales proceeds of seeds and traits.
3 The nature and extent of regulatory covenants that it was prepared to offer.
4 The assessment of risks and benefits from a tax inversion to the UK.
Although not explicitly stated, these objections leave us with the impression that
management is primarily concerned about preventing job losses in its core sites and
protecting its own interests.
The Syngenta statement also commented that the board remained committed to
accelerat[ing] shareholder value creation. One week after Monsantos withdrawal of
its offer, Syngenta issued a further statement on 3 September entitled Actions to
accelerate shareholder value creation. These actions amounted to a US$2bn share
buyback programme and the divestment of its vegetable seeds businesses, which we
think could generate proceeds of $2.5-3.0bn.
Syngenta shares are currently 25% below their July peak. These two actions do little to
compensate shareholders for the $10bn drop in market cap and can hardly be
described as sustained value-creation measures. There may be more value-creation
measures in the tank, but we are left with the strong sense that Syngentas rejection of
the Monsanto offer was not based on the lack of potential value. Instead, the rejection
suggests a management board more concerned with protecting its own local
stakeholder interests and independence than one with a clear strategic plan of how to
match, let alone exceed, the value being offered by Monsanto.
In Chapter 7 we argue we see a current fair value for Syngenta shares of CHF290. This
includes CHF127/share of value for Syngentas pipeline. Considering the numerous
disappointments relating to delivery of late-stage pipeline products (e.g. Viptera,
Plene, Tegra), the pipeline valuation is, if anything, generous. In our view, the
Syngenta board was wrong to rebuff the final Monsanto proposal.
So what happens next?

Monsantos bid for Syngenta has almost certainly pushed the topic of M&A to the top
of the boardroom agenda across the industry. Management at all companies will be
considering the prospects for consolidation. This raises the stakes and all participants
will be keenly aware that if they miss out on the last big potential deal, the competitive
consequences would be serious. Over the last two weeks, the CEOs at both DuPont
and Dow have commented publicly that everyone is talking to everyone.
Monsantos next move

For Monsanto, the alternatives to combining with Syngenta are potentially broader.
Other than DuPont, whose strong seeds business would present an insurmountable
antitrust hurdle, combining with any of the other major crop protection companies
would offer similar benefits. The difficulty will be persuading the owners of those
assets to part with them. However, sharing the likely large synergies on offer should
help oil the wheels of any discussions.
Of the three remaining crop protection players of scale, the most likely seller appears
to be Dow. CEO Andrew Liveris stated on the Q3 conference call that given the
potential synergies in a newly consolidating agricultural market, an attractive

opportunity to release value may be upon us.
For Monsanto, combining with Dow would bring greater scale and diversity for
herbicides, which could help Monsanto better address its glyphosate resistance
problem. It would also provide Monsanto with a market position within the
insecticide segment. The drawback is that the Dow product portfolio is clearly less
attractive not only than Syngentas offering, but also than that of both BASF and
Bayer. A material proportion of Dows active ingredients is already off-patent and the
EBIT margin in 2014 was barely above 10%.
Where does this leave Syngenta?

For Syngentas board, the situation is more challenging. Its poor cash flow track record
means an outright purchase of any of its competitors would likely need to be financed
at least in part via equity. Shareholders have seen the value of their holding fall 25%
since June and watched the current management repeatedly fall short of its operational
and financial targets. They could therefore be forgiven for being reluctant to back that
team with further equity. On the other hand, if Syngenta waits on the sidelines, it risks
being eclipsed as two or more of its closest competitors combine.
A realistic option could be for Syngenta and DuPont Pioneer to merge. A combination
with DuPont Pioneer would at least fulfil the most important criterion of combining
seeds and crop protection chemicals. Syngenta would gain access to a superior
franchise for GM seed germplasm. DuPont could use its huge North American
distribution footprint to sell more chemicals to US farmers.
However, teaming up with DuPont would not provide Syngenta with any new trait
technology, given DuPonts deficiencies and historic reliance upon licensing from
third parties. In addition, tying up with DuPont would undoubtedly prompt questions
over why Syngenta rejected the leading seeds technology franchise to combine with the
number two.
Perhaps the greatest barrier to such a deal is the antitrust scrutiny that would follow. A
core component of Syngentas defence against Monsanto was the potential disruption
that could result and engaging with DuPont would be unlikely to change this.
The value proposition of a merger would (justifiably) be less obvious to Syngenta

shareholders than what had been offered by Monsanto. More crucially, the success of
any merger hinges on the two parties agreeing on the relative value of their respective
assets. Unless the Syngenta board has adjusted the >CHF500/share value on which it
rejected Monsantos offer, valuation could once again prove to be the deal-breaker.
It is possible that if Syngenta and DuPont did announce a merger that the Monsanto
board would be sufficiently concerned over the emergence of a more powerful
competitor that it might consider returning with a hostile approach for Syngenta.
However, it feels more likely that Syngenta is intent on ploughing its own furrow.
Following the sudden departure of Syngenta CEO Mike Mack, the board is on the
hunt for a replacement. It is our view that the board will recruit a CEO to run rather
than to sell the business. Providing a CEO with such a mandate would also remove the
problem of potential candidates viewing the position as a lame duck role.
Fig 100 summarises the global market shares of the major crop protection and seed
companies. The regional market share data have been provided by agricultural
consultancy Phillips McDougall. The summary not only shows the potential
complementarity of a Syngenta/Monsanto combination, but also shows where overlap
would likely become too significant from an antitrust perspective.
Fig 100: Market shares in seeds and crop protection

------ Europe ------ ------ NAFTA ------ -------- Asia -------- ------ LATAM ------ ------ Global ------
Seeds Crop Pro Seeds Crop Pro Seeds Crop Pro Seeds Crop Pro Seeds Crop Pro
BASF 0% 16% 0% 12% 0% 8% 0% 13% 0% 12%
Bayer 4% 23% 4% 22% 4% 8% 9% 17% 4% 17%
Dow 5% 7% 13% 8% 2% 4% 0% 6% 5% 6%
DuPont 31% 9% 29% 8% 20% 5% 16% 7% 27% 7%
Monsanto 42% 4% 39% 12% 16% 1% 22% 4% 34% 5%
Syngenta 7% 21% 12% 24% 19% 13% 16% 21% 11% 19%
Other 11% 20% 3% 14% 38% 61% 37% 32% 18% 33%
Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
What are the other major industry players thinking?

DuPont
DuPonts intentions for its agrichemicals and seeds business are uncertain. Edward
Breen has just been appointed as permanent CEO and chairman, after the previous
CEO retired in October 2015. His experience at Tyco highlighted form in breaking up
companies. His comments on the most recent DuPont conference call suggested that
he remained open-minded regarding discussions that would release value from the
agriculture business.
DuPonts chief asset is its strong seeds franchise. Although much of the trait
technology is licensed in, the business enjoys strong distribution through its dealer
network. This network could offer a crop protection company almost unmatched
reach to potential customers in North America. As well as the potential combination
with Syngenta discussed above, the logic of such a combination would extend to the
other three crop protection companies Dow, Bayer and BASF. Of the three, BASF
has the greatest balance sheet flexibility, while still presenting limited antitrust
obstacles.
Dow Chemical
The Dow Agroscience business has perhaps the fewest unique selling points among the
major players, with a largely generic agrochemicals product portfolio and little in the
way of unique seeds technology. In light of this profile, it is unsurprising that
commentary from Dow CEO Andrew Liveris also points to managements keenness to
participate in potential consolidation within the agrichemicals industry. There is also
an activist investor involved (Third Point), which is exerting pressure to unlock
additional value.
The pressures that we discuss throughout this report are more prescient for Dow than
for any of the other top six players. A recent statement from its management
highlighted the burden from rising innovation costs in agrichemicals. Strategically,
Dow needs to be involved in future consolidation more than any of its top-tier
competitors.
BASF
Despite early teething problems that effectively drew a line under the BASF career
aspirations of its former head, the past decade has seen Agricultural Solutions as one
of the most consistent performers within the BASF group. It is also one of the only
businesses within BASF that has generated consistent earnings growth over recent
years. Innovation related to this industry was showcased at a recent capital markets
event and our sense is that the company is far more likely to act as an acquirer in any
round of consolidation than to want to dispose of its asset.
One of BASFs strategic objectives for all of its businesses is to hold a top-three
position in all of its markets. Although the criterion is fulfilled for Crop Protection, the
company has little in the way of seeds outside of its joint venture with Monsanto,
formed in 2007. Until now, BASF management has appeared content with maintaining
the distinction between the crop protection and seeds markets when referring to its
own market prowess. However, it seems probable the next round of consolidation will
further blur the boundaries between the two categories. In doing so, BASF may need
to rethink its strategy for this industry.
The boards conservatism probably precludes a mega-deal that would require an

equity issue. Nevertheless, the company has ample balance sheet capacity. Our crude
calculations, assuming 3.5x net debt/EBITDA, indicate BASF could spend upwards of
24bn without needing to raise equity. Of the major assets, the DuPont agrichemicals
assets would bring an immediate market position in GM seeds and a complementary
crop protection portfolio. A required antitrust analysis would be protracted and some
assets would need to be divested, but this does not appear insurmountable.
Bayer
Bayers Crop Science assets have attracted far less debate and attention. The recent
IPO of the Covestro (plastics) business has been the chief focus for debate around
potential portfolio change. CEO Marijn Dekkers has consistently given the impression
that the companys Crop Science business should be considered a core asset. The
division has been earmarked for further investment in R&D and regional production
capabilities, so it seems unlikely management is contemplating exiting this business.
On the other hand, with net debt to EBITDA already around 2x, Bayers balance sheet
is more constrained than BASFs. Consequently, Bayer is not an obvious acquirer of
large assets. Indeed, it seems the least likely of the major players to participate in
consolidations.
However, this might change should management discover a need for funds. We
understand from our colleagues in the Redburn Pharmaceuticals team that Bayer
would be keen to build on its currently sub-scale position in animal health. Sanofi has
recently announced its intention to explore strategic options for its Merial animal
health franchise, with the business returning to solid growth over the past few quarters
and reportedly generating higher margins than some peers.
Were Sanofi to sell Merial, the price tag would likely reach 10-12bn. Of course, a
complete exit of its remaining 70% stake in Covestro would be one option to raise
funds, but so soon into that companys life as a public entity, the appetite for further
70% free float could be limited. Another much less debated source of funds might be
to explore options for the companys agrichemicals business.
Industry firepower: who has the balance sheet capacity?

Monsantos initial CHF449/share offer for Syngenta was equal to 3.0x 2015 sales or
15.9x 2016 EBITDA. Fig 101 applies these two multiples to consensus 2016 forecasts
for the six major industry participants.
Fig 101: Valuation at 3x FY16 sales

Valuation Valuation
Ag FY16 Ag FY16 at 15.9x 2016 at 3.0x 2015
sales (US$m) EBITDA (US$m) EBITDA (US$m) sales (US$m)
BASF Ag Solutions 6,356 1,225 19,477 19,250
Bayer Crop Science 10,636 2,751 43,736 32,213
Dow Agroscience 6,139 737 11,718 18,593
DuPont Pioneer 9,968 1,771 28,158 30,190
Monsanto 14,973 5,001 79,513 45,348
Syngenta 15,134 2,941 46,760 45,836
Source: Redburn, Bloomberg
Fig 101 suggests potential deal values ranging from $12bn (Dow Agroscience at 15.9x
2016 EBITDA) to $80bn (Monsanto at the same multiple).
This implies that even for BASF, the company with the largest balance sheet, an
acquisition of either Monsanto, Syngenta or even Bayer Crop Science would be
difficult to achieve without equity financing.
Secondly, for Syngenta to buy Dupont Pioneer, which we see as the next most logical
combination after Monsanto, equity would probably be required. So recently after
rejecting a 35% bid premium from Monsanto, it would be understandable if Syngenta
shareholders were reluctant to fund a significant issue of new equity.
As was the case in the late 1990s, a sustained period of low farm margins may well
prompt an increase in corporate M&A activity in the agricultural sector.
Monsantos approach for Syngenta is more likely to mark the beginning than the
end of this activity. Material cost synergies should be achievable in most
combinations. However, the strategic logic of combining seeds and crop protection
offers the most compelling case for value-creation. Having shunned the advances of
its most logical suitor, Syngentas options may now be limited by shareholders
willingness to back management and fund an alternative deal. The likelihood of
Monsanto returning for Syngenta with another bid seems remote and Monsanto
may now pursue other combinations. Syngenta risks losing out as its competitors
combine.
06/
06/ Pipeline analysis
Pipeline analysis
Innovation in agrichemicals appears healthy. A detailed review of
research pipelines for the top six global companies has identified 139
new products under development. Fully risk-adjusted and treated for
attrition effects, total incremental gross profit will exceed $14bn by
2025. Syngenta and Bayer appear best placed in crop protection, with
respective pipelines worth an NPV of $11.5bn and $5.8bn. In seeds and
traits, Monsantos leadership appears undisputable. A decade of
innovations set to be unleashed should add nearly $6bn of gross profit.
We value the companys pipeline at $17bn.
The winners
We have performed a detailed review of the product pipelines for the leaders in both
crop protection and seeds. Total risk-adjusted sales potential by 2025, across the six
suppliers, is $21bn. Gross profit generation should near $14.5bn.
Although varied amongst the different companies, the total NPV for all 11 of the
product pipelines is just shy of $50bn. We summarise the work in Fig 102.
Fig 102: Crop production, seeds and traits product pipeline summary
$m Monsanto Syngenta BASF Bayer Dow DuPont
Sales FY14A 15,855 14,536 7,235 12,612 7,290 11,304
Pipeline sales risk adjusted 7,604 3,610 1,247 2,465 1,399 4,958
Implied total sales 23,429 18,146 8,482 15,077 8,689 16,262
Sales CAGR 2014-25E 4.0% 2.2% 1.6% 1.8% 1.8% 3.7%
Projects in development 34 21 12 28 17 27
Crop protection projects 4 15 12 16 5 10
Seed and trait projects 30 6 0 12 12 17
Pipeline gross profit 5,864 2,287 654 1,579 905 3,009

gross margin 77.4% 63.4% 52.4% 64.0% 64.6% 60.7%
NPV of pipeline 16,845 11,487 2,971 5,817 3,055 9,144
Crop protection component 1,592 9,565 2,971 4,413 1,967 3,562
Seeds and traits component 15,253 1,922 0 1,404 1,088 5,583
Pipeline value per share ($/share) 38 124 3 7 3 10
Current share price ($/share) 93 338 83 135 52 64
Pipeline value as % of share price 40.% 36.6% 3.9% 5.2% 5.1% 16.3%
Almost all companies are active, with many projects in development, but there is some
variation in the split between crop protection and seeds businesses. This reflects the
revenue and earnings split between current divisions. The value of all the pipelines is
positive in all cases and will likely help yield earnings growth over the cycle.
We have also derived the pipeline value on a per share basis. When compared to the
current share price, this is most material for Monsanto, Syngenta and DuPont.
Crop protection winners: Syngenta and Bayer

Sales potential from all pesticide pipelines should near $8bn by 2025. Innovation-
driven growth by Syngenta and Bayer alone could reach over 50% of this total (Fig
103).
A greater strategic focus on seeds and biotech trait development means that the lowest
sales growth potential from new products appears to be for Dow Chemical and
Monsanto.
Fig 103: Crop protection pipeline sales risk adjusted: 2014-25E

2,500 2,332
Sales by 2025 / $m
2,000
1,616
1,500 1,247 1,156
1,000 751 690
500
0
Syngenta Bayer BASF DuPont Dow Chemical Monsanto
Crop Protection pipeline sales (risk adjusted)
Four of the six companies have at least ten crop protection products in development.
Yet, of the 16 R&D projects to innovate new fungicide active ingredients, 12 are being
pursued by Syngenta and Bayer.
We detail the split by crop protection product category in Fig 104.
Fig 104: Crop protection pipeline projects split by product category

20
15
R&D projects
10
0
Monsanto Syngenta BASF Bayer Dow Chemical DuPont
Herbicides Insecticides Fungicides / ST Other

This market segment typically yields the highest gross margin and frequently sales can
reach blockbuster status, nearing $1bn post a full regional launch.
Although new product margins can fall slightly below our expected average in the
initial launch year (due to one-off costs), those materials achieving a higher sales
potential tend to generate positive operational gearing due to greater cost absorption.
Although the levels of product profitability are somewhat opaque for some companies,
Syngenta and Bayer have previously indicated that the assumptions shown in Fig 105
are reasonable.
Fig 105: Crop protection gross margin assumption by product category

80% 70%
60%
Gross margin
60% 50%
40% 35%
20%
0%
Non-selective herbicides Selective herbicides Fungicides Insecticides
Crop protection product category gross margin
Applying these gross margin assumptions along with a 50% sales attrition to our risk-
adjusted pipeline sales translates into gross profit potential, which we summarise in
Fig 106.
The gross profit at Syngenta and Bayer is 54% of the total across these six major
suppliers. Combining all six implies the scope for $4.6bn of gross incremental
earnings.
Fig 106: Crop protection pipeline risk-adjusted gross profit: 2014-25E

2,000
1,511
1,500
973
1,000 709
654
420 358
500
0
Syngenta Bayer BASF DuPont Dow Chemical Monsanto
Crop Protection pipeline gross profit
Seeds and traits winner: Monsanto

Monsanto has by far the largest pipeline, in terms of both number of products and
sales potential, with the scope to generate over $7bn revenue by 2025.
Summing up all the different company sales pipelines for seeds reaches $13.4bn, which
implies that Monsanto will generate around 50% of total industry growth over the
coming decade (Fig 107).
As we detail from page 133, Syngentas pipeline in seeds and traits seems to offer much
less growth potential than that for crop protection. Even less revenue expansion from
new products appears likely for Bayer and Dow Chemical. BASF has no commercial
seeds franchise at this time.
Fig 107: Seeds and traits pipeline sales risk-adjusted: 2014-25E

8,000 6,884
Sales by 2025 / $m
6,000
3,802
4,000
2,000 1,278
849 648
0
0
Seeds and traits pipeline sales (risk adjusted)
We have identified 78 seeds and traits projects under development. Four of the six
companies have at least ten products in various R&D phases. Syngenta and Bayer have
the fewest innovation programmes. While these two suppliers represented a dominant
proportion of potential gross sales growth in crop protection, this falls to only 16% of
industry pipeline revenue in seeds.
We detail the projects split by crop in Fig 108.
Fig 108: Seeds and traits pipeline projects split by crop

40
30
R&D projects
20
10
0
Monsanto Syngenta BASF Bayer Dow Chemical DuPont
Corn Soy Cotton Canola Other

As is the norm, Monsantos pipeline has a heavy focus upon corn, soy and cotton. But
there are also developments underway in early-stage phases for wheat. Bayer is the
only company with no R&D for corn.
We maintain the assumption that gross margin for new seed traits is 80% across the
industry, but less for hybrid seeds and germplasm (50-60%). This is in keeping with
commentary from industry consultants and our modelling of Monsantos historic
earnings generation.
Applying these gross margin assumptions to our risk-adjusted pipeline sales translates
into gross profit potential, which we summarise in Fig 109.
Our main conclusion is that Monsanto is set to derive nearly 60% of all industry value
created in seeds and traits by 2025. The critical point is that the growth will primarily
be generated from incremental trait sales per seed, which is not only high gross margin
but is extremely scalable.
For Syngenta and Bayer, additional income attributable to new products sums to
$1.5bn, which is only 14% of the industry total.
Fig 109: Seeds and traits pipeline risk-adjusted gross profit: 2014-25E
6,000 5,507
5,000
4,000
3,000 2,299
2,000
776 606
1,000 484
0
0
Seeds and traits pipeline gross profit
Methodology and definitions

In keeping with industry convention, we define new products as active ingredients
and combinations that have so far not been launched in all targeted regions. This can
mean that a product may have been commercialised already in one country and be
generating initial sales, but incremental revenue is yet to be realised once the material
is approved and launched in additional territories.
In some cases, the year of peak sales has been indicated by the company. However, in
numerous other cases, this has not been specified. It seems to be more the case for
seeds and traits at those companies with a lower market share, which may suggest a
lack of confidence in market acceptance.
As such, we have applied the assumption that peak sales will be determined by market
share potential, which is crop-specific, and potential retail price. We take the view that
new seed traits will lead to incremental revenue, on the basis that a new valued effect
results from their use, and to capture the return on prior innovation.
Although some argue that farmers may not pay up for new traits when market
conditions are more challenging, we disagree. Providing value in use can be
demonstrated, it makes no sense to not realise a return on historic R&D expense,
especially within a relatively consolidated industry.
Monsanto
Product diversification to add new active ingredients to Roundup makes sense, given
the resistancy trend. However, the big prize will come from seeds and traits, with 31
different projects under various phases of development and a pipeline value of $17bn.
Crop protection pipeline is worth $1.6bn

It is well known that Monsanto management has favoured allocating innovation
resources for the companys seeds and traits business. As such, the number of products
in the crop protection pipeline is low (Fig 110).
Fig 110: Monsanto crop protection product pipeline summary table

$m Peak sales Phase Launch Peak sales year Category
Tioxazafen 200 4 2017 2022 Insecticide
Acceleron 2nd gen 200 4 2017 2020 Insecticide (seed treatment)
Dicamba Xtend 300 3 2017 2019 Herbicide
Roundup Ready Plus 500 4 2016 2020 Herbicide
Total 1,200
Source: Redburn, Phillips McDougall, company
The only truly novel, differentiated product in this list is Tioxazafen, which is a
nematicide for use on corn, soy and cotton. Although the active ingredient will be a
new insecticide, the range of pests being targeted will be quite focused, which may
limit the scale of potential sales growth.
Material sales growth potential stems from Dicamba Xtend, which will be
commercialised from 2017, as a new production asset ramps up. This will be available
as pre-mixed formulations with glyphosate and targeted to be used with Monsantos
GM seed crops.
Collaborating with other crop protection suppliers has meant that Monsanto has
access to a more diverse number of ingredients for blending into Roundup mixtures,
to help combat resistancy. This is expected to provide $0.5bn sales growth potential, as
detailed in Fig 110. Phasing of the additional gross sales from crop protection products
is shown in Fig 111.
Fig 111: Monsanto crop protection product pipeline gross sales model: 2014-25E
$m 2014A 2015A 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E
Tioxazafen 10 50 100 150 200 205 210 215 221
Acceleron 2nd gen 10 50 100 150 200 205 210 215 221
Dicamba Xtend 10 50 100 150 200 250 300 308 315
Roundup Ready Plus 50 100 200 300 400 500 500 500 513 525
Total sales 0 0 50 130 350 600 850 1,100 1,160 1,220 1,251 1,282
Annual growth - - - 160% 169% 71% 42% 29% 5% 5% 2% 2%
However, Fig 111 does not take into account the risk adjustments relating to which
R&D phase each product resides in, nor does it account for sales attrition of existing
products.
With two products in late-stage development, the risk adjustment impact to sales is
limited. However, we also assume 50% attrition, as we have across practically all crop
protection pipelines and for all companies. The exception is Tioxazafen, which is a
new application for Monsanto.
Fig 112: CP product pipeline attrition and risk-adjusted sales model: 2015-25E
$m Risk 2015A 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E
Tioxazafen 95% 0 0 10 50 100 150 200 205 210 215 221
Acceleron 2nd gen 95% 0 0 5 25 50 75 100 103 105 108 110
Dicamba Xtend 80% 0 0 5 25 50 75 100 125 150 154 158
Roundup Ready Plus 95% 0 25 50 100 150 200 250 250 250 256 263
Sales (50% attrition) 0 25 70 200 350 500 650 683 715 733 751
Annual growth - - 180% 186% 75% 43% 30% 5% 5% 2% 3%
Sales risk adjusted 0 24 66 186 325 464 603 630 657 673 690
Implementing our core assumptions for gross margins by product category allows us
to reach a gross profit growth profile for the pipeline, as shown in Fig 113.
The variation in gross margin across the four products, heavily weighted towards
Roundup Ready Plus, leads us to model c50% for the new products.
This is well above the 35% gross margin reported in the Agricultural Productivity
division, but much closer to the levels achieved by other suppliers.
Fig 113: CP product pipeline attrition and risk-adjusted gross profit model: 2015-25E
$m G mgn 2015A 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E
Tioxazafen 60% 0 0 6 30 60 90 120 123 126 129 132
Acceleron 2nd gen 60% 0 0 3 15 30 45 60 62 63 65 66
Dicamba Xtend 35% 0 0 2 9 18 26 35 44 53 54 55
Roundup Ready Plus 50% 0 13 25 50 75 100 125 125 125 128 131
GP (50% attrition) 0 13 36 104 183 261 340 353 367 376 385
Annual growth - - 186% 190% 76% 43% 30% 4% 4% 2% 2%
Gross profits risk adj 0 12 34 97 171 244 318 329 340 349 358
A discounted cash flow model can be found in Fig 114. Our methodology is to assume
added expenses for new innovation, marketing and sales will be an offset to gross
profits. The ratio as a percentage of sales for R&D is relatively standard for the
industry.
Marketing and sales costs are slightly lower than for the Monsanto group (17-18% of
sales in 2014 and 2015). But, arguably, our assumption that material additional
commercial expense will be required is cautious, given that the company already has a
strong distribution network.
Fig 114: Monsanto crop protection cash flow model

$m 2015A 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E
Gross profit 0 (1) (3) (8) (14) (20) (26) (27) (29) (29) (30)
SG&A 0 (1) (3) (8) (14) (20) (26) (27) (29) (29) (30)
% of sales 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0%
R&D 0 (2) (6) (16) (28) (40) (52) (55) (57) (59) (59)
% of sales 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 7.8%
Distribution 0 (2) (6) (16) (28) (40) (52) (55) (57) (59) (60)
% of sales 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%
EBIT risk adj 0 7 21 60 106 152 197 203 209 214 221
Tax rate 27.0% 27.0% 27.0% 27.0% 27.0% 27.0% 27.0% 27.0% 27.0% 27.0% 27.0%
NOPLAT risk adj 0 5 15 44 77 111 144 148 153 156 161
Capex 0 (1) (1) (4) (7) (10) (13) (14) (14) (15) (15)
% of sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
NWC 0 (1) (1) (4) (7) (10) (13) (14) (14) (15) (15)
% of sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
D&A 0 1 3 8 14 20 26 27 29 29 30
% of sales (4.0%) (4.0%) (4.0%) (4.0%) (4.0%) (4.0%) (4.0%) (4.0%) (4.0%) (4.0%) (4.0%)
Cash flow risk adj 0 5 15 44 77 111 144 148 153 156 161
Discount rate 92.6% 85.7% 79.4% 73.5% 68.1% 63.0% 58.3% 54.0% 50.0% 46.3% 42.9%
DCF risk adjusted 0 4 12 32 53 70 84 80 76 72 69
The 27% tax rate applied in our modelling is taken from the companys reported
results. Therefore, we introduce no tax credits for innovation.
Small cash flow adjustments have been made for capital expenditure and working
capital, which is offset by adding back non-cash depreciation.
We summarise the total value of the pipeline in Fig 115, with an NPV of $1.6bn.
Fig 115: Monsanto crop protection pipeline NPV model summary

------------------------- Cash flows ($m) ---------------------- -------------- Assumptions and growth rates -----------
Forecast cash flows to 2025 553 Discount rate 8.0%
Normalised cash flows to 2034 500 Sales CAGR 21.2%
Terminal value 539 NOPAT CAGR 23.0%
Total value of cash flows 1,592 EBIT CAGR 17.0%
Shares in issue (million) 440 Terminal growth rate 2.0%
Implied value per share ($/share) 4 Tax rate 27.0%
Seeds pipeline is worth $15.3bn

Monsantos seeds and traits pipeline is the most comprehensive we have found across
our coverage. It is numerous, with 31 different projects, and provides growth potential
from product launches spanning the coming decade.
Development projects in phase four are detailed in Fig 116. Risk-adjusted sales
potential nears $3bn, with scope for gross profit to reach $2.3bn.
Fig 116: Monsanto seeds and traits pipeline phase four products: 2016-22E
Product Phase Risk adj Launch Peak year Acres/m Price/acre Peak sales Peak gr prof.
Corn Roundup Hybridization System 4 95% 2016 2020 45 $5.00 225 180
Corn SmartStax Pro 4 95% 2019 2024 45 $10.00 450 360
Corn third gen above-ground insect prot. 4 95% 2017 2022 45 $10.00 450 360
Corn Plant health germplasm roll-out 4 95% 2016 2021 45 $6.00 270 216
Soy Intacta RR2 Pro second gen 4 95% 2017 2021 50 $8.00 400 320
Soy RR2 Xtend 4 95% 2016 2021 75 $5.00 375 300
Soy Vistive Gold 4 95% 2016 2020 5 $20.00 100 80
Soy Omega-3 4 95% 2016 2019 2 $50.00 100 80
Cotton Genuity Bollgard III 4 95% 2016 2021 18 $20.00 360 288
Cotton Bollgard II XtendFlex 4 95% 2016 2021 8 $20.00 160 128
Canola LibertyLink 4 95% 2017 2022 10 $15.00 150 120
Total phase 4 products 348 3,040 2,432
Total phase 4 products risk adjusted 2,888 2,310
Important projects include the launch of SmartStax Pro GM corn, which will again set
the industry standard for trait combinations.
An additional corn trait with gross profit potential of $0.4bn is set to be launched from
2017. This will improve above-the-ground insect protection and may therefore present
a risk to insecticide demand for row crops.
For soy, the second-generation Intacta variant is planned for commercialisation from
2017 and has recently moved from phase three to four. Incremental trait pricing
around $8/acre should result from increased farmer yield and a potential decrease to
insecticide usage.
Monsantos Roundup Ready 2 Xtend soy project has also been upgraded from phase
three to phase four status and is now expected to be available from 2016. This offer will
be the first time that GM soy, which is resistant to dicamba herbicide, becomes widely
available and should help alleviate the resistancy issues farmers are finding with
regular glyphosate-resistant soy seed. The additional $5-10 per acre trait cost should
be offset by reduced selective herbicide usage and potentially higher yields.
We also think that new innovations in GM cotton are worth noting, after a period of
limited new technology launches. Monsantos Genuity Bollgard III should be available
from 2016, which will be a stacked trait combination including Syngentas Viptera
technology. The offer to the grower will be to boost above-ground insect protection.
Bollgard II XtendFlex will be a GM cotton variety with both glyphosate and dicamba
resistance. As for corn, an incremental trait cost of $20 per acre will be compensated
for by boosting yields and reduced spend on insecticides.
Monsanto R&D projects in phase three are shown in Fig 117. Arguably the most
interesting will be the companys high-yielding GM corn trait technology. This is a
collaboration with BASF that began back in 2007. The aim is to boost plant yield by
over 12 bushels per acre. At a corn price of $4/acre, gross value creation would be
around $48/acre, which permits Monsanto to charge the additional $20/acre trait cost.
Fig 117: Monsanto seeds and traits pipeline phase three products: 2017-24E
Corn high-yielding corn 3 80% 2018 2023 55 $20.00 1,100 880
Corn Glufosinate, glyphosate, dicamba 3 80% 2017 2021 50 $15.00 750 600
resistant
Soy RR2 Xtend III 3 80% 2019 2023 75 $5.00 375 300
Soy second gen nematode resistance 3 80% 2018 2023 10 $15.00 150 120
Cotton Lygus control 3 80% 2019 2024 8 $20.00 160 128
A project to develop corn varieties with three different means of herbicide resistance is
also under assessment. To be fair, all these individual trait technologies are available
today in isolation, but so far no company has been able to combine all three without
reducing the yield of the final crop. Monsantos use of glufosinate may be more
successful and an initial commercial launch is planned for around 2018.
Further enhancements are planned to the Xtend soy offer, with tolerance to another
herbicide, in addition to glyphosate and dicamba. We are modelling an incremental
trait cost of $5/acre, which will be accounted for by reduced herbicide usage.
Seven projects currently reside in phase two of development, with the new high-
yielding soy product offering the greatest potential for gross profit growth. The value
proposition is for the offer to generate around 6 additional bushels per acre of land.
Assuming a soy price of $9/acre implies gross incremental value of $54/acre, which
should permit Monsanto to charge $25/acre for the trait technology.
Although only early days, it is worth highlighting two innovation projects that seek to
boost wheat farming productivity. It seems highly unlikely that consumers, the food
industry and grain processing firms would accept a GM wheat crop, and with this in
mind, Monsanto is developing a hybrid variety that is tolerant to glyphosate.
Some of these projects have the potential to generate material sales and earnings
growth, but given the phase two development status, all projections have been risk-
adjusted by a factor of 50%.
Fig 118: Monsanto seeds and traits pipeline phase two products: 2021-27E
Corn fourth gen herbicide protection 2 50% 2021 2026 50 $15.00 750 600
Corn Roundup Hybridization System 2 2 50% 2021 2026 45 $5.00 225 180
Soy fourth gen herbicide tolerance 2 50% 2021 2026 50 $5.00 250 200
Soy High Yield Soy + Stress 2 50% 2022 2027 50 $25.00 1,250 1,000
Canola Dicamba tolerance 2 50% 2022 2027 10 $15.00 150 120
Wheat Hybrid Herbicide tolerance 1 2 50% 2021 2026 100 $5.00 500 400
Wheat Hybrid Herbicide tolerance 2 2 50% 2022 2027 100 $5.00 500 400
More speculative projects in phase one include four corn projects. DroughtGard offers
the farmer the ability to grow crops in regions with low water availability. Our
protection for 30 million acres is mainly derived from US states and LATAM farm
territories that currently cannot economically grow corn. But there is additional
potential in Africa, where nearly 80 million acres are already dedicated to the crop, yet
average yield is only around 20% of that in the US.
Fig 119: Monsanto seeds and traits pipeline phase one products: 2023-28E
Corn DroughtGard 1 25% 2023 2028 30 $20.00 600 480
Corn fourth gen insect protection 1 25% 2023 2028 45 $10.00 450 360
Corn Yield + Stress II 1 25% 2023 2028 55 $25.00 1,375 1,100
Corn nitrogen fixing 1 25% 2023 2028 40 $25.00 1,000 800
Soy Intacta RR2 Pro third gen 1 25% 2023 2028 50 $8.00 400 320
Cotton Genuity Bollgard IV 1 25% 2023 2028 18 $20.00 360 288
Cotton Xtend fourth gen 1 25% 2023 2028 8 $20.00 160 128
Total phase 1 products risk adjusted 1,086 869
Corn Yield and Stress, a combined project with further enhancements to yield and
greater tolerance to heat would be an attractive offer to US farmers in Midwest states
and those in LATAM. If successful, widespread adoption could generate over $1bn
gross profit. The trait cost of $25/acre does appear high, in comparison to incremental
costs for recent new product offers. However, this may be justified due to the
productivity gains and extra yield generated.
The discounted cash flow model for the total seeds and traits pipeline is shown in Fig
120. We have been consistent in assuming that the gross margin for traits remains at
80%. This is broadly in line with Monsantos current business and may even be
conservative for some of the most novel projects.
All other assumptions for expenses and tax are identical to our model for the
companys crop protection pipeline.
The only additional expense line relates to royalty payments due to Syngenta and Dow
Chemicals for cross-licensing the Viptera and Herculex technologies.
Fig 120: Monsanto seeds and traits pipeline DCF model

$m 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E
Sales risk adjusted 228 774 1,630 2,773 3,796 4,635 5,134 5,778 6,344 6,884 7,346 7,631 7,815
Gross profit 182 619 1,304 2,218 3,037 3,708 4,107 4,622 5,075 5,507 5,877 6,105 6,252
gross margin 80% 80% 80% 80% 80% 80% 80% 80% 80% 80% 80% 80% 80%
R&D expense (23) (77) (163) (277) (380) (463) (513) (578) (634) (688) (735) (763) (781)
as % sales 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
SG&A expense (41) (139) (293) (499) (683) (834) (924) (1,040) (1,142) (1,239) (1,322) (1,374) (1,407)
as % sales 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0%
EBITDA 119 402 847 1,442 1,974 2,410 2,669 3,004 3,299 3,579 3,820 3,968 4,064
Royalty payments (5) (15) (33) (55) (76) (93) (103) (116) (127) (138) (147) (153) (156)
as % sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
Tax (32) (108) (228) (388) (531) (649) (719) (809) (888) (964) (1,028) (1,068) (1,094)
as % PBT 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0%
NOPLAT 82 278 587 998 1,366 1,669 1,848 2,080 2,284 2,478 2,645 2,747 2,813
Cash adjustments
Capex (7) (23) (49) (83) (114) (139) (154) (173) (190) (207) (220) (229) (234)
as % sales 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
Working capital (5) (15) (33) (55) (76) (93) (103) (116) (127) (138) (147) (153) (156)
as % sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
Cash flow 71 240 505 860 1,177 1,437 1,591 1,791 1,966 2,134 2,277 2,366 2,423
Discount rate 92.6% 85.7% 79.4% 73.5% 68.1% 63.0% 58.3% 54.0% 50.0% 46.3% 42.9% 39.7% 36.8%
Discounted cash flows 65 206 401 632 801 905 929 968 984 988 977 939 891
We do assume that capital expenditure costs are materially higher for Monsantos
seeds and traits business than for crop protection.
By 2025, we model that around $210m capex per year would be needed to
manufacture and commercialise the pipeline detailed above.
Perhaps very pessimistic, but to remain cautious over the long term we assume 0%
growth for the terminal cash flow calculation in the seeds business.
The NPV calculation for the companys seeds and traits pipeline is shown in Fig 121.
With total cash flow potential nearing $15.2bn, implying a value of $34/share, this is
by far the most attractive pipeline across all companies within the industry.
Fig 121: Monsanto seeds and traits NPV calculation

$m Cash flow
Forecast cash flow 2016-28E 9,685
Terminal cash flow 5,567
Total cash flow 15,253
Implied value 15,253
Shares in issue (million) 446
Implied value per share ($/share) 34
Risks to our views and modelling could arise from an inability to collect farmer
payments for trait technology in one specific case. Although this seems highly unlikely
in the established NAFTA markets and Brazil, the company appears to have some
issues in Argentina. The recent launch of Intacta GM soy has been eagerly accepted by
local growers and we understand that all available seed has been sold in the first year of
commercialisation.
However, Argentinian law permits farmers to save seed and the government has
recently stated that it would seek to prevent grain processing companies from
collecting royalties due to Monsanto. The company has stated that 70% of expected
income from the Intacta trait has already been accounted for at the point of seed sale,
but it appears unclear what the actual terms of trade will be in 2016.
Syngenta
The companys product pipelines for crop protection and seeds are polar opposites of
Monsantos, but in combination are worth $11.5bn. This is the second highest across
the crop protection and seeds industry.

Syngenta has recently revealed greater depth to its crop protection pipeline and added
an additional seven active ingredients (Fig 122). Some might argue that this is due to
external pressure to demonstrate greater growth potential. However, we note that the
company regularly provides pipeline updates and the recent R&D event was planned
for over a year (i.e. in advance of any acquisition interest from Monsanto).
One of the major products in the table is Elatus, the new SDHI fungicide. A positive
response to the ingredient being launched in Brazil at the end of 2014 has led to peak
sales being upgraded to $1bn. Additional sales potential beyond the $0.4bn achieved so
far will be derived from planned launches in Europe and NAFTA. Product registration
has recently been achieved for US and Canada.
Fig 122: Syngenta crop protection product pipeline summary table

Peak sales
$m Peak sales Phase Launch year Category
Acuron 550 4 2015 2020 Selective herbicide
Orondis 200 3 2016 2018 Fungicide
Elatus 1,000 4 2015 2020 Fungicide
Adepidyn 800 3 2017 2022 Fungicide
Seguris 200 4 2014 2018 Fungicide
Vibrance 500 4 2014 2020 Fungicide/ST
Clariva 250 4 2014 2018 Insecticide/ST
Fortenza/Minecto 450 4 2014 2020 Insecticide/ST
Insecticide NEW 600 2 2021 2025 Insecticide
Herbicide NEW 650 1 2022 2028 Selective herbicide
Fungicide NEW 650 1 2022 2028 Fungicide
Insecticide NEW 300 3 2020 2026 Insecticide
Fungicide/ST NEW 250 1 2021 2027 Fungicide/ST
Fungicide/ST NEW 450 1 2022 2028 Fungicide/ST
Insecticide/ST NEW 150 1 2022 2028 Insecticide/ST
Total 7,000
Note: ST is an abbreviation for seed treatment or seed coated with crop protection chemistry
Similarly, Acuron is in the mid-launch phase regionally and sales are expected to
increase from around $0.1bn currently to exceed $0.5bn by 2020. Its value proposition
is to confer superior herbicidal properties on row crops.
Peak sales from phase-three product Adepidyn are expected to exceed $0.8bn, with
widespread appeal across cereals, oil seed crops and higher value vegetables. This is
likely to be Syngentas next major fungicide active ingredient, once sales for Elatus
near peak in 2020.
The combined sales potential for new R&D projects at an earlier stage is quite high, at
$3.1bn. However, given these developments mostly reside in phase one, risk
adjustment reduces the revenue potential quite materially in our model.
The phasing of gross sales for each crop protection active ingredient is shown in Fig
123. The profile of the pipeline looks strong, with numerous products set to generate
total sales of over $3.3bn by 2020. However, there appears to be no new product
planned for launch between 2018 and 2020.
Fig 123: Syngenta crop protection product pipeline gross sales model: 2014-25E
$m 2014A 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E
Acuron 100 200 250 300 350 400 450 500 550 564 578
Orondis 50 100 150 200 205 210 215 221 226 232
Elatus 350 450 500 800 900 950 1,000 1,025 1,051 1,077 1,104 1,131
Adepidyn 100 200 300 400 500 600 700 800 820
Seguris 80 125 150 175 200 205 210 215 221 226 232 238
Vibrance 170 250 300 350 400 450 500 513 525 538 552 566
Clariva 30 100 150 175 200 225 250 256 263 269 276 283
Fortenza/Minecto 10 50 130 180 250 300 350 400 410 420 431 442
Insecticide NEW 50 150 250 350 450
Herbicide NEW 50 150 250 350
Fungicide NEW 50 150 250 350
Insecticide NEW 50 100 150 200 250 280
Fungicide/ST NEW 50 100 150 200 215
Fungicide/ST NEW 50 100 150 200
Insecticide/ST NEW 10 25 50 75
Total sales 640 1,075 1,480 2,130 2,600 2,980 3,365 3,769 4,345 5,027 5,684 6,209
Annual growth - 68% 38% 44% 22% 15% 13% 12% 15% 16% 13% 9%
After treating for attrition effects (we assume 50% cannibalisation of existing sales),
net sales from the Syngenta crop protection pipe are detailed in Fig 124. We also risk-
adjust the potential for all materials, in keeping with our methodology.
The fact that six active ingredients under development are in phase one means that the
risk adjustment impact is significant over the next five years.
New products should be contributing $1.7bn to sales by 2020, despite our adjustments
for existing product attrition and phasing risk.
One other point worth debating is that three of the products in early stage
development are insecticides. We are aware that a number of GM seed trait
technologies are scheduled for launch over the next five years, which may erode
demand. Mix improvement from resistancy may provide some offset.
$m Risk 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E
Acuron 95% 50 100 125 150 175 200 225 250 275 282 289
Orondis 80% 0 25 50 75 100 103 105 108 110 113 116
Elatus 95% 225 250 400 450 475 500 513 525 538 552 566
Adepidyn 80% 0 0 50 100 150 200 250 300 350 400 410
Seguris 95% 63 75 88 100 103 105 108 110 113 116 119
Vibrance 95% 125 150 175 200 225 250 256 263 269 276 283
Clariva 95% 50 75 88 100 113 125 128 131 135 138 141
Fortenza/Minecto 95% 25 65 90 125 150 175 200 205 210 215 221
Insecticide NEW 50% 0 0 0 0 0 0 25 75 125 175 225
Herbicide NEW 25% 0 0 0 0 0 0 0 25 75 125 175
Fungicide NEW 25% 0 0 0 0 0 0 0 25 75 125 175
Insecticide NEW 80% 0 0 0 0 0 25 50 75 100 125 140
Fungicide/ST NEW 25% 0 0 0 0 0 0 25 50 75 100 108
Fungicide/ST NEW 25% 0 0 0 0 0 0 0 25 50 75 100
Insecticide/ST NEW 25% 0 0 0 0 0 0 0 5 13 25 38
Sales (50% attrition) 538 740 1,065 1,300 1,490 1,683 1,885 2,172 2,513 2,842 3,105
Annual growth - 68% 38% 44% 22% 15% 13% 12% 15% 16% 13% 9%
Sales risk adjusted 511 699 997 1,209 1,378 1,549 1,701 1,867 2,046 2,211 2,332
The table of sales development by product shown in Fig 124 has been translated into
gross profit generation in Fig 125. Product category assumptions have been
implemented, as described earlier on page 121.
The products that appear likely to contribute most to Syngentas earnings growth
include Elatus, Vibrance and Adepidyn. These three should generate nearly $0.7bn of
gross profit by 2020, which represents 61% of the risk-adjusted total income from the
entire pipeline.
Aside from the high peak sales potential for these three products, all are fungicides for
use in crop protection blends to counter plant disease, and for seed treatment. These
applications are highly profitable, with gross margins often exceeding 70%. Although
this level of earnings power is above that of the group, it should be the case that new
products yield higher margins, whereas old off-patent chemistry generates lower
returns.
There are practically no known projects for seed trait development certainly not with
scope for commercial release in the next five years that seek to disrupt fungicide
demand, unlike for insecticides. Our view is therefore that Syngenta has a high chance
of success in reaching these growth aspirations.
$m G mgn 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E
Acuron 50% 25 50 63 75 88 100 113 125 138 141 144
Orondis 70% 0 18 35 53 70 72 74 75 77 79 81
Elatus 70% 158 175 280 315 333 350 359 368 377 386 396
Adepidyn 70% 0 0 35 70 105 140 175 210 245 280 287
Seguris 70% 44 53 61 70 72 74 75 77 79 81 83
Vibrance 70% 88 105 123 140 158 175 179 184 188 193 198
Clariva 60% 30 45 53 60 68 75 77 79 81 83 85
Fortenza/Minecto 60% 15 39 54 75 90 105 120 123 126 129 132
Insecticide NEW 60% 0 0 0 0 0 0 15 45 75 105 135
Herbicide NEW 50% 0 0 0 0 0 0 0 13 38 63 88
Fungicide NEW 70% 0 0 0 0 0 0 0 18 53 88 123
Insecticide NEW 60% 0 0 0 0 0 15 30 45 60 75 84
Fungicide/ST NEW 70% 0 0 0 0 0 0 18 35 53 70 75
Fungicide/ST NEW 70% 0 0 0 0 0 0 0 18 35 53 70
Insecticide/ST NEW 60% 0 0 0 0 0 0 0 3 8 15 23
GP (50% attrition) 359 484 703 858 982 1,105 1,234 1,417 1,631 1,840 2,004
Annual growth - 62% 35% 45% 22% 14% 13% 12% 15% 15% 13% 9%
Gross profit risk adj 341 457 657 796 906 1,016 1,111 1,216 1,329 1,435 1,511
We show the NPV model calculation and assumptions in Fig 126.
The total Syngenta crop protection pipeline appears to be worth $9.6bn, which implies
$103/share.
Fig 126: Syngenta crop protection pipeline NPV model summary

------------------------- Cash flows ($m) ---------------------- -------------- Assumptions and growth rates -----------
Forecast cash flows to 2025 3,708 Discount rate 8.0%
Normalised cash flows to 2034 2,822 Sales CAGR 11.7%
Terminal value 3,035 NOPAT CAGR 11.7%
Shares in issue (million) pre buyback 93 Terminal growth rate 2.0%
Implied value per share ($/share) 103 Tax rate 16.0%
Seeds pipeline is worth $2bn

In stark contrast to a compelling pipeline in crop protection, Syngentas innovation
projects in seeds and traits appear much less exciting than those for crop protection.
We show only four projects in phase four development (Fig 128). Of these, Viptera
sales and income from licensing is reliant upon commercial success for the DuPont
Pioneer corn franchise (which we think is set to lose share).
However, we understand that Syngenta has signed contracts in place with DuPont,
Dow Chemical and Monsanto for the Viptera insect technology, so the degree of
confidence on incremental sales is relatively high.
As is the case for all new trait sales, the drop-through to earnings is high because there
is little in the way of additional cost. Gross margin for Viptera licensing income will be
above 90%. We show the expected revenue development in Fig 127.
Fig 127: Syngenta corn seed trait sales and royalty income
1,200
Corn trait revenue / $m
1,000
800 320 350
600 270
190
400 275 190
90 110 95 630
75 600
200 40 400 480
250 290 310 280 295 330
200
0
2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Branded sales Third-party royalties
Intacta RR Pro is a licensed product from Monsanto. Therefore the only point of
competitive differentiation is for Syngenta to bundle the soy seed with existing crop
protection products. There could be a risk of price discounting to take share.
Fig 128: Syngenta seeds and traits pipeline phase four products: 2016-21E
Corn Artesian trait 4 95% 2016 2020 3 $15.00 45 36
Corn Viptera trait licensing 4 95% 2016 2020 20 $15.00 300 240
Barley Hyvido 4 95% 2016 2021 50 $10.00 500 300
Intacta RR Pro 4 95% 2016 2021 15 $6.00 90 36
Total phase 4 products 88 935 612
Total phase 4 products risk adjusted 888 581
For Hyvido hybrid barley, we include associated crop protection sales within the peak
sales potential above $0.5bn. Both seed and pesticides are supplied together as a
package and, to our knowledge, the split between both groups has not been provided.
The only project in phase three appears to be Plene, the sugarcane cutting product,
which has seen mass-market commercialisation delayed due to production problems.
Although many market observers are sceptical, we like the idea of branded farming
solutions and have already highlighted the projects worth in our prior work.
The company has previously stated that peak sales will far exceed $0.5bn and
commercialisation would begin from 2017. However, recent comments from the
company indicate delays continue. Our assumptions are more cautious and we model
a much lower peak sales total of $0.2bn, with initial sales to commence in 2020.
Fig 129: Syngenta seeds and traits pipeline phase three products: 2018-23E
Sugarcane Plene NEW 3 80% 2020 2026 10 $20.00 200 100
As is the case for most seeds and traits suppliers, long-term research continues to
develop a high-yielding hybrid wheat offer. Syngenta does have a strong franchise in
this business though, so the opportunity should not be overlooked. Assuming a
$20/acre seed cost, this suggests there is potential for $0.5bn sales over the long run.
Fig 130: Syngenta seeds and traits pipeline phase two products: 2021-26E
Wheat Hybrid High Yield 2 50% 2021 2026 25 $20.00 500 250
Risk-adjusting the sales and gross profit does reduce the potential contribution.
However, as the development proceeds and its status steps up towards phase four, the
value contribution to the Syngenta pipeline will increase.
The discounted cash flow model for the total Syngenta seeds and traits pipeline is
shown in Fig 131. Assumptions for expenses are consistent with other companies.
There are a few points worth highlighting. Firstly, the gross margin is much lower than
that for Monsanto. This is because Syngenta tends to generate a lower proportion of
sales from direct trait sales and a correspondingly higher ratio from germplasm and
hybrid seeds.
However, as we showed earlier in Fig 127, the contribution from trait sales is set to rise
as licence agreements with third parties begin to have a stronger effect from 2016. As
such, Syngentas group gross margin should begin to benefit.
Also, the company gains from being exposed to low tax expense. In recent years,
Syngenta has reported a 14-15% tax rate, but guidance is for this to trend upwards. To
be prudent, we assume a 20% rate over the long run.
Guidance has been provided on tax that the 14-15% group rate achieved in 2014 will
increase to around 17% in 2015 and trend upwards to reach 20% by 2020.
Fig 131: Syngenta seeds and traits pipeline DCF model

$m 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E
Sales risk adjusted 214 257 409 537 691 808 926 1,093 1,186 1,278 1,348 1,398 1,448
Gross profit 154 171 276 361 459 522 586 674 725 776 811 836 861
gross margin 72% 67% 67% 67% 66% 65% 63% 62% 61% 61% 60% 60% 59%
R&D expense (21) (26) (41) (54) (69) (81) (93) (109) (119) (128) (135) (140) (145)
as % sales 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
SG&A expense (38) (46) (74) (97) (124) (145) (167) (197) (213) (230) (243) (252) (261)
as % sales 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0%
EBITDA 94 99 161 211 265 296 327 368 393 418 434 445 456
as % sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
Tax (18) (19) (31) (40) (50) (56) (62) (69) (74) (79) (81) (83) (85)
as % PBT 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%
NOPLAT 72 75 122 160 201 224 247 277 296 314 326 334 342
Cash adjustments
Capex (6) (8) (12) (16) (21) (24) (28) (33) (36) (38) (40) (42) (43)
as % sales 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
Working capital (4) (5) (8) (11) (14) (16) (19) (22) (24) (26) (27) (28) (29)
as % sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
Cash flow 61 62 102 133 167 184 200 222 236 250 258 264 269
Discount rate 92.6% 85.7% 79.4% 73.5% 68.1% 63.0% 58.3% 54.0% 50.0% 46.3% 42.9% 39.7% 36.8%
The NPV for Syngentas seeds and traits pipeline is shown in Fig 132. Total discounted
cash flows sum to $1.9bn, which implies a value of $21/share.
Fig 132: Syngenta seeds and traits NPV calculation

Cash flow $m
Terminal cash flow 618
Implied value 1,922
Shares in issue (million) pre buyback 93
Bayer, BASF, Dow Chemical and DuPont

Bayer
Bayers Crop Science pipeline, like that at Syngenta, is significantly weighted towards
agrichemicals. It has 16 crop protection products in its pipeline and 12 for seeds and
traits. Our analysis of Bayers R&D programme values its crop protection pipeline at
$4.4bn and its in-development seeds and traits at $1.3bn.

Bayers crop protection pipeline is relatively well-diversified across herbicides,
fungicides and insecticides, contributing 23%, 28% and 49% of peak sales respectively.
The individual products are shown in Fig 133.
In several cases, the company has yet to provide a peak sales forecast for individual
products. However, we are assigning our own forecasts based on likely sales potential,
given Bayers scale (global number-two supplier), and on the product category. We
assume that incremental sales from new active ingredients will amount to c0.5bn, and
revenue associated with new combinations will be 150m.
We have no concerns over the pipelines maturity. As with the other premium crop
protection suppliers, we have a well-defined road map for new combination mixtures,
product extensions and three novel active ingredients set to be launched by 2020.
Fig 133: Bayer crop protection product pipeline summary table

Verango 350 4 2014 2019 Insecticide
Flocter 150 4 2014 2019 Insecticide
Sivanto 150 4 2015 2020 Insecticide
Council 150 4 2015 2020 Selective herbicide
Movento 100 4 2015 2020 Insecticide
Alion 80 4 2015 2020 Herbicide
Fungicide new mix 200 4 2016 2021 Fungicide
Fungicide extension 150 4 2016 2021 Fungicide
Herbicide extension 150 4 2016 2021 Herbicide
Insecticide new AI 500 3 2017 2022 Insecticide
Fungicide extension 150 3 2017 2022 Fungicide
Herbicide extension 150 3 2017 2022 Herbicide
Herbicide new mix 150 2 2018 2023 Herbicide
Herbicide new mix 150 2 2018 2023 Herbicide
Insecticide new AI 500 2 2019 2025 Insecticide
Fungicide new AI 500 2 2019 2025 Fungicide
Total 3,580
There will inevitably be other products in development. It is likely that there are
unannounced items in stage one development, but with no information on these, we
have not been able to include these in our value analysis.
The top three products in terms of peak sales are all planned new active ingredients,
which will not be launched until at least 2017. In aggregate, these account for 42% of
peak sales.
Notable products set to be newly launched, or scaled up from selling into approved
regions, include Verango (active ingredient fluopyram) and Floctor (biological soil
application) to combat nematode root pests.
Also, a new product set to launch in 2015, Council, will target rice farming, with a
particular emphasis upon the Asia Pacific region. The main active ingredient is
triafamone, which is used in herbicides to control a broad variety of weeds.
The phasing assumptions for pipeline revenue growth are detailed in Fig 134.
Fig 134: Bayer crop protection product pipeline gross sales model: 2014-25E
$m 2014A 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E
Verango 10 50 150 250 300 350 359 368 377 386 396 406
Flocter 10 40 75 100 125 150 154 158 162 166 170 174
Sivanto 0 10 40 75 100 125 150 154 158 162 166 170
Council 0 10 40 75 100 125 150 154 158 162 166 170
Movento 0 10 30 55 80 90 100 103 105 108 110 113
Alion 0 10 25 45 60 70 80 82 84 86 88 91
Fungicide new mix 0 0 10 50 100 150 175 200 205 210 215 221
Fungicide extension 0 0 10 40 75 100 125 150 154 158 162 166
Herbicide extension 0 0 10 40 75 100 125 150 154 158 162 166
Insecticide new AI 0 0 0 10 75 200 300 400 500 513 525 538
Fungicide extension 0 0 0 10 40 75 100 125 150 154 158 162
Herbicide extension 0 0 0 10 40 75 100 125 150 154 158 162
Herbicide new mix 0 0 0 0 10 40 75 100 125 150 154 158
Herbicide new mix 0 0 0 0 10 40 75 100 125 150 154 158
Insecticide new AI 0 0 0 0 0 10 75 150 250 350 425 500
Fungicide new AI 0 0 0 0 0 10 75 150 250 350 425 500
Total sales 20 130 390 760 1,190 1,710 2,218 2,667 3,105 3,414 3,632 3,852
Annual growth - 550% 200% 95% 57% 44% 30% 20% 16% 10% 6% 6%
Of the 16 projects within Bayers crop protection pipeline, nine are in stage-four
development, three are in stage three, and another four still reside in the second phase.
This latter group includes two potential blockbuster active ingredients, with combined
peak sales of 1bn. As such, there is a dilution effect, once we adjust for attribution
and risk of project failure.
In Fig 135, we detail the pipeline revenue phasing after adjusting for risk and sales
attrition.
Verango 95% 25 75 125 150 175 179 184 188 193 198 203
Flocter 95% 20 38 50 63 75 77 79 81 83 85 87
Sivanto 95% 5 20 38 50 63 75 77 79 81 83 85
Council 95% 5 20 38 50 63 75 77 79 81 83 85
Movento 95% 5 15 28 40 45 50 51 53 54 55 57
Alion 95% 5 13 23 30 35 40 41 42 43 44 45
Fungicide new mix 95% 0 5 25 50 75 88 100 103 105 108 110
Fungicide extension 95% 0 5 20 38 50 63 75 77 79 81 83
Herbicide extension 95% 0 5 20 38 50 63 75 77 79 81 83
Insecticide new AI 80% 0 0 5 38 100 150 200 250 256 263 269
Herbicide new mix 50% 0 0 0 5 20 38 50 63 75 77 79
Fungicide new AI 50% 0 0 0 0 5 38 75 125 175 213 250
Sales (50% attrition) 65 195 380 595 855 1,109 1,334 1,553 1,707 1,816 1,926
Annual growth 550% 200% 95% 57% 44% 30% 20% 16% 10% 6% 6%
Net sales risk adjusted 62 185 359 549 764 948 1,106 1,246 1,335 1,402 1,469
In addition to a robust pipeline, the product mix is weighted towards insecticides and
fungicides, which we assume to be the higher margin segments in crop protection.
As the phase two projects proceed into more advanced stages and therefore receive less
severe risk adjustment, it seems likely that the pipeline value will trend upwards.
On average, we model that the gross margin of the Bayer crop protection pipeline will
remain relatively consistent, at 58% in 2015 and rising by 200bp to 60% by 2025.
The annual gross profit contribution of the pipeline products is shown in Fig 136.
Verango 60% 15 45 75 90 105 108 110 113 116 119 122
Flocter 60% 12 23 30 38 45 46 47 48 50 51 52
Sivanto 60% 3 12 23 30 38 45 46 47 48 50 51
Council 50% 3 10 19 25 31 38 38 39 40 41 42
Movento 60% 3 9 17 24 27 30 31 32 32 33 34
Alion 50% 3 6 11 15 18 20 21 21 22 22 23
Fungicide new mix 70% 0 4 18 35 53 61 70 72 74 75 77
Fungicide new AI 70% 0 0 0 0 4 26 53 88 123 149 175
GP (50% attrition) 38 114 225 353 507 659 796 930 1,025 1,094 1,163
Annual growth 533% 201% 96% 57% 44% 30% 21% 17% 10% 7% 6%
Gross profit risk adj 36 109 212 326 454 565 660 746 801 842 884
In Fig 137, we show the results of our crop protection pipeline NPV calculation.
Bayers total crop protection pipeline appears to be worth $4.4bn, or $5.3/share. We

have maintained a terminal growth rate assumption of 2%, which is consistent for
other companies in agrichemicals.
Fig 137: Bayer crop protection pipeline NPV model summary

------------------------- Cash flows ($m) -------------------- -------------- Assumptions and growth rates -----------
Implied value per share ($/share) 5.3 Tax rate 25.0%

Compared to the in-crop protection innovation programme, Bayers R&D pipeline in
seeds and traits is less mature. Nevertheless, there are 11 products set to launch before
2020, as well as a hybrid wheat seed variety, which we believed could be launched in
2021.
Although still at least six years out from launch and in phase two, the wheat seed
project has the potential to be the most significant within the companys pipeline. This
development could contribute up to $400m annually of incremental sales.
Bayers imminent launches within phase four development are listed in Fig 138.
FiberMax, the companys dual herbicide-resistant cotton seed, is expected to have the
highest impact on gross profit: $160m annually at peak.
This dual herbicide-resistant GM cotton seed provides an incremental improvement

to existing products, which are resistant to glyphosate and glufosinate. This update will
add an extra insect resistance gene and should be well received in regions with high
pest pressure.
Fig 138: Bayer seeds and traits pipeline phase four products: 2014-21E
Soy GLY and HPPD tolerance 4 95% 2017 2021 5 $15.00 75 60
Arize Rice blight resistance 4 95% 2014 2019 2 $10.00 20 16
FiberMax Cotton dual HT and IR 4 95% 2014 2020 10 $20.00 200 160
InVigor Canola pod shatter reduction 4 95% 2014 2020 4 $10.00 40 32
Wheat non-hybrid 4 95% 2015 2020 4 $10.00 40 20
Canola dual herbicide tolerance 4 95% 2016 2021 4 $10.00 40 32
Of the four phase three products, we anticipate that the hybrid rice projects will all be
well received and generate $100m gross profit annually by 2024 (Fig 139). The salt-
tolerant hybrid rice is only likely to find traction in the developing markets and will
remain fairly constrained geographically.
All three of the rice products have been bred using more conventional techniques and,
as such, are not classified as GM. These varieties will therefore not have the same
planting restrictions as those that occur with biotech seeds.
Fig 139: Bayer seeds and traits pipeline phase three products: 2016-22E
Rice insect resistance hybrids 3 80% 2016 2021 10 $10.00 100 50
Rice submergence tolerant hybrids 3 80% 2016 2021 10 $10.00 100 50
Rice salinity tolerant hybrids 3 80% 2016 2021 10 $10.00 100 50
Cotton dual HT + IR 3 80% 2017 2022 5 $10.00 50 40
We only include two phase two products in our analysis. By far the most interesting
appears to be Bayers high-yielding hybrid wheat. However, it is anticipated that this
project will not be commercialised before 2021 and will require a five-year ramping-up
period. At this time, there are no GM wheat seeds available.
A successful introduction of more profitable wheat could potentially cause a major

shift in the split of cereal crops planted. We include a long five-year ramping-up
period, as the hybrid wheat will be a brand-new technology and farmers may need to
be gradually convinced of its worth in a real-world application.
Bayer also plans to launch a GM soy variety in 2019 that will be tolerant to three
different herbicides. We understand these include glyphosate, glufosinate and HPPD
tolerance (a new trait MOA jointly developed with Syngenta and MF Technologies).
Our assumptions for the phase-two hybrid wheat and GM soy development projects
are detailed in Fig 140.
Fig 140: Bayer seeds and traits pipeline phase two products: 2021-26E
Wheat Hybrid High Yield 2 50% 2021 2026 20 $20.00 400 200
Soy Triple herbicide tolerance 2 50% 2019 2026 5 $10.00 50 40
In Fig 141, we detail our discounted cash flow model for the companys seeds and
traits business.
Unlike those for Monsanto and Syngenta, Bayers seeds and traits gross margin seems
likely to decline slightly, due to maturity of the pipeline. Our modelling shows a fade
from 69% in 2016 to 64% in 2026 and thereafter. Currently, the company is investing
for growth and improved cost absorption over the long run could render our
profitability assumptions too cautious.
A change in mix also could have an impact upon profitability. This primarily stems
from the increased revenue from hybrid varieties, for which we attribute a 50% gross
margin. We assume Bayers tax rate remains low compared to the US companies, at
25%. Otherwise, all our assumptions remain the same.
Royalty payments in Bayers case relate to licensing of the glyphosate tolerant trait
from Monsanto and Viptera technology from Syngenta. We would also add that there
are many cross-licensing agreements across the industry.
Fig 141: Bayer seeds and traits pipeline DCF model

$m 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E
Sales risk adjusted 91 197 335 498 616 689 714 744 799 849 899 899 899
Gross profit 62 135 225 334 416 464 481 497 526 551 576 576 576
gross margin 69% 69% 67% 67% 68% 67% 67% 67% 66% 65% 64% 64% 64%
R&D expense (9) (20) (34) (50) (62) (69) (71) (74) (80) (85) (90) (90) (90)
as % sales 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
SG&A expense (16) (35) (60) (90) (111) (124) (129) (134) (144) (153) (162) (162) (162)
as % sales 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0%
EBITDA 37 80 131 195 244 271 281 289 302 313 324 324 324
as % sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
Tax (9) (19) (31) (46) (58) (64) (67) (68) (72) (74) (77) (77) (77)
as % PBT 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0%
NOPLAT 26 57 93 139 174 193 200 205 215 222 230 230 230
Cash adjustments
Capex (3) (6) (10) (15) (18) (21) (21) (22) (24) (25) (27) (27) (27)
as % sales 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
Working capital (2) (4) (7) (10) (12) (14) (14) (15) (16) (17) (18) (18) (18)
as % sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
Cash flow 22 47 77 114 143 158 164 168 175 180 185 185 185
Discount rate 92.6% 85.7% 79.4% 73.5% 68.1% 63.0% 58.3% 54.0% 50.0% 46.3% 42.9% 39.7% 36.8%
The NPV calculation for Bayers seeds and traits pipeline is shown in Fig 142.
We model that the total cash flow potential is $1.4bn, which is amongst the lowest of
the agrichemical companies covered in this report. This excludes BASF, which has no
commercial seeds business. The implied value per share is $1.7.
Fig 142: Bayer seeds and traits NPV calculation

$m Cash flow
Forecast cash flow 2016-28E 980
Implied value 1,404
Implied value per share ($/share) 1.7
BASF
BASF has no commercial seeds business and, as such, its pipeline consists only of crop
protection chemicals. We are aware that the company has run a joint innovation
programme with Monsanto since 2007 to develop novel output traits. Our
understanding is that c$100m R&D is allocated per year to biotech innovation.
So little information is available on new seed project developments, beyond the abiotic
stress trait (for drought resistance), that we have been unable to conduct any pipeline
modelling work. However, the companys crop protection innovations appear more
tangible.

BASFs pipeline is remarkably homogenous. All bar three products are herbicides and
all have similar revenue potential. We model all but two as having peak sales of 200m.
Serifel, the new biofungicide, is likely to be the greatest driver of bottom-line growth,
thanks to a combination of having the highest peak sales potential and the high gross
margin attributed to fungicides. BASFs pipeline is detailed in Fig 143.
Sharpen, Optill Pro, Armezon and Zidua have all been previously introduced in at
least one region, but new sales potential will arise from more widespread
commercialisation. In addition, for most products, the launch date in Fig 143 refers to
the release of the product for an additional crop or as an improved combination,
mixed with other active ingredients.
Fig 143: BASF crop protection product pipeline summary table

Engenia 200 4 2015 2019 Non-selective herbicide
Outlook 200 4 2015 2019 Selective herbicide
Sharpen 200 4 2015 2019 Selective herbicide
Varisto 200 4 2015 2019 Selective herbicide
Serifel 250 4 2015 2020 Fungicide
Afidopyropen 200 4 2015 2019 Insecticide
Limus 150 3 2016 2019 Other
Optill Pro 200 3 2016 2020 Non-selective herbicide
Outlook Plus 200 3 2016 2020 Selective herbicide
Armezon 200 3 2016 2020 Selective herbicide
Zidua 200 2 2017 2021 Selective herbicide
Trifludimoxazin 200 2 2018 2021 Selective herbicide
Total 2,400
Despite the majority of innovations in BASFs pipeline being selective herbicides, there
is still good variety within this group. There is little overlap for different modes of
action and across the different product offerings, protection from grasses and
broadleaf weeds should be available for many cereals and cash crops.
Our phasing assumptions for BASFs pipeline sales are shown in Fig 144.
Fig 144: BASF crop protection product pipeline gross sales model: 2014-25E
$m 2014A 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E
Engenia 10 50 100 150 200 205 210 215 221 226 232
Outlook 10 50 100 150 200 205 210 215 221 226 232
Sharpen 10 50 100 150 200 205 210 215 221 226 232
Varisto 10 50 100 150 200 200 205 210 215 221 226
Serifel 10 50 100 150 200 250 256 263 269 276 283
Afidopyropen 10 50 100 150 200 205 210 215 221 226 232
Limus 10 50 100 150 154 158 162 166 170 174
Optill Pro 10 50 100 150 200 205 210 215 221 226
Outlook Plus 10 50 100 150 200 205 210 215 221 226
Armezon 10 50 100 150 200 205 210 215 221 226
Zidua 10 50 100 150 200 205 210 215 221
Trifludimoxazin 10 50 100 150 200 205 210 215 221
Total pipeline sales 0 60 340 820 1,400 2,000 2,324 2,474 2,536 2,600 2,665 2,731
Annual growth - - 467% 141% 71% 43% 16% 6% 2% 3% 2% 2%
Fig 145 details the results of applying our risk adjustments and sales attrition factors to
potential sales. However, with major projects in phases two and three, the probability
risk adjustment has a significant impact on pipeline sales.
Engenia 95% 5 25 50 75 100 103 105 108 110 113 116
Outlook 95% 5 25 50 75 100 103 105 108 110 113 116
Sharpen 95% 5 25 50 75 100 103 105 108 110 113 116
Varisto 95% 5 25 50 75 100 100 103 105 108 110 113
Serifel 95% 5 25 50 75 100 125 128 131 135 138 141
Afidopyropen 95% 5 25 50 75 100 103 105 108 110 113 116
Limus 80% 0 5 25 50 75 77 79 81 83 85 87
Optill Pro 80% 0 5 25 50 75 100 103 105 108 110 113
Outlook Plus 80% 0 5 25 50 75 100 103 105 108 110 113
Armezon 80% 0 5 25 50 75 100 103 105 108 110 113
Zidua 50% 0 0 5 25 50 75 100 103 105 108 110
Trifludimoxazin 50% 0 0 5 25 50 75 100 103 105 108 110
Sales (50% attrition) 30 170 410 700 1,000 1,162 1,237 1,268 1,300 1,332 1,366
Annual growth - 467% 141% 71% 43% 16% 6% 2% 3% 2% 2%
Sales risk adjusted 29 159 370 613 860 980 1,027 1,053 1,079 1,106 1,134
Given the higher gross margin generated by fungicides and insecticides, two products
Serifel and Afidopyropen are expected to contribute the most to gross profit.
By 2020, these two products should generate c88m and 62m of incremental earnings
respectively, as detailed in the risk-adjustment model (Fig 146).
Engenia 50% 3 13 25 38 50 51 53 54 55 57 58
Outlook 50% 3 13 25 38 50 51 53 54 55 57 58
Sharpen 50% 3 13 25 38 50 51 53 54 55 57 58
Varisto 50% 3 13 25 38 50 50 51 53 54 55 57
Serifel 70% 4 18 35 53 70 88 90 92 94 97 99
Afidopyropen 60% 3 15 30 45 60 62 63 65 66 68 70
Limus 35% 0 2 9 18 26 27 28 28 29 30 30
Optill Pro 50% 0 3 13 25 38 50 51 53 54 55 57
Outlook Plus 50% 0 3 13 25 38 50 51 53 54 55 57
Armezon 50% 0 3 13 25 38 50 51 53 54 55 57
Zidua 50% 0 0 3 13 25 38 50 51 53 54 55
Trifludimoxazin 50% 0 0 3 13 25 38 50 51 53 54 55
GP (50% attrition) 17 92 216 365 519 605 643 659 675 692 710
Annual growth - 456% 136% 69% 42% 17% 6% 3% 2% 2% 2%
The NPV calculation for BASFs crop protection R&D programme is shown in Fig
147.
The total value of the forecast cash flow is 3.0bn, which implies a value of 3.23 per
share.
Fig 147: BASF crop protection pipeline NPV model summary

------------------------- Cash flows ($m) ----------------------- -------------- Assumptions and growth rates -----------
Shares in issue (million) 918.5 Terminal growth rate 2.0%
Dow Chemical
Dow Chemical has a focused, relatively small-sized R&D programme, but with
numerous projects. The company has five crop protection products in its pipeline,
which we value at $2.0bn. Its 12 GM seeds and traits innovations are valued at $1.1bn.
Our analysis suggests that Dow Chemicals pipeline in aggregate has one of the lowest
NPVs of all the companies in this report.

Dow has two blockbuster products set to be released during 2015 Arylex and Isoclast
each with a peak sales potential of $450m. However, we see Isoclast sales growing at
a faster rate, given its ability to counter resistance to some existing insecticides.
Arylex and Isolcast are both unique offerings, and although neither represents the
development of a new MOA group (as defined by WSSA or HRAC), these products
are the first in two new groups of chemicals. As such, they are both likely to prove
valuable as a resistance management tool.
Arylex is new synthetic auxin-type herbicide that induces the plant into excess growth,
which causes death as it uses resources faster than it can acquire them.
Isoclast is a selective insecticide acting on sap-feeding hemiptera, a group containing

aphids, leafhoppers and mealybugs. It is effective against pests that have become
somewhat resistant to several stable farm pesticides, including the neonicotinoid
group and organophosphates. The product has broad application covering cereals,
cotton, fruit and vegetables.
Our assessment of Dow Chemicals crop protection pipeline is given in Fig 148.
Fig 148: Dow Chemical crop protection product pipeline summary table
Arylex 450 4 2015 2024 Selective herbicide
Enlist 150 4 2015 2017 Non-selective herbicide
Fungicide NEW 250 3 2018 2022 Fungicide
Rinskor 250 3 2018 2022 Non-selective herbicide
Isoclast 450 4 2015 2022 Insecticide
Total 1,550
Gross sales phasing assumptions for the five products are shown in Fig 149.
Fig 149: Dow Chemical crop protection product pipeline gross sales model: 2014-25E
$m 2014A 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E
Arylex 10 50 100 150 200 250 300 350 400 450 461
Enlist 10 50 150 154 158 162 166 170 174 178 183
Fungicide NEW 10 50 150 200 250 256 263 269
Rinskor 10 50 150 200 250 256 263 269
Isoclast 50 100 150 200 250 300 350 400 450 461 473 485
Total sales 50 120 250 450 574 758 1,062 1,266 1,470 1,548 1,626 1,667
Annual growth - 140% 108% 80% 28% 32% 40% 19% 16% 5% 5% 2%
On a risk-adjusted basis, we anticipate Dows crop protection pipeline will yield an

additional $530m in net risk-adjusted revenue by 2020 (Fig 150).
Arylex 95% 5 25 50 75 100 125 150 175 200 225 231
Enlist 95% 5 25 75 77 79 81 83 85 87 89 91
Fungicide NEW 80% 0 0 0 5 25 75 100 125 128 131 135
Rinskor 80% 0 0 0 5 25 75 100 125 128 131 135
Isoclast 95% 50 75 100 125 150 175 200 225 231 236 242
Sales (50% attrition) 60 125 225 287 379 531 633 735 774 813 834
Annual growth 140% 108% 80% 28% 32% 40% 19% 16% 5% 5% 2%
Sales risk adj 57 119 214 271 352 482 571 661 697 733 751
As a result of the higher gross margin for fungicides versus selective herbicides,
Isoclast becomes the largest contributor to gross profit.
By 2020, this product should realise $105m of incremental gross profit, compared with
$63m for Arylex. A new (as yet) unnamed fungicide that is currently in phase three
development could yield another $53m of gross profit.
Full details of risk-adjusted gross profit potential can be found in Fig 151.
Arylex 50% 3 13 25 38 50 63 75 88 100 113 115
Enlist 50% 3 13 38 38 39 40 41 42 43 45 46
Fungicide NEW 70% 0 0 0 4 18 53 70 88 90 92 94
Rinskor 50% 0 0 0 3 13 38 50 63 64 66 67
Isoclast 60% 30 45 60 75 90 105 120 135 138 142 145
GP (50% attrition) 35 70 123 157 209 298 356 415 436 457 468
Annual growth - - 75% 28% 33% 42% 20% 16% 5% 5% 3%
Our NPV calculation for Dows crop protection pipeline is given in Fig 152. The work
suggests that the pipeline has an NPV of $1,967m, implying $1.7/share.
For comparison, it should be noted that, as with Monsanto, Dow has relatively high
tax rate compared to the European companies, at 28%.
Fig 152: Dow Chemical crop protection pipeline NPV model summary
Forecast cash flows to 2025 714 Discount rate 8.0%
Shares in issue (million) 1,159 Terminal growth rate 2.0%

We do not believe Dow Chemical has any blockbuster seed and traits products in its
pipeline. However, it has good variety and covers a broad range of crops.
Of the phase four products, Dows corn Enlist trait is most likely to be the greatest
driver of gross revenue. This trait combination blends herbicide tolerance to
glyphosate and 2,4-D, thereby offering two MOAs and limiting the scope for
resistancy.
The technology is now approved commercially and sales should begin to ramp up
from 2016. We detail our assumptions for Enlist, along with the other phase four seed
and traits, in Fig 153.
Fig 153: Dow Chemical seed and traits pipeline phase four products: 2016-21E
Corn Enlist 4 95% 2016 2021 10 $10.00 100 70
Cotton Enlist 4 95% 2016 2021 5 $10.00 50 35
Soy Enlist 4 95% 2016 2021 8 $10.00 80 48
Soy Enlist E3 4 95% 2016 2021 5 $15.00 75 45
Canola ProPound 4 95% 2016 2021 3 $25.00 75 53
Currently in phase three, SmartStax PRO has one of the highest peak sales potential of
the entire pipeline. It is a GM corn seed platform developed in collaboration with
Monsanto and will be well received on launched. The trait combination is numerous
and designed to provide multiple MOAs for herbicide tolerance and resistance to
insects.
Stacked genes will provide resistance to glyphosate and glufosinate herbicides, two
traits add insect resistance and three additional biotech modifications improve corn
yield.
Dow Chemicals phase three product line-up is detailed in Fig 154.
Fig 154: Dow Chemical seeds and traits pipeline phase three products: 2018-23E
Soy E3 + Conkesta 3 25% 2018 2023 8 $10.00 80 56
Sunflower Omega 9 reduced saturates 3 25% 2018 2023 3 $20.00 60 42
Corn SmartStax PRO 3 25% 2018 2023 10 $10.00 100 60
Dows phase two pipeline consists entirely of corn traits, but with the data available so
far, it does not appear to have high revenue-generating potential.
The four projects include two new herbicide traits and two biotech gene modifications
to impart added protection from insects. Our sales growth assumptions for the
projects are shown in Fig 155.
Fig 155: Dow Chemical seeds and traits pipeline phase two products: 2022-28E
Corn New herbicide tolerance trait 1 2 50% 2022 2028 5 $15.00 75 60
Corn New herbicide tolerance trait 2 2 50% 2023 2028 5 $15.00 75 60
Corn New insect trait 1 2 50% 2022 2028 5 $20.00 100 80
Corn New insect trait 2 2 50% 2023 2028 5 $20.00 100 80
A discounted cash flow model for Dow Chemicals seeds and traits pipeline can be
found in Fig 156.
Our standard industry assumptions for terminal growth and incremental expense
remain unchanged for Dow Chemical.
Fig 156: Dow Chemical seeds and traits pipeline DCF model
$m 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E
Sales risk adjusted 48 100 199 320 413 501 544 583 616 648 683 718 728
Gross profit 31 66 131 211 273 330 361 390 414 440 468 496 504
gross margin 66% 66% 66% 66% 66% 66% 66% 67% 67% 68% 69% 69% 69%
R&D expense (5) (10) (20) (32) (41) (50) (54) (58) (62) (65) (68) (72) (73)
as % sales 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
SG&A expense (9) (18) (36) (58) (74) (90) (98) (105) (111) (117) (123) (129) (131)
as % sales 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0%
EBITDA 18 38 76 122 157 190 209 226 242 259 277 295 301
as % sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
Tax (5) (10) (20) (32) (42) (50) (55) (60) (64) (69) (74) (79) (80)
as % PBT 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0%
NOPLAT 12 26 52 83 107 130 143 155 165 177 190 202 206
Cash adjustments
Capex (1) (3) (6) (10) (12) (15) (16) (17) (18) (19) (20) (22) (22)
as % sales 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
Working capital (1) (2) (4) (6) (8) (10) (11) (12) (12) (13) (14) (14) (15)
as % sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
Cash flow 10 21 42 67 86 105 115 126 135 145 156 166 170
Discount rate 92.6% 85.7% 79.4% 73.5% 68.1% 63.0% 58.3% 54.0% 50.0% 46.3% 42.9% 39.7% 36.8%
The NPV calculation is shown in Fig 157. Total cash flow of $1,088m implies a value
of $0.9/share, the lowest in our analysis.
Fig 157: Dow Chemical seeds and traits NPV calculation

$m Cash flow
Forecast cash flow 2016-28E 699
Implied value 1,088
Shares in issue (million) 1,158
DuPont
Arguably, this company has the most balanced pipeline. We value the ten components
in crop protection at $3.6bn and seeds and traits at $5.6bn, across 17 products.
The high valuation of DuPonts pipeline relies on two active ingredients that have peak
revenue potential of $0.7bn and both reside in phase four development. To be fair, the
company has a solid franchise, especially in seeds, and close industry collaborations in
crop protection, which can provide a more secure route to market in some
geographies.

DuPonts crop protection pipeline focuses heavily on insecticides, which comprise
85% of peak sales growth potential.
In phase four, the company has two key insecticide products Lumigen Seed Sense
and Cyazypyr. We expect both to launch towards the end of 2015 and progressively
ramp up to peak sales of $700m by 2025.
Lumigen Seed Sense is DuPonts seed treatment brand under which it will launch
additional active ingredient products. We expect this insecticide to generate high
revenue, due to the novelty of being an insecticide that is directly coated onto seeds,
making it more precise and minimising waste. The product also has broad crop appeal
and should ultimately be launched in all regions.
Cyazypyr protects high-value fruit and vegetable and oilseed crops selectively,
targeting both hemipetera (aphids) and coleopteran pests (beetles). It is the second and
most effective chemical in the diamide class (IRAC group 28).
DuPonts crop protection pipeline and our respective peak sales assumptions are given
in Fig 158.
Fig 158: DuPont crop protection product pipeline summary table

Zorvec 350 3 2016 2023 Fungicide
DPX-RAB55 100 1 2020 2022 Insecticide
DPX-Q8U80 100 1 2020 2022 Fungicide
Pyraxalt 350 3 2017 2024 Insecticide
Dichloromezotiaz 350 2 2020 2027 Insecticide
Lumigen Seed Sense I 700 4 2014 2025 Insecticide
Lumigen Seed Sense F 100 3 2015 2018 Insecticide/ST
Cyazypyr 700 4 2015 2025 Insecticide
Lumiderm 100 4 2014 2018 Insecticide/ST
Dermacor 100 4 2014 2018 Insecticide/ST
Total 2,950
Alongside Lumigen Seed Sense and Cyazypyr, we also note three other products of
significance. New active ingredients Zorvec (fungicide), Pyraxalt (insecticide) and
Dichlormezotiaz (insecticide) should each result in peak sales of $350m.
Our gross sales phasing for DuPonts crop protection pipeline is shown in Fig 159.
Fig 159: DuPont crop protection product pipeline gross sales model: 2014-25E
$m 2014A 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E
Zorvec 10 50 100 150 200 250 300 350 359 368
DPX-RAB55 10 50 100 103 105 108
DPX-Q8U80 10 50 100 103 105 108
Pyraxalt 10 50 100 150 200 250 300 350 359
Dichloromezotiaz 10 50 100 150 200 250
Lumigen Seed Sense I 50 150 200 250 300 350 400 450 500 550 600 650
Lumigen Seed Sense F 10 50 75 100 100 100 103 105 108 110 113
Cyazypyr 50 150 200 250 300 350 400 450 500 550 600 650
Lumiderm 10 30 50 80 100 103 105 108 110 113 116 119
Dermacor 10 30 50 80 100 103 105 108 110 113 116 119
Total sales 120 370 560 795 1,050 1,255 1,490 1,818 2,176 2,439 2,661 2,843
Annual growth - 208% 51% 42% 32% 20% 19% 22% 20% 12% 9% 7%
Zorvec and Pyraxalt are both in phase three development, whereas Dichlormezotiaz is
still in phase two. As such, all three receive significant risk-adjustment penalties, along
with the more distant products still in phase one R&D.
Our attrition and risk-adjusted net sales numbers are displayed in Fig 160.
Zorvec 80% 5 25 50 75 100 125 150 175 179 184
DPX-RAB55 25% 5 25 50 51 53 54
DPX-Q8U80 25% 5 25 50 51 53 54
Pyraxalt 80% 5 25 50 75 100 125 150 175 179
Dichloromezotiaz 50% 5 25 50 75 100 125
Lumigen Seed Sense I 95% 75 100 125 150 175 200 225 250 275 300 325
Lumigen Seed Sense F 80% 5 25 38 50 50 50 51 53 54 55 57
Cyazypyr 95% 75 100 125 150 175 200 225 250 275 300 325
Lumiderm 95% 15 25 40 50 51 53 54 55 57 58 59
Dermacor 95% 15 25 40 50 51 53 54 55 57 58 59
Sales (50% attrition) 185 280 398 525 628 745 909 1,088 1,219 1,331 1,421
Annual growth 208% 51% 42% 32% 20% 19% 22% 20% 12% 9% 7%
Sales risk adj 175 262 368 480 570 665 776 892 996 1,084 1,156
After applying our standard gross margin assumptions to the adjusted sales numbers
above, we see that the three largest contributors to gross profit by 2020 are likely to be
the Lumigen Seed Sense insecticide, Cyazypyr and Zorvec.
Our gross profit model is shown in Fig 161.
Zorvec 70% 0 4 18 35 53 70 88 105 123 126 129
DPX-RAB55 60% 3 15 30 31 32 32
DPX-Q8U80 70% 4 18 35 36 37 38
Pyraxalt 60% 3 15 30 45 60 75 90 105 108
Dichloromezotiaz 60% 3 15 30 45 60 75
Lumigen Seed Sense I 60% 45 60 75 90 105 120 135 150 165 180 195
Lumigen Seed Sense F 60% 3 15 23 30 30 30 31 32 32 33 34
Cyazypyr 60% 45 60 75 90 105 120 135 150 165 180 195
Lumiderm 60% 9 15 24 30 31 32 32 33 34 35 36
Dermacor 60% 9 15 24 30 31 32 32 33 34 35 36
GP (50% attrition) 111 169 241 320 384 458 560 673 754 822 877
Annual growth 208% 52% 43% 33% 20% 19% 22% 20% 12% 9% 7%
Our NPV calculation for DuPonts crop protection pipeline can be found in Fig 162.
The analysis suggests that the innovation projects have a value of $3,562m, which
implies a value of $4.1/share.
Fig 162: DuPont crop protection pipeline NPV model summary


DuPont has an interesting seeds and traits pipeline, with potential blockbuster
products in phases four, two and one. Apart from Monsanto, which has by far the
most exciting range of innovation projects, DuPont is a solid number two within the
industry.
Two corn seed projects are in phase four development and due for launch in 2016. The
first is a trait to protect against lepidopteran pests (moths) and the second is the
Optimum Leptra. Peak sales are $810m and $675m respectively.
A new multi-mode herbicide-tolerant soybean seed will also be launched in 2016, with
peak sales of $675m. This is mainly targeted (initially) for growth in Brazil and
Argentina.
Our peak sales assumptions for all of DuPonts phase four products are shown in Fig
163.
Fig 163: DuPont seeds and traits pipeline phase four products: 2016-21E
Corn Optimum Leptra 4 95% 2016 2021 45 $15.00 675 405
Corn Lepidopteran/Coleopteran trait 4 95% 2016 2021 45 $18.00 810 486
(DP4114)
Soy Plenish high oleic soy 4 95% 2016 2021 10 $30.00 300 240
Soy Multi-mode Herbicide tolerance 4 95% 2016 2021 45 $15.00 675 405
Canola Optimum GLY tolerance 4 95% 2016 2021 10 $15.00 150 90
Canola LibertyLink 4 95% 2016 2021 10 $10.00 100 50
DuPonts phase three seeds and traits projects have more limited markets and thus
lower peak sales. These are detailed in Fig 164.
Fig 164: DuPont seeds and traits pipeline phase three products: 2018-24E
Canola Optimum GLY + LibertyLink 3 80% 2018 2023 10 $15.00 150 83
Rice Hybrid Technology II 3 80% 2019 2024 20 $10.00 200 100
DuPonts next generation corn traits are in phase two development and look
interesting. New modes of action are under development to protect the crop from
lepidoptera and coleoptera, but with multiple mechanisms.
If the technology can be developed with no negative impact to yield, then the products
are likely to be well received. A reduction in the use of insecticides for corn may ensue
and form part of the fight against resistance development.
Two resource-focused output traits are also in development: Drought Tolerance II and
Nitrogen Efficiency. With the increased frequency of extreme weather events such as
El Nio and fertilisers accounting for a significant component of farm costs, we expect
these two traits to achieve high sales.
In Fig 165 we give our assumptions for the phase two product pipeline.
Fig 165: DuPont seeds and traits pipeline phase two products: 2022-28E
Corn New Lepidopteran MOA 2 50% 2022 2028 45 $15.00 675 405
Corn New Coleopteran MOA 2 50% 2022 2028 45 $15.00 675 405
Corn Drought tolerance II 2 50% 2022 2028 15 $20.00 300 180
Corn Nitrogen Efficiency 2 50% 2022 2028 25 $20.00 500 300
Soy Increased oil and meal value 2 50% 2023 2028 10 $15.00 150 90
Total phase 2 products risk adjusted 1,150 690
As is the case with Bayers seeds pipeline, over the longer term, DuPonts Wheat
Hybrid is potentially the most interesting technology under development. After
minimal yield improvement for this crop over the past decade, an effective
technological boost is justifiable.
We forecast that a successful launch of the seed could lead to $1bn in peak sales.
However, the wheat programme is currently in phase one and, as such, we risk adjust
this sales potential appropriately.
The phase one products and their assumptions are given in Fig 166.
Fig 166: DuPont seeds and traits pipeline phase one products: 2024-30E
Soy Lepidopteran protection 1 25% 2024 2030 10 $15.00 150 90
Soy Hemipteran protection 1 25% 2024 2030 10 $15.00 150 90
Soy Asia soy rust resistance 1 25% 2024 2030 10 $15.00 150 90
Wheat Hybrid Technology 1 25% 2024 2030 50 $20.00 1,000 500
Total phase 1 products 80 1,450 770
Our discounted cash flow model for DuPonts complete seeds and traits pipeline is
displayed in Fig 167.
Our standard assumptions for terminal growth and operating expense are unchanged
for DuPont.
Fig 167: DuPont seeds and traits pipeline DCF model

$m 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E
Sales risk adjusted 371 751 1,270 1,857 2,346 2,735 2,959 3,185 3,475 3,802 4,040 4,265 4,367
Gross profit 231 467 786 1,141 1,438 1,675 1,805 1,936 2,108 2,299 2,437 2,564 2,621
gross margin 62% 62% 62% 61% 61% 61% 61% 61% 61% 60% 60% 60% 60%
R&D expense (37) (75) (127) (186) (235) (273) (296) (318) (347) (380) (404) (426) (437)
as % sales 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
SG&A expense (67) (135) (229) (334) (422) (492) (533) (573) (625) (684) (727) (768) (786)
as % sales 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0%
EBITDA 127 257 430 621 781 910 977 1,045 1,135 1,235 1,306 1,370 1,398
as % sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
Tax (24) (48) (81) (117) (147) (171) (183) (196) (213) (232) (245) (257) (262)
as % PBT 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%
NOPLAT 96 193 324 467 587 684 734 785 852 927 980 1,028 1,048
Cash adjustments
Capex (11) (23) (38) (56) (70) (82) (89) (96) (104) (114) (121) (128) (131)
as % sales 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
Working capital (7) (15) (25) (37) (47) (55) (59) (64) (69) (76) (81) (85) (87)
as % sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
Cash flow 77 156 260 375 470 547 586 625 679 737 778 815 830
Discount rate 92.6% 85.7% 79.4% 73.5% 68.1% 63.0% 58.3% 54.0% 50.0% 46.3% 42.9% 39.7% 36.8%
We value DuPonts seeds and traits pipeline at $5,583m, implying a value of

$6.4/share. The NPV calculation is given in Fig 168 .
Fig 168: DuPont seeds and traits NPV calculation

Cash flow $m
Implied value 5,583
A careful examination of the innovation pipelines across the top six agrichemical
companies shows that plenty of projects are underway. Using announced or derived
peak sales targets, we calculate that risk-adjusted incremental gross profit could
reach $14bn by 2025. However, this assumes no deceleration in the pace of market
growth, which may be optimistic given the themes we debate in this report.
07/
07/ Syngenta forecasts and valuation
Syngenta forecasts and

valuation
The shares have underperformed, but organic growth has not been the
problem. We fear a prolonged period of lower volume expansion, as
demand stalls in high-margin mature regions. With potential for
operational gearing diminished and inflationary effects an offset to
targeted savings, our modelling indicates that margins will hardly
expand. Long-term guidance appears optimistic and we cut 2017 EPS
by 17%. The burden from years of restructuring and an extended cash
cycle in developing countries seems likely to constrain FCF. Given our
emphasis on this critical metric, we no longer see any unrealised value
in the shares and downgrade to Sell.
Syngenta forecasts cut and we downgrade to Sell

We make material changes to our forecasts, lowering EPS by 4%, 8% and 17% for 2016
to 2018. After a period of resilient revenue growth, we fear a deceleration our view is
that the global crop protection industry will only expand at a c2% CAGR in 2016-18.
We remain more upbeat on higher pesticide usage intensity in emerging economies,
but problems in LATAM could eliminate any growth in this area in 2016.
With less exciting growth prospects, we now only expect planned cost savings to offset
inflation. This means the outlook for earnings growth is significantly diminished, with
EBIT likely to expand at a 5% CAGR over the next three years. Cash flow conversion
seems likely to remain low, averaging 33% of EBITDA during the same period. We
lower our recommendation from Buy to Sell.
We summarise our forecast changes in Fig 169.
Fig 169: Redburn forecasts for Syngenta new vs old

----------------- 2015E ----------------- ----------------- 2016E ----------------- ----------------- 2017E -----------------
Y/E December ($m) Old New % chg Old New % chg Old New % chg
Sales 13,409 13,309 (0.7%) 14,062 13,472 (4.2%) 14,615 13,680 (6.4%)
EBITDA 2,776 2,704 (2.6%) 3,019 2,803 (7.2%) 3,340 2,916 (12.7%)
EBIT 2,149 2,077 (3.4%) 2,359 2,143 (9.1%) 2,641 2,221 (15.9%)
PBT 1,607 1,535 (4.5%) 1,905 1,641 (13.8%) 2,130 1,664 (21.9%)
EPS adjusted ($) 17.09 16.43 (3.8%) 20.22 18.59 (8.1%) 22.42 18.61 (17.0%)
We detail our underlying assumptions below.
x Volume growth. We model 1.6% expansion in 2016, with a slight reduction to

1.4% in 2017 and 2018. This is below the 2.8% achieved between 2012 and 2015,
but takes account of our more downbeat view on demand in mature economies.
We model 1% expansion in Europe for 2016 and 0% for NAFTA (reducing to -1%
from 2017).
We expect better demand in emerging regions, with 3% for LATAM and Asia from
2016 onwards. Although this pace of volume growth is lower than in the prior cycle
for the former region, usage intensity has risen steadily and has exceeded that in
NAFTA. But we are more wary of constrained credit supply to farmers in Brazil
and therefore limited incremental investment in agriculture.
x Pricing. A gain of 1.0% is assumed for Europe in 2017 and 2018, but not in 2016.
This is because the strong increases achieved in 2015 to offset currency seem likely
to partly reverse in the coming year. We maintain 1% price increases for LATAM
and Asia to help address local inflation.
However, in keeping with our view that pesticides could suffer share loss for total
farm expenditure, we assume pricing is 0% in 2016 and then drops to -1% from
2017.
x Currency: the impact to revenue from FX volatility is likely to be less serious in

2016 than in 2015, when sales were reduced by c$1.8bn. The company did well with
hedges to limit the impact to earnings and still guides for only a $130m negative hit
to EBITDA. However, we sense further implications in 2016 and assume a $100m
charge as currency hedges expire.
x Cost savings: planned fixed cost reduction for 2016 totals $210m, but our
understanding is that around 40% of the planned savings associated with the AOL
programme ($1bn targeted cost savings from 2015 to 2018) are predicated upon 3-
4% volume growth over the cycle. As a consequence, we only assume that 60% of
targeted savings are likely to materialise on a gross basis.
It is our sector view that chemical companies will experience 3-4% operating cost
inflation, which covers wages and rising innovation spend. Simply taking the
expected total opex for 2015, at $4.2bn, and inflating this by 3.5% for 2016 implies
around $150m of incremental cost. This is enough to more than fully offset
planned savings that are not reliant upon growth and one of the reasons we no
longer model much margin expansion from 2015 onwards.
x Royalties: management has been firm in guiding for royalty income during 2016.
Visibility appears reinforced by agreed contracts with DuPont, Dow and Monsanto
for the Viptera insect trait technology.
The company may announce a new royalty contract, as was the case recently with
KWS, which seems likely to boost income by up to $200m in 2015. The problem
with this, however, is that company guidance on royalties for 2016 implies a lower
magnitude of income. We model a $50m reduction in 2016 and a return to modest
growth in 2017.
x Other effects: we assume a $41m reduction in earnings within our EBITDA bridge
for 2016, to partially take account of the change in revenue recognition in 2015 for
business done through Brazilian distributors. Although some have flagged this as a
negative, Syngenta is only falling into line with the industry practice to book sales
once shipped from the intermediarys warehouse.
The implications of our model assumptions for 2016 can be seen in our EBITDA
bridge (Fig 170).
Fig 170: Syngenta EBITDA bridge: 2015E-16E

3,200
100 -148 3,061
3,100
210
3,000 -90
60
EBITDA $m
2,900 -100 -41

108 2,803
2,800 2,704
2,700
2,600
2,500
Price
Consensus
FX
EBITDA '15
Volume
EBITDA '16
Inflation
Savings
COGS
Other
Royalties
Source: Redburn, company, Bloomberg, as of 6 November 2015
Post the implementation of the integrated strategy in 2012, Syngenta reports greater
detail on a regional basis, rather than on business lines. The reporting disclosure may
revert back to being more product-specific, but this may take time and may be subject
to separating crop protection from seeds.
Within the regions, EBIT is the preferred metric. We compare Redburn forecasts
against the latest external consensus in Fig 171, which has been gathered post the Q3
update.
Fig 171: Regional sales and EBIT forecasts: Redburn vs consensus: 2016E
-------------------- Sales -------------------- -------------------- EBIT -------------------- --------------- EBIT margin ---------------
Y/E Dec ($m) Cons. Redburn Diff % diff. Cons. Redburn Diff % diff. Cons. Redburn Diff % diff.
EMEA 4,058 3,947 (111) (2.7%) 1,357 1,322 (35) (2.6%) 33.5% 33.5% 5bp 0.1%
NAFTA 3,328 3,172 (156) (4.7%) 952 981 29 3.0% 28.6% 30.9% 231bp 8.1%
LATAM 3,740 3,804 64 1.7% 1,057 978 (79) (7.5%) 28.3% 25.7% (256bp) (9.1%)
Asia 1,916 1,913 (3) (0.1%) 571 561 (11) (1.9%) 29.8% 29.3% (52bp) (1.8%)
Lawns 604 635 31 5.2% 102 121 18 17.9% 17.0% 19.0% 204bp 12.0%
Non-regional n/a n/a n/a n/a (1,785) (1,818) (33) 1.8% n/a n/a n/a n/a
Group 13,646 13,472 (174) (1.3%) 2,255 2,143 (111) (4.9%) 16.5% 15.9% (61bp) (3.7%)
Source: Redburn, company, Vara Research
With management guidance more cautious, sell-side estimates have begun to reduce
but we expect that this trend will continue and industry commentary continues to
highlight deterioration.
Our view is the earnings cuts are still needed and our $2.1bn EBIT forecast for 2016
still implies consensus needs to reduce 5%.
Margin stagnation could be structural

Growth has not been a major problem for Syngenta. Yet, currency has reduced profits
materially in recent years, lowering this metric nearly $0.4bn between 2011 and 2014.
Another $130m impact has arisen in 2015 and we model another $100m charge for
2016.
As a consequence, gross margin has declined. As we show in Fig 172, the reduction has
been particularly painful in recent years, with profitability lowered 330bp between
2012 and 2014.
The result for 2015 is expected to show the first meaningful improvement to gross
margin since 2008, due to high royalty income, pricing gains to partially offset
currency and also some raw material benefits. We are modelling 47.3%, broadly in line
with consensus.
On the basis that net price gains are expected to be limited from 2016 and volume-
related operational leverage minimal, we envisage no improvement in the coming year
(Fig 172).
But there is an additional problem. The gross margin in mature farming regions such
as Europe and NAFTA is materially higher than that in emerging markets. In 2015, we
are expecting the advanced countries to contribute 51% gross margin, whereas Brazil
and Asia in aggregate trail with a much lower 43%.
Our fear is that the only sustained growth that does materialise will come from the
lower margin regions. Unless there is a huge change in product mix, regional trends
seem likely to reduce gross margin, as we show in Fig 172.
Fig 172: Syngenta gross margin vs historic average: 2008-18E

52% 50.9%
51%
49.5%
50% 49.4% 48.8% 49.1%
Gross margin
49%
48%
47.3% 47.0% 46.7%
47% 46.8%
45.6% 45.9%
46%
45%
2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E
Gross margin Long-run average

The scope for gross margin to remain constrained at this 46-47% level seems likely to
be structural, unless a huge step-up in trait licensing income materialises.
Although deals to monetise the Viptera technology are now coming through and are
captured in our financial model, we are not sure what else Syngenta has that may offer
similar appeal to other GM seed companies. Whilst there are products in the
companys innovation pipeline, these are almost all crop protection products.
We know that management has guided for around 49% gross margin by 2018, so some
may counter that our modeling is too cautious. However, our understanding is that
this view has been provided on a constant currency basis, using 2014 as a base.
Excluding the negative impact from exchange rates in 2015 would boost gross margin
by around 90bp, which would imply a result nearer 48%. We have also factored in
another $100m currency drag to our 2016 forecasts, which reduced gross margin by
another 70bp in that year.
We also realise that our work on Syngentas innovation programme shows that six
new products are set to be commercialised between 2016 and 2018, with a weighted
gross margin above 60%. However, the incremental sales contribution to the group per
year is likely to be in the range of $0.2-0.3bn.
Considering that group sales for the base business are forecast to be around $13.3bn in
2015, the additional sales from new products will only represent 1-2% growth and
therefore will have little impact upon gross margin at a company level.
Cost savings and margin modelling

With cost savings being presented as a core component of managements turnaround
strategy, we have split out the $1bn target by year and function. This can be seen in
Fig 173.
Management has indicated that plans for 2016 are already well advanced and that
savings will be extracted from optimising R&D activities, synergies in the commercial
functions and early gains from production operations.
Fig 173: Syngenta cost savings split by year: 2015-18E

300
250
Cost savings $m
85 85
200 155
75
150
120 100
100 90
90
50
60 45 70
0 25
2015E 2016E 2017E 2018E
R&D Commercial Operations
We do not doubt the best intentions of management to improve the companys

profitability. However, the margin improvement plan has been presented with the
assumption that organic growth will be maintained at a c4% CAGR from 2015 to 2018.
Actual gross savings are said to form 60% of the $1bn cost reduction target, with the
remaining 40% coming from leverage effects.
Clearly, with our lower aspirations for Syngentas growth over this cycle, it should
come as no surprise that we model a much reduced margin gain. When we also factor
in 3.5% inflationary pressure to the core operating expenditure, this leads us to
conclude that net savings from the cost reduction programme will be negligible.
To help investors better assess the moving parts of the companys historic profitability
and our assumptions, we detail our margin model for Syngenta in Fig 174.
Fig 174: Syngenta cost components model, 2011-18E

CAGR CAGR
$m 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2010-14 2014-17
Revenue 13,268 14,202 14,688 15,134 13,309 13,472 13,680 13,974 6.8% (2.0%)
COGS (6,790) (7,223) (7,986) (8,192) (7,014) (7,141) (7,289) (7,432) 8.6% (2.4%)
Gross profit 6,478 6,979 6,702 6,942 6,295 6,330 6,391 6,542 4.8% (1.5%)
Gross margin 48.8% 49.1% 45.6% 45.9% 47.3% 47.0% 46.7% 46.8% (351bp) 95bp
Operating cost components

Marketing (2,390) (2,423) (2,394) (2,497) (2,199) (2,179) (2,183) (2,190) 4.5% (3.2%)
R&D (1,194) (1,257) (1,376) (1,430) (1,379) (1,379) (1,379) (1,379) 7.2% (0.9%)
SG&A (645) (774) (667) (704) (640) (629) (608) (592) 4.0% (4.3%)
Total opex (4,229) (4,454) (4,437) (4,631) (4,218) (4,187) (4,171) (4,161) 5.2% (2.6%)
EBIT 2,249 2,525 2,265 2,311 2,077 2,143 2,221 2,381 4.1% 0.7%
EBIT margin 17.0% 17.8% 15.4% 15.3% 15.6% 15.9% 16.2% 17.0% (165bp) 177bp
Restructuring (240) (269) (179) (206) (281) (260) (262) (265) 3.9% 6.5%
Operating income 2,009 2,256 2,086 2,105 1,796 1,883 1,958 2,116 4.1% 0.1%
Operating margin 15.1% 15.9% 14.2% 13.9% 13.5% 14.0% 14.3% 15.1% (149bp) 123bp
Depreciation (609) (593) (630) (615) (627) (660) (696) (726) 3.5% 4.3%
EBITDA 2,858 3,118 2,895 2,926 2,704 2,803 2,916 3,107 4.0% 1.5%
EBITDA margin 21.5% 22.0% 19.7% 19.3% 20.3% 20.8% 21.3% 22.2% (218bp) 290bp
Opex components as % of sales

COGS 51.2% 50.9% 54.4% 54.1% 52.7% 53.0% 53.3% 53.2% 351bp (95bp)
Marketing 18.0% 17.1% 16.3% 16.5% 16.5% 16.2% 16.0% 15.7% (150bp) (82bp)
R&D 9.0% 8.9% 9.4% 9.4% 10.4% 10.2% 10.1% 9.9% 16bp 42bp
SG&A 4.9% 5.5% 4.5% 4.7% 4.8% 4.7% 4.4% 4.2% (52bp) (42bp)
Opex 22.9% 22.5% 20.8% 21.2% 21.3% 20.8% 20.4% 19.9% (202bp) (124bp)
Guidance has been given that EBITDA margin should at least reach 24% by 2018, but
with the potential to get to 26%. Again this target has been set on a constant currency
basis.
To determine whether the company could seek to do more to improve margins, we

have updated cost component benchmarking for 2014 in Fig 175.
Unfortunately, details of operating costs at Bayer and BASF are unavailable given both
companies are conglomerates. However, we do know that R&D spending in crop
science for these two companies reached 10.3% and 9.4% respectively in 2014.
Fig 175: Agrichemicals cost benchmarking R&D and opex components: 2014
35%
30%
25% 21.2% 21.1%
19.6% 19.1%
% of sales
20% 17.5%
15.4%
15% 10.9%
9.4% 8.3%
10%
1.4% 1.7% 3.2% 2.0%
5% 1.0% 1.8%
0%
Syngenta Monsanto Adama Nufarm FMC Average
R&D OPEX Other
Source: Redburn, company, Bloomberg
As one might expect, the industry leaders would normally allocate a greater
proportion of capital to innovation. To preserve any hope of sustaining an innovation
pipeline, we struggle to see Syngenta cutting its R&D cost ratio much below 9-10% of
sales.
There appears to be a modest spread for operating expense though, with Syngenta at
21.2% of sales appearing slightly higher when compared to some global peers.
Rightly, Syngentas savings programme should move the company more into line with
the cost structure of other global peers and, by 2018, we have total opex to sales
reaching 19.9%. We think such progress is likely to be as good as it will get.
FMC appears to be the lowest cost supplier, but it offers predominantly generic
pesticides with a much more streamlined business structure. It seems tough to
consider that Syngentas operating expenditure should reach parity with this company.
Monsanto has lower opex to sales, due to scale effects associated with many seed trait
licensing agreements.
Cash flows and returns

A business model with growth prospects and respectable mid-to-high teens ROCE
should be generating cash, aside from periods of heavy growth investments.
Wrongly, we had previously become more optimistic that Syngenta would return to
converting more income into cash flows and in the favour of shareholders.
The problem with cost turnaround plans is that in the early years, cash flows can be
eroded quickly. Guidance has been given that annual cash out for restructuring would
be $300m in 2016, $200m in 2017 and $120m in 2018. Together with $230m of cash
consumed in 2015 implies that a total of $850m charges will be needed to generate
$1bn of gross savings.
Such a ratio is not uncommon in the chemical industry. Yet, with our assumptions on
lower growth likely to diminish the net gains, we now worry that free cash flows will
remain at lower levels than we would like.
There is also the issue of extended credit cycles in emerging markets, when compared
to Europe and NAFTA. Structurally expanding working capital is a risk and could
introduce an added burden upon free cash flow generation.
Cash flow conversion from EBIT improved to nearly 60% in 2014, but we assume a
worse result by the end of 2015 (Fig 176), due to the timing of receivables from the
LATAM season (running from Q3 2015 to Q1 2016) being delayed until 2016.
Fig 176: Syngenta FCF conversion: 2010-18E

3,000 80%
2,500 70%
Cash conversion %
EBIT or FCF $m
2,000 60%
1,500 50%
1,000 40%
500 30%
0 20%
2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E
EBIT adjusted FCF Conversion

A modest improvement is expected from 2016, but FCF seems likely to be hampered
by prolonged restructuring and minimal growth.
When we benchmark Syngentas free cash flow conversion from EBIT across
European chemicals and some of the larger US companies, the ranking appears quite
mediocre (Fig 177).
Our methodology here is to take the average EBIT and FCF over the past three years as
a means to calculate the conversion ratio. There will always be differences between
cash flow generation at different points in the cycle, given that chemical companies are
cyclical. However, we argue that taking a three-year average will iron out some of the
major deviations.
Fig 177: European chemicals FCF conversion ranking: 2012-14

100%
80%
FCF conversion
60%
40%
20%
0%
-20%
BASF
Umicore
Givaudan
Dow
Covestro
CF Ind.
Yara
Solvay
Praxair
Arkema
K+S
Akzo Nobel
Potash Corp
Clariant
Monsanto
Du Pont
Bayer
Croda
Syngenta
J Matthey
Kemira
Air Liquide
Linde
DSM
Elementis
Source: Redburn, FactSet
We detail our free cash flow model for Syngenta in Fig 178.
Fig 178: Syngenta free cash flow model: 2010-18E

Y/E December ($m) 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E
Sales 11,641 13,268 14,202 14,688 15,134 13,309 13,472 13,680 13,974
PBT 1,677 1,859 2,116 1,934 1,895 1,535 1,641 1,664 1,780
Non-cash items 805 843 1,020 910 808 895 908 997 1,070
Financing (164) (114) (225) (218) (206) (268) (249) (302) (343)
Cash tax (268) (282) (378) (292) (330) (261) (246) (266) (303)
Restructuring (38) (71) (55) (37) (26) (120) (100) (100) (50)
Pensions (335) (198) (78) (128) (184) (180) (180) (180) (180)
Other provisions (95) (116) (182) (71) (70) (70) (70) (70) (70)
Associate income 0 0 0 0 0 (7) (7) (7) (7)
Gross operating cash flow 1,582 1,921 2,218 2,098 1,887 1,524 1,698 1,736 1,897
Net working capital 125 (50) (859) (884) 44 (227) (94) (109) (109)
Cash from operations 1,707 1,871 1,359 1,214 1,931 1,297 1,604 1,627 1,788
Capex (513) (479) (508) (625) (600) (592) (599) (609) (622)
FCF 1,194 1,392 851 589 1,331 705 1,005 1,018 1,166
FCF yield (post buyback) 5.1% 4.9% 2.7% 1.6% 4.1% 2.3% 3.5% 3.5% 4.0%
NWC to sales 32.7% 30.5% 31.8% 35.4% 33.6% 39.9% 40.1% 40.3% 40.3%
Capex to sales 4.4% 3.6% 3.6% 4.3% 4.0% 4.4% 4.4% 4.4% 4.4%
With management change in progress and a cost-saving target, it normally follows that
capex is cut to improve cash flows when operations are still struggling.
It could be the case that a new strategy emerges at some point with a plan to cut
expansionary capital allocation back to historic levels. But as we have shown in the
above table, the ratio of capex to sales has not deviated that much with history.
Our dialogue with management has tended to point to the need to step up capex at
least in absolute terms because the company has insufficient crop protection
blending and distribution capacity in emerging economies.
This suggests to us that if a new strategy was proposed with radically lower capital
allocation for growth projects, then volume expansion would almost certainly be
limited. Whilst running the company for cash is fine as a new strategy, it would result
in a huge valuation derating.
Our modelling incorporates the assumption that capital expenditure remains at 4.5%
of sales from 2015 to 2018.
With our view that free cash flows are set to be less abundant, we have cut our
dividend assumptions accordingly. We envisage that DPS now only expands by a 4%
CAGR between 2015 and 2018. For such a highly rated company, this pace of growth
is far too low.
There is not much room for manoeuvre (Fig 179). Dividends are likely to be partly
paid out of debt in 2015 and it will be close to a similar scenario in 2016 and 2017. This
is in spite of our lowered dividend expectations.
Fig 179: Syngenta free cash flow vs dividend cash flows: 2010-18E
2,000 2.5 x
2.0 x
Cash flows $m
1,500
1.5 x
Ratio
1,000
1.0 x
500
0.5 x
0 0.0 x
2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E
FCF Dividends FCF : Divi CF

Portfolio change and accelerated cash return

Management has announced the intention to seek a buyer for both the companys
flower seeds and, more recently, the vegetable seeds business.
There is stated interest from potential trade buyers (e.g. Vilmorin), but also
speculation that others already holding a market position in seeds, such as Bayer, may
seek gain scale.
Combined sales for both businesses are around $0.9bn and a divestment multiple of
2-3x sales seems feasible (Syngenta trades on 2.3x sales). On completion, the deals
would yield between $1.8bn and $2.7bn in proceeds.
The company has also announced the intention to begin a $2bn share buyback
programme, and we understand this is not predicated upon the planned divestments.
The CFO stated on the recent Q3 results conference call that Syngenta would begin to
repurchase shares immediately.
There is clearly pressure upon management to unlock additional value and prove to
shareholders that rejecting the Monsanto approach was the right thing to do. We
understand the repurchase will commence at some point in Q4 2015, with
management seeking to get the message out that somehow the shares are cheap, given
earnings growth prospects. Buying back $2bn of shares at an average price of
$340/share and assuming a 3% cost of debt implies the programme is earnings
accretive.
Returns to remain depressed

Despite periods of being an uncomfortable buyer of Syngenta shares, we have tried to
maintain the view that the industry structure is sound, there will be growth over the
cycle and that returns will recover as cost control is properly implemented.
However, we are no longer as upbeat and show our expectations for post-tax ROCE in
Fig 180.
Fig 180: Syngenta post-tax ROCE: 2010-18E

25%
21.4%
20.1% 20.2%
ROCE post-tax
20% 18.4% 17.7%

16.4% 16.4%
14.3% 14.5% 14.5% 15.1%

15%
10%
2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E
ROCE - post tax Long-run average

Despite $1bn of targeted cost savings, we see limited improvement to ROCE before
2018.
Invested capital turnover is not likely to reduce because capex is still being added at a
ratio of 4.5% sales, which is over double our base case assumption for revenue
expansion from 2016.
Our returns model for Syngenta can be found in Fig 181.
Fig 181: Syngenta returns model: 2010-18E

Y/E Dec ($m) 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E
Pension deficit 884 968 841 766 676 496 316 136 (44)
Equity 7,439 7,494 8,774 9,491 8,889 8,803 7,619 7,932 8,283
Net debt 1,129 1,135 1,706 2,265 2,423 3,238 4,973 5,146 5,214
Associates 124 131 143 204 188 195 202 209 216
Capital employed 9,328 9,466 11,178 12,318 11,800 12,342 12,706 13,005 13,237
Average capital employed 9,302 9,397 10,322 11,748 12,059 12,071 12,524 12,856 13,121
Sales 11,641 13,268 14,202 14,688 15,134 13,309 13,472 13,680 13,974
EBIT 1,970 2,249 2,525 2,265 2,311 2,077 2,143 2,221 2,381
Tax rate 16% 16% 13% 15% 14% 17% 15% 16% 17%
NOPAT 1,647 1,899 2,208 1,931 1,978 1,724 1,822 1,865 1,976
NOPAT margin 14.1% 14.3% 15.5% 13.1% 13.1% 13.0% 13.5% 13.6% 14.1%
IC turnover 1.25 1.41 1.38 1.25 1.25 1.10 1.08 1.06 1.06
ROCE pre tax 21.2% 23.9% 24.5% 19.3% 19.2% 17.2% 17.1% 17.3% 18.1%
ROCE post tax 17.7% 20.2% 21.4% 16.4% 16.4% 14.3% 14.5% 14.5% 15.1%
Valuation
Syngentas underperformance has been disappointing. Since the cyclical peak in H1
2013, the companys shares have underperformed the Stoxx 600 Index by around 30%.
As we show in Fig 182, the decline has generally been progressive, with all the gains
achieved over the preceding three years now eroded.
Fig 182: Syngenta shares relative to Stoxx 600: 2005-15

1.6
Syngenta rel. SXXP
1.4
1.2
1
0.8
0.6
0.4
Nov 05 Nov 06 Nov 07 Nov 08 Nov 09 Nov 10 Nov 11 Nov 12 Nov 13 Nov 14 Nov 15
Syngenta shares relative to Stoxx 600 Index
Some claim the shares now reside in value territory, but this seems to be predicated
upon continued strong organic growth and a return to positive operational gearing.
The shares trade on 18.8x 2016 EPS, which is well above the long-term average, at 16x
12-month forward earnings (Fig 183).
Fig 183: Syngenta P/E rolling 12m forward (on consensus forecasts)
24.0 x
22.0 x
20.0 x
18.0 x
PE
16.0 x
14.0 x
12.0 x
10.0 x
8.0 x
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Syngenta P/E - 12m forward Long-term average
Source: FactSet
Syngenta shares are also trading on a premium to the European Chemicals sector,
which is valued on 16.7x 12-month forward EPS.
Some may argue a comparison to European Chemicals is not valid and to some extent
we sympathise with this view. However, if crop protection demand growth decelerates
to levels akin to GDP expansion, then any valuation premium cannot be easily
justified.
Over much of the last 18 months, Syngentas P/E valuation multiple has actually
rerated relative to the European Chemical index (Fig 184).
Fig 184: Syngenta P/E relative to European Chemicals: 2011-15

110%
100%
Relative PE
90%
80%
70%
60%
Oct 11 Apr 12 Oct 12 Apr 13 Oct 13 Apr 14 Oct 14 Apr 15 Oct 15
The strong relative P/E inflation which occurred during Q2 to Q3 2015 relates to the
approach by Monsanto, which we understand Syngentas board did not engage with.
Derating risk
We think there is a risk that Syngenta shares begin to derate over the cycle, as the
investment community works out that earnings and cash flow generation seem likely
to increase at a slower pace than in the past.
Even if this does not happen, simply valuing Syngenta shares based on its historic P/E
multiple (averaging 16x 12m forward earnings) and our forecast for $18.6 EPS in 2016,
implies a fair value of around CHF298/share. This is 15% below the share price.
So why did Monsanto offer CHF470/share? This acquisition offer for Syngenta caused
the valuation multiple to peak at a P/E of 23.2x in June 2015. There is a strategic
argument, with Monsanto keen to establish a crop protection technology platform that
we think could be priced and marketed in a different way. However, the main logic
appears to be the scope for around $1bn of additional cost synergies, as common
commercial and corporate functions could be radically reshaped.
On a standalone basis, we do not believe that enough can change at Syngenta over the
next year or two to justify anything like the Monsanto offer. Additional cost savings
could be announced, but may just lead to additional cash burn in the near term. And
retention seems likely to be low, as we have already pointed out.
The other problem is that the corporate strategy to offer crop protection and seeds on
an integrated basis has not worked well in some regions. Bundling products together
with agronomic advice has been helpful to growers in emerging economies, which
have been keen to improve yields. But we believe there have been problems in NAFTA
and areas of Europe where distributors wield much power and do not like being
prescribed a combined product offer. Instead, some prefer to cherry-pick products

from a range of suppliers.
After it has taken three years to assemble the Syngenta integrated strategy, unravelling
such a business model seems likely to result in negative effects during the initial stages.
It would be likely that yet more restructuring charges and cash consumption would be
involved. Strong competitors such as Bayer and BASF may also use this potential
period of disturbance to take selective market share.
Our revenue and earnings growth expectations from 2015 to 2018 are shown in Fig
185. With EBIT likely to expand at a pedestrian pace, Syngenta shares begin to trade at
quite high valuation multiples in 2017 and 2018.
Note that we have already accounted for the companys $2bn share buyback in our
modelling and this is the primary reason why the EPS growth is high in 2016.
Excluding this effect would imply that EPS is likely to increase 6%.
Fig 185: Syngenta revenue, earnings and dividend growth, 2012-18E

Growth (%) 2012 2013 2014 2015E 2016E 2017E 2018E
Revenue 7.0% 3.4% 3.0% (12.1%) 1.2% 1.5% 2.1%
EAME (0.2%) 6.3% 7.7% (15.1%) 2.2% 2.0% 2.0%
North America 20.1% (2.1%) (6.9%) (9.7%) (3.2%) (2.7%) (0.2%)
Latin America 12.3% 7.5% 7.2% (11.9%) 1.8% 3.9% 3.7%
Asia Pacific (3.2%) 5.9% 5.1% (10.5%) 4.5% 3.5% 3.5%
Lawn and garden (8.3%) (7.4%) (0.0%) (8.3%) 0.0% 0.0% 0.0%
EBIT underlying 12.3% (10.3%) 2.0% (10.1%) 3.2% 3.6% 7.2%
EAME (1.0%) 13.7% 3.5% (12.9%) 1.3% 3.5% 3.5%
North America 42.4% (21.7%) (14.1%) 13.8% (6.7%) (5.5%) 3.1%
Latin America 15.3% 1.3% 7.4% (13.1%) 2.8% 4.1% 4.7%
Asia Pacific (10.6%) 6.9% 4.4% (8.1%) 8.2% 5.3% 3.5%
Lawn and garden 8.3% 52.6% (3.4%) (17.1%) 26.7% 0.0% 0.0%
EPS growth 15.2% (13.4%) 0.6% (15.4%) 13.1% 0.1% 4.9%
DPS growth 18.8% 5.3% 10.0% 4.5% 4.3% 4.2% 4.0%
In terms of what we are paying for this profile, we detail our EV calculation in Fig 186
and detail the valuation multiples for Syngenta in Fig 187.
Fig 186: Syngenta EV calculation, 2012-18E

Year-end December ($m) 2012 2013 2014 2015E 2016E 2017E 2018E
Share price (CHF) 325 377 325 352 352 352 352
Share price ($) 346 406 356 350 350 350 350
Market capitalisation 31,720 37,353 32,666 31,940 30,293 30,293 30,293
Minorities 11 13 16 19 22 25 28
Net debt 1,706 2,265 2,423 3,238 4,973 5,146 5,214
Pension debt 841 766 676 496 316 136 (44)
Associates (143) (204) (188) (195) (202) (209) (216)
Enterprise value 34,135 40,193 35,593 35,498 35,403 35,391 35,275
Fig 187: Syngenta valuation metrics, 2012-18E

Year-end December (x) 2012 2013 2014 2015E 2016E 2017E 2018E
EV/sales 2.4 2.7 2.4 2.7 2.6 2.6 2.5
EV/EBITDA 10.9 13.9 12.2 13.1 12.6 12.1 11.4
EV/EBIT 13.5 17.7 15.4 17.1 16.5 15.9 14.8
EV/FCF 40.1 68.2 26.7 50.4 35.2 34.8 30.3
EV/IC 3.1 3.3 3.0 2.9 2.8 2.7 2.7
ROCE/WACC 2.6 2.0 2.1 1.8 1.9 1.9 1.9
Free cash flow yield 2.7% 1.6% 4.1% 2.2% 3.3% 3.4% 3.8%
Dividend yield 2.9% 2.7% 3.4% 3.3% 3.4% 3.6% 3.7%
P/E 15.5 21.0 18.3 21.3 18.8 18.8 17.9
Price to book 3.6 3.9 3.7 3.6 4.0 3.8 3.7
Sum-of-the-parts valuation
Where possible, we are now including sum-of-the-parts valuation for companies in
our research and not only for those businesses with a conglomerate structure.
The problem for those industries with few direct pure-play peers is that it can be
difficult to know what valuation multiple to introduce. We have opted to use the
EV/EBIT ratio that Monsanto has been trading on during the past year, but introduce
a small discount. We think this is warranted given the material different to cash flow
generation.
Our sum-of-the-parts valuation model for Syngenta is shown in Fig 188. To be fair to
the company, we are applying our Monsanto EV/EBIT multiple for fiscal 2016 (at 14x
EBIT) in the Syngenta valuation model, with slightly lower numbers used thereafter.
Fig 188: Syngenta sum-of-the-parts valuation model: 2015-17E

$m 2015E 2016E 2017E
Regional EBIT
Europe 1,305 1,322 1,369
NAFTA 1,051 981 927
LATAM 951 978 1,017
Asia 518 561 590
Lawn 95 121 121
Corporate centre (1,844) (1,818) (1,804)
Total EBIT 2,077 2,143 2,221
Peer multiple (Monsanto) 14.0x 13.5x 13.0x

Discount/premium to peer (5.0%) (5.0%) (5.0%)
Implied valuation 27,619 27,489 27,424
Adjust for net debt (3,238) (4,973) (5,146)

Adjust for provisions (496) (316) (136)
Adjust for net associates 176 180 184
Implied market cap in USDm 24,060 22,380 22,326
USD/CHF 1.01 1.01 1.01
Implied market cap in CHFm 24,190 22,501 22,446
Shares in issue (million) 91 86 86

Implied FV per share ($/share) 265 260 260
Average FV 262
DCF valuation
Syngenta should continue to generate revenue growth, but at a lower rate. Margin
seems unlikely to reach the peak levels achieved in the past, but we do have
profitability rising by 140bp between 2015 and 2018.
With varying growth rates and margin adjustments, we therefore believe DCF
valuation can be a useful tool to value the shares.
Our DCF model includes explicit forecasts in 2015-18, as detailed in Fig 189, followed
by a normalised period of growth to 2024 and a terminal value.
Fig 189: Syngenta growth and margin assumptions, 2012-18E

$m 2012A 2013A 2014A 2015E 2016E 2017E 2018E
Volume 6.7% 4.0% 2.6% (2.2%) 1.6% 1.4% 1.4%
Price 3.2% 2.0% 3.1% 3.8% 0.4% 0.5% 0.5%
FX (2.9%) (1.6%) (2.4%) (12.0%) (0.9%) 0.0% 0.0%
Portfolio 0.0% (1.0%) (0.3%) (1.7%) 0.1% (0.3%) 0.2%
Organic growth 9.9% 6.0% 5.7% 1.7% 2.1% 1.9% 1.9%
Total sales growth 7.0% 3.4% 3.0% (12.1%) 1.2% 1.5% 2.1%
EBIT margin 17.8% 15.4% 15.3% 15.6% 15.9% 16.2% 17.0%
Additional detail that supports our assumptions for 2015 to 2018 are as follows:
x Revenue growth. We envisage no material improvement to the companys organic

growth rate achieved in 2015. It may even be worse in 2016, with some competitors
in NAFTA particularly negative on the demand outlook. Currency impact on the
sales line seems likely to be less negative in the coming year.
x EBIT margin. Minor improvement to EBIT margin is possible, which is more a

function of new products maintaining a c0.5% price and mix gain in several
regions. We assume little net contribution from cost savings, after accounting for
3.5% inflation to the companys core operating expenditure.
x Tax rate. As a Swiss company, Syngenta has benefited from low taxation, averaging
15.5% between 2008 and 2014. Management has guided for a tax rate that
progressively trends upwards over the next few years. However, since we have little
visibility on the phasing, we model a 15% rate in 2016 which rises to 17% by 2018.
x D&A and capex. We assume the D&A and capex ratios represent c3% of revenues
by 2025, which is slightly below the companys historic rate of capital allocation.
However, if growth prospects do begin to diminish, then it would be strange for a
management team to continue investing at historic rates.
x Discount rate. We use a 7.9% discount rate during the forecast period and 7.7%
during the normalised growth period, to reflect a minor change in capital structure.
We assume a 2% terminal growth rate, which is in keeping with our view on
organic growth.
These assumptions yield a DCF-derived fair value of $305/share, which implies

CHF307/share (rounded). This is 13% below the share price.
Fig 190: DCF valuation summary ($m)

Cash flow component Cash flow
Forecast cash flows 6,337
Normal growth cash flows 7,903
Total cash flows 31,387
Pension provisions (496)
Net debt/cash (3,238)
Net minorities/associates 176
Implied valuation 27,829
Implied value ($) 305
Implied value CHF 307
Since our revenue growth forecasts for Syngenta are well below historic levels and
there is potential for the discount rate to decrease if the company adjusts its capital
structure, we have included a DCF sensitivity table in Fig 191.
Examining the growth and discount rate sensitivities in the table below shows that the
market is discounting a scenario where long-term growth is maintained at 3.0%.
To make Syngenta a Buy, we would need a fair value of over CHF370/share, which
means that a terminal growth rate of at least 3.5% would be needed in our DCF model.
We are not using such an assumption for any company in the chemical sector.
Fig 191: Fair value sensitivity table to terminal growth and discount rate ($/share)
--------------------------------------- Terminal growth rate --------------------------------------
0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50%
-------------- Discount rate ------------
6.5% 283 297 313 333 357 387 426 478

6.8% 277 290 305 323 344 371 405 450
7.3% 266 277 290 305 323 344 371 405
7.5% 261 271 283 297 313 333 357 387
7.8% 256 266 277 290 305 323 344 371
8.0% 252 261 271 283 297 313 333 357
8.3% 247 256 266 277 290 305 323 344
8.5% 244 252 261 271 283 297 313 333
8.8% 239 247 255 265 276 289 304 321
Valuing the base business plus the pipeline

We think the best way to think about Syngentas valuation is to derive the value of the
base business, under a zero-growth scenario and then add on the pipeline.
We show our working in Fig 192.
Fig 192: Syngenta valuation: zero growth for base business plus the pipeline
$m Item
EBIT unadjusted for restructuring 1,796
Depreciation 627
Working capital (227)
Provisions for pension (257)
Maintenance capex (182)
Tax (261)
Free cash flows 1,496
Capitalise at cost of capital 8%
Implied EV under zero growth scenario 18,702
Net debt (3,238)
Pension (496)
Implied equity value 14,968
Shares 91
Zero growth FV ($/share) 164
Pipeline value per share ($/share) 127
Implied FV ($/share) 291
Taking a simple average of four valuation approaches (P/E multiple, DCF, SOTP and
zero growth plus pipeline) implies a fair value of $289/share. This is summarised
pictorially in Fig 193. After adjusting for currency, we set our Syngenta price target at
CHF290.
Fig 193: Syngenta valuation summary chart

Valuation summary Current share price
average: CHF290/s CHF352/share
DCF
SOTP
P/E on 2016
Base + pipeline
250 260 270 280 290 300 310 320 330 340 350 360
Fair value $ / share
08/
08/ Monsanto forecasts and valuation
Monsanto forecasts and

valuation
Market dominance, a $17bn pipeline and seeds occupying premium
importance amongst farm inputs, offers a strong starting point for an
investment case. We derive forecasts at a product level and show the
potential for 7% CAGR gross profit from 2015 to 2018, in Seeds and
Traits. We model no recovery for the pesticides division. Using
buybacks as a regular mechanism to reward shareholders, another
$3bn programme over this year is a sign of confidence. This all
translates into 8% CAGR earnings to fiscal 2018 and implies the
shares trade on only 12.9x 2018 EPS. We launch coverage with a Buy.
Launching coverage with a Buy recommendation

With our research examining how global industry trends are changing and the
innovation pipelines for the major agrichemical suppliers, we now launch coverage of
Monsanto. Our work leads us to conclude that seeds are best placed to capture
incremental share of farmers capital over this cycle.
A dominant market position appears defendable and new seed products appear likely
to reintroduce price gains and strong gross profit growth. We realise there are sceptics
who believe the agricultural industry is stagnating and that suppliers cannot increase
earnings when commodity prices are depressed. We disagree, arguing farmers will still
selectively invest in productivity tools or inputs that can increase land output.
Our forecasts are not dramatically different to consensus expectations, but the share
price in 2015 has been very focused upon a weak upcoming fiscal period in 2016.
Beyond that, we think the outlook is positive, reflecting its strong industry position.
The crop protection businesses (with Syngenta as market leader) are struggling to
increase prices over a sustained period above the rate of operating cost inflation, so
earnings growth is mostly predicated upon volume growth. In contrast, selling the
highest quality seed germplasm (which creates the yield potential) and more complex
trait combinations (offering in-built protection) seems much more likely to generate
value from raising prices.
We forecast Monsantos sales and operating income will grow at a 3% and a 9% CAGR
respectively from August 2015 to 2018. However, this includes an expected big drop in
profits in the coming year for the Roundup herbicide range, which has been
overearning over the past few years due to constrained supply. This is widely known to
be a commoditised business and normally only represents around 15% of profits.
The core seeds and traits business is expected to do much better, with new products
either in ramp-up mode (e.g. Intacta GM soy seed) or expected to gain approval for
launch over the next year (e.g. SmartStax Pro seed). Positive progress may be
announced at an R&D update on 17 November, when the global innovation pipeline
will be presented. This is the business that investors value and we see the potential for
7% gross profit growth over the next three years.
The company expects ongoing EPS to fall within the range of $5.10-5.60/share in 2016.
This is partly being achieved by repurchasing $3bn of shares, which is equivalent to 7%
of the current market capitalisation.
FCF is expected to be between $1.6bn and $1.8bn in 2016. For a company to focus on
cash flows is refreshing. Indeed, one of the reasons we are more positive on Monsanto
is the more stable and higher conversion from EBIT into FCF.
The shares have underperformed the S&P by 23% so far in 2015 and now trade on
multiples below historic levels. The underperformance reflects investor concern for
2016, which is now better understood, and M&A risk. In this regard, we think
Monsanto is in a strong position to explore deals with a number of companies other
than Syngenta.
We set our fair value at $115/share, which is 23% above the share price, and
commence coverage with a Buy recommendation. Our summary financials are shown
in Fig 194.
Fig 194: Monsanto summary financials and valuation metrics

Year-end August ($m) 2012A 2013A 2014A 2015A 2016E 2017E 2018E
Revenue 13,516 14,861 15,857 15,001 14,630 15,491 16,313
Gross profit 7,045 7,653 8,574 8,182 7,845 8,318 8,807
Operating income 3,148 3,570 4,075 3,523 3,021 4,015 4,525
EBIT adjusted 3,078 3,444 3,962 4,115 3,521 4,015 4,525
EPS adjusted 3.70 4.56 5.23 5.73 5.30 6.20 7.24
EBIT margin adjusted 22.8% 23.2% 25.0% 27.4% 24.1% 25.9% 27.7%
EV/EBIT (x) 14.4 16.0 16.7 14.1 14.0 11.9 10.2
P/E (x) 22.5 22.8 22.0 18.9 17.6 15.1 12.9
ROCE post tax 16.0% 18.5% 19.2% 20.5% 18.3% 19.5% 21.3%
FCF yield 5.4% 3.6% 3.4% 4.1% 4.1% 5.5% 6.5%
Dividend yield 1.5% 1.4% 1.5% 1.8% 2.1% 2.4% 2.6%
The company reports its earnings split by seed category and this is how we have
constructed our financial model. Our operating income bridge for 2015-18 (Fig 195)
shows earnings growth is mainly coming from corn and soybean seeds and traits. Price
normalisation in the Agricultural Productivity division is the major offset.
Perhaps harshly, we assume minimal retention of planned cost savings. Although the
company seeks to lower its spending by $0.5bn in 2016, we assume this is offset by
higher innovation costs (an industry theme) and general inflation. Grossing up the
group operating costs of $4.3bn in 2015 by 3% implies $130m of added cost.
Fig 195: Monsanto operating income bridge: 2015-18E

5,500
35 16 -31 -689
5,000 540
393 4,525
EBIT $m
4,500 753
-16
4,000
3,523
3,500
3,000
Vegetables
Ag Products
one-offs
Op income
Op income
Soy
Other seeds
OPEX
Cotton
Reverse
Corn
2018E
2015
Seeds and traits

We model Monsantos business using a bottom-up approach that begins with regional
market shares to derive the acres planted with the companys seeds, taken from
published data on the total crop area. We provide detail on our methodology for the
two largest businesses, corn and soy. Our approach has been similar for other crops.
Modelling corn germplasm sales

Our assumptions for the companys GM corn seed market shares are shown in
Fig 196.
Fig 196: Monsanto GM corn market share by country/region: 2011-18E

share % 2011 2012 2013 2014 2015 2016E 2017E 2018E
US 34.5% 35.0% 35.0% 35.5% 35.7% 35.9% 36.0% 36.0%
Brazil 33.2% 29.8% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0%
Argentina 40.0% 46.5% 46.0% 45.0% 45.0% 45.0% 45.0% 45.0%
LATAM Other 17.0% 18.0% 19.0% 20.0% 20.0% 20.0% 20.0% 20.0%
Mexico 17.0% 18.0% 19.0% 20.0% 20.0% 20.0% 20.0% 20.0%
Europe 6.0% 6.0% 8.0% 10.0% 10.0% 10.0% 10.0% 10.0%
CIS 5.0% 5.0% 6.0% 7.0% 7.0% 7.0% 7.0% 8.0%
Asia & ME 5.0% 5.0% 5.0% 6.0% 7.0% 7.0% 7.0% 7.0%
Africa 5.0% 5.0% 5.0% 6.0% 7.0% 7.0% 7.0% 7.0%
Average 18.1% 18.7% 19.2% 19.9% 20.2% 20.2% 20.2% 20.3%
Source: Redburn, company, Phillips McDougall
From data published by the USDA on total corn arable acres, we can calculate the area
of land planted with Monsanto seed (Fig 197).
Fig 197: Monsanto GM corn acres by country/region: 2011-18E

Million acres 2011 2012 2013 2014 2015 2016E 2017E 2018E
US 31.7 34.0 33.4 31.7 30.3 30.7 31.4 32.1
Brazil 12.5 11.6 11.4 9.9 8.9 8.9 9.1 9.3
Argentina 4.9 7.0 6.5 6.0 4.8 4.8 4.9 5.0
LATAM Other 2.4 2.5 2.9 1.0 0.8 0.8 0.8 0.8
Mexico 2.9 3.6 3.8 3.9 3.8 3.7 3.8 3.9
Europe 1.4 1.5 1.9 2.3 2.1 2.1 2.1 2.2
CIS 0.2 0.3 0.4 0.5 0.4 0.4 0.4 0.5
Asia & ME 6.6 6.8 7.1 8.4 9.3 9.2 9.4 9.6
Africa 0.3 0.3 0.3 0.4 0.4 0.4 0.4 0.4
Total planted acreage 62.9 67.5 67.7 64.0 60.8 61.1 62.4 63.7
The GM seeds business model allows for earnings to be generated from two main
sources.
Firstly, income is generated from direct and indirect sales of seed germplasm. This is a
function of the crop area planted within each region and local pricing. We have
assumed that 30% of this revenue is not recovered by Monsanto and instead is serving
as distribution fees.
We show our assumptions for corn seed germplasm pricing in Fig 198. It is worth
noting this appears to have held up well, despite the less favourable soft commodity
cycle of the past three years.
Fig 198: GM corn seed average germplasm pricing: 2009-18E

80.0
69.2
70.0 62.9 65.2
60.8 61.2
57.3
Price $ / acre
60.0 53.0
46.6
50.0 42.6
38.6
40.0
30.0
20.0
2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E
GM corn germplasm price

Source: Redburn, Phillips McDougall, USDA
Applying the pricing data to our corn seed acre model allows us to calculate estimates
for corn seed and germplasm sales (Fig 199).
However, although seed germplasm pricing has remained resilient, less favourable
farming economics for corn in comparison to soybeans has led to a mix shift within
NAFTA and LATAM acres. This explains the lack of growth in 2014 and the decline in
2015, when 5% fewer corn acres were planted.
Fig 199: Regional base corn seed and germplasm sales: 2011-18E
$m 2011 2012 2013 2014 2015 2016E 2017E 2018E
US 1,110 1,356 1,448 1,441 1,378 1,453 1,538 1,685
Brazil 350 341 351 319 287 299 319 342
Argentina 158 235 228 218 175 181 185 210
ROW 432 574 689 751 764 755 803 848
Total sales 2,049 2,506 2,716 2,729 2,604 2,689 2,845 3,084
Source: Redburn
We are expecting the coming year to be more stable and discussions with agronomists
suggest this is a reasonable assumption.
Although it is a little early in the NAFTA season to be making a strong call on planting
intentions, farmers will already be planning for the 2016 season and can often begin to
place early orders for seed in December. With this in mind, those actively involved in
debates with growers may be indicating a useful early read on the potential for broadly
unchanged corn acreage in 2016.
Modelling corn trait sales and income

The second means of generating revenue and earnings from seeds is via trait stacking.
In the past, growth has been generated by including more numerous biotech traits per
seed, with each carrying an incremental fee to the purchaser. For the seed companies,
higher price gains result, which should translate to positive operational gearing.
This effect is derived from the gross margin on most traits being very high and, in
keeping with industry practice, we assume an 80% level of profitability.
Our starting point has been to derive a model that splits the regional acres planted
with Monsanto seed into different trait combinations (Fig 200). To be clear, these are
our assumptions, but we have had numerous discussions with industry participants to
inform our work.
We do not plan to review each individual trait and combination. However, to

summarise, seeds are typically either:
1 Single trait, which provides tolerance to a herbicide or resistance against an insect,

typically the corn borer.
2 Stacked, which means they contain a combination of traits that confer resistance to
herbicides and plant pests (e.g. the corn borer), and possibly phenotype
improvements such as drought resistance or improved nutritional content. One
such example is Monsantos double-stacked corn, which usually includes
glyphosate resistance and corn borer protection traits.
Fig 200: Monsanto GM corn seed trait acreage model: 2011-18E

Million acres 2011 2012 2013 2014 2015 2016E 2017E 2018E
US corn single 8.4 7.9 4.3 3.4 2.9 2.2 2.0 1.4
US corn double 0.6 0.6 0.6 0.3 0.3 0.3 0.0 0.0
US corn VT Triple 15.0 9.1 2.5 1.7 1.2 1.1 1.0 0.7
US corn VT Double Pro 1.8 3.0 4.9 5.0 5.2 4.8 4.6 4.2
US corn VT Triple Pro 1.8 5.5 11.1 10.1 8.7 7.8 7.9 7.7
US corn SmartStax 4.2 7.9 9.9 11.2 12.1 14.5 16.0 18.0
US corn acres 31.7 34.0 33.4 31.7 30.3 30.7 31.4 32.1
Brazil corn single 9.0 9.0 8.7 8.2 7.5 7.5 7.5 7.5
Brazil corn double 3.5 2.6 2.7 1.7 1.4 1.4 1.6 1.8
Brazil corn acres 12.5 11.6 11.4 9.9 8.9 8.9 9.1 9.3
Argentina corn single 3.6 4.5 4.3 3.5 2.8 2.7 2.6 2.5
Argentina corn double 1.3 2.5 2.2 2.5 2.0 2.1 2.2 2.5
Argentina corn acres 4.9 7.0 6.5 6.0 4.8 4.8 4.8 5.0
Other corn single 10.4 11.0 10.6 11.0 11.4 11.0 11.0 11.0
Other corn double 3.3 3.9 5.8 5.5 5.4 5.6 6.0 6.3
Other corn acres 13.7 14.9 16.4 16.5 16.8 16.6 17.0 17.3
Total acres 62.8 67.5 67.7 64.1 60.8 61.0 62.3 63.7
Triple-type varieties would usually include the same traits as the double-stacked seeds,
but would also be genetically modified with resistance to corn root worm.
Monsantos SmartStax corn comes with additional above and below the ground
protection by including the Herculux technology under licence from Dow Chemical.
Tolerance to the Bayer herbicide, Liberty (glufosinate), is also included.
Using our corn seed trait acre model, we can then introduce pricing to determine
revenue per biotech trait.
Fig 201: Corn trait pricing model: 2011-18E

Incremental trait price ($) 2011 2012 2013 2014 2015 2016E 2017E 2018E
US traits
Roundup Ready US 23 26 30 30 30 32 32 32
Yieldguard CB US 28 32 35 37 37 37 40 40
Yieldguard RW US 48 52 58 59 59 59 60 60
VT Double Pro US 38 52 56 58 58 55 55 55
VT Triple US 50 54 65 65 65 70 70 70
VT Triple Pro US 60 60 65 65 65 70 70 70
SmartStax US 65 65 70 70 70 70 70 70
DroughtGard 10 10 10 10 10
LATAM traits
Roundup Ready Brazil 14 20 25 23 23 23 23 23
Yieldguard CB Brazil 18 20 25 23 23 23 23 23
Yieldguard VT Pro Brazil 20 23 30 26 26 26 26 26
Roundup Ready Argentina 12 12 15 12 12 12 12 12
EU CB Argentina 10 10 15 12 12 12 12 12
RR + CB Argentina double 12 12 15 15 15 15 15 15
Yieldguard VT RW Argentina 20 20 25 24 24 24 24 24
ROW traits
Roundup Ready 13 15 20 15 15 15 15 15
Yieldguard CB 15 20 23 20 20 20 20 20
Yieldguard RW 18 25 28 25 25 25 25 25
VT Triple Pro 45 50 55 50 50 50 50 50
We assume the trait gross margin will remain consistent at 80%. This may be too
cautious for some of the most recently launched innovations. However, to be prudent
and to account for consistency in our pipeline modelling work, we have applied the
same assumption to all seed companies.
However, there are gross margin variations for the germplasm (Fig 202), which tend to
be due to the change in seed production cost, as professional growers may look to
charge a higher manufacturing fee during periods of higher crop returns. In other
words, there is an opportunity cost effect to be aware of.
Fig 202: Corn seed germplasm gross margin: 2011-18E

40% 37.6%
36.5% 36.0% 36.0% 36.5%
35% 33.7%
Gross margin
32.2%
30.4%
30%
25%
20%
2011 2012 2013 2014 2015 2016E 2017E 2018E
We aggregate all of our modelling for seed germplasm and trait sales, together with
gross margin assumptions, to reach our profit forecasts (Fig 203).
Fig 203: Corn seed sales and gross profit: 2011-18E

$m 2011 2012 2013 2014 2015 2016E 2017E 2018E
Regional seed germplasm sales
US 1,110 1,356 1,448 1,441 1,378 1,453 1,538 1,685
LATAM 508 576 579 537 461 480 503 552
Rest of world 432 574 689 751 764 755 803 848
Total corn germplasm sales 2,049 2,506 2,716 2,729 2,604 2,689 2,845 3,084
Regional seed trait sales

US 1,468 1,691 1,986 1,901 1,771 1,912 2,023 2,193
LATAM 756 890 976 847 641 687 710 758
Rest of World 532 727 918 924 938 931 983 1,029
Total corn trait sales 2,756 3,308 3,880 3,672 3,349 3,529 3,716 3,980
Regional gross profit

US 1,531 1,862 2,029 2,046 1,881 2,053 2,172 2,369
LATAM 768 929 957 874 668 722 750 808
Rest of World 564 798 943 1,013 1,008 1,016 1,075 1,132
Total corn gross profit 2,864 3,589 3,929 3,932 3,557 3,791 3,997 4,310
Modelling soybean seeds and traits

We also use the same bottom-up approach for forecasting Monsantos soy and cotton
seed sales. Our assessment of historic global market share, together with our
expectations for soy, is shown in Fig 204.
Fig 204: Monsanto GM soy seed market share: 2011-18E

40%
33.9%
31.8%
29.1% 30.1%
26.6% 28.2%
30% 25.1%
24.2%
Market share
20%
10%
0%
2011 2012 2013 2014 2015 2016E 2017E 2018E
We have applied these market share data to consultant data sets on planted acres for
different soy seed varieties to determine the companys germplasm sales (Fig 205).
Assumptions have been made to account for sales derived from third-party seed
companies in the US. Fig 205 shows the net sales, after distributor fees and
promotional discounts have been applied.
Fig 205: Monsanto soy germplasm sales: 2011-18E

$m 2011 2012 2013 2014 2015 2016E 2017E 2018E
US Monsanto 365 404 450 537 538 593 639 673
US third parties 35 38 39 44 42 45 47 49
Brazil 121 160 149 158 163 171 194 216
Argentina 109 122 122 135 141 148 185 231
Total germplasm sales 630 724 759 874 884 957 1,066 1,169
We understand that trait prices for soy have held up quite well in recent years, despite
softening crop prices (Fig 206). The main exception appears to be in Argentina, where
we assume no collection of licence income and trait fees.
Fig 206: Soy seed trait average price: 2011-18E

20
14.5 14.6 14.2 14.2 14.7 14.8

Trait price $ / acre
15 12.6 12.3
10
0
2011 2012 2013 2014 2015 2016E 2017E 2018E
Our detailed model splits Monsantos soy trait sales by region and by product. We
aggregate the latter into three categories:
x Roundup Ready. This renders the soybean plant tolerant to glyphosate herbicides.
The original patent expired in early 2015, but we believe that most growers have
moved onto higher yielding varieties, at least in the NAFTA region. In principle,
farmers could save seed until the following season and therefore there could be
some modest sales at risk. However, additional varietal patents are normally in
place (dependent upon the soy seed), which are still said to be partly preserving
value.
x Roundup Ready 2 Yield. The second-generation variant improved yields by

enabling the plant to produce 3-5 more beans per pod. Adoption was rapid, given
that this yield enhancement was built into the plant and theoretically not as
dependent on weather conditions.
x Intacta. This is targeted for the huge LATAM soy market. In the first full year of
commercial launch, enough seed was sold to cover 15 million acres. This new trait
variety offers protection from a range of soil-based insects, in addition to high
yields and glyphosate tolerance. This allows the farmer to reduce insecticide usage.
Despite Intacta being introduced only recently, anecdotal feedback has suggested
that pesticide applications could be lowered by up to 50%.
Continued growth is expected to be high, with sales doubling in 2016 and further
opportunities over the longer term. Second- and third-generation Intact variants
will likely boost sales over the next decade, with a potential launch by 2020.
Management has guided that 100 million acres could be farmed ultimately with
the Intacta technology, representing nearly 50% of global soy acres. Our growth
assumptions, as shown in Fig 207, may prove too cautious.
Fig 207: Monsanto soy acres by trait category: 2011-18E

150
15 38 46
100 3 30
m acres
18 30 43 57 64
50 68 70 73
62 57 45 39 30 17
0 15 13
2011 2012 2013 2014 2015 2016E 2017E 2018E
Total Roundup Ready acres Total Roundup Ready 2 Yield acres Total Intacta acres
The next generation GM soy trait offer for the NAFTA region will be Roundup Ready
2 Xtend, which is expected to be granted regulatory approval for a small initial launch
in 2016. This will be the first soybean technology to include tolerance to both dicamba
and glyphosate herbicides.
Thus far, development of resistance to glyphosate has mainly been seen in broadleaf
weeds, such as Palmer amaranth. The herbicide combinations that Monsanto plans to
market from 2016, subject to approval, should combat such resistance problems.
Combining our modelling assumptions allows us to forecast soy trait revenue, as we

show in Fig 208, split by the three main product categories.
Fig 208: Monsanto soy trait sales: 2001-18E
2,000
1,600 813
667
522
Sales $m
1,200 95 348
800 351 600
999 963 1,018 1,088 1,120
724
400
561 447 170 134 81 59 64 69
0
2011 2012 2013 2014 2015 2016E 2017E 2018E
Total Roundup Ready sales Total Roundup Ready 2 Yield sales Total Intacta trait sales
Aggregated sales for soy germplasm and traits have been used to derive gross profit
forecasts, using the same methodology we have used in our corn model.
This is shown in Fig 209, together with five years of history. The drop in sales in 2015
is associated with the loss of trait royalty sales in Argentina for the older Roundup
Ready soy seeds. We assume this is not recovered, but do forecast growth associated
with the ramp-up of Intacta.
Regulatory approval of the Xtend soybean system would be an additional positive. Our
pipeline modelling work suggests this new trait could generate up to $300m of risk-
adjusted incremental profit on full market adoption.
Fig 209: Monsanto soy sales and gross profit: 2011-18E

$m 2011 2012 2013 2014 2015 2016E 2017E 2018E
Regional germplasm sales
US 400 442 489 580 580 638 687 722
LATAM 230 282 270 294 304 319 380 447
Total soy germplasm sales 630 724 759 874 884 957 1,066 1,169
Regional seed trait sales

US 828 936 885 1,124 1,037 1,071 1,147 1,185
LATAM 84 111 9 40 124 182 239 297
Total soy trait sales 912 1,047 894 1,165 1,161 1,253 1,386 1,482
Regional gross profit

US 887 975 874 1,221 1,252 1,349 1,460 1,523
LATAM 157 185 74 142 258 339 432 528
Total soy gross profit 1,045 1,160 948 1,364 1,510 1,688 1,892 2,051
Agricultural Productivity: expectations rebased

We are less excited about growth prospects for the companys crop protection
division, but appreciate the chemicals are often bundled with GM seeds, so we do not
envisage a divestment.
Indeed, a $1bn capex programme to produce dicamba for blending into Roundup
herbicide mixtures should help preserve value and maintain a modest price premium
above generic competition.
We also realise the company is buying a number of other active ingredients and
reformulating them for use under Monsantos Roundup Ready Plus programme.
With recent guidance sensibility reflecting more normal pricing and expectations
rebased for 2016, we see limited risk of an additional cut to estimates. Management
has indicated that gross profit in the Agricultural Productivity division will be in the
$0.9-1.1bn range for 2016. Our forecast is very slightly above this level, at $1.2bn, to
account for a small amount of profit for resale of other active ingredients.
Our sales and profit forecasts are derived from first principles, using volume, price and
cost data to forecast the outlook from 2016. Starting with volume, we have split this
into US and ROW (rest of world), as shown in Fig 210. Since Monsanto increased
capacity in the US, there has been no major volume growth that we are aware of and
we are not expecting any changes over the medium term.
Fig 210: Roundup glyphosate volumes: 2009-18E

250 30%
25%
200
20%
Volume (m gal)
150
Growth YoY
15%
10%
100
5%
50
0%
0 -5%
2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E
US volume ROW volume Growth YoY
Glyphosate pricing is volatile. Monsanto is the lowest cost producer globally, as it is

vertically integrated into the major raw material (phosphate rock) and represents c50%
of world capacity. The other major component of output is formed by numerous
Chinese producers, which collectively represent another c40% of capacity.
The problem is that supply constraints, or major shifts to input costs for the generic
producers, tend to cause temporary price spikes. Monsanto will raise prices
accordingly and has already been able to maintain a small price premium (Fig 211).
However, we do expect prices to fall back to much lower levels in 2016, with a sizeable
drop from around $14 per gallon in 2014 and 2015, to close to $11 per gallon for the
coming year. It seems reasonable to expect market prices that are more in line with
history.
Fig 211: Roundup pricing vs generic glyphosate: 2012-16E

15.0 14.0 13.9
12.7
Glyphosate price $ / gal
10.7 10.2 11.3

10.1 10.2 10.2
10.0
7.1
5.0
0.0
2012 2013 2014 2015 2016E
Monsanto branded glyphosate Chinese generic glyphosate
Source: Redburn, company, Bloomberg
A model has been constructed that derives Monsantos sales and unit costs in order to
determine the margin per gallon (Fig 212). Due to good control of operating
expenditure and the companys vertical integration, Monsanto seems able to maintain
its unit costs at around $8-9 per gallon.
We have assumed that some small gains are received from input cost deflation
(petrochemical derivatives), which should help lower costs slightly in 2016. We model
$8.2 per gallon total cost from 2016 onwards.
Fig 212: Roundup revenue, cost and margin per unit: 2009-18E
20
18
16.7
16
14.0 13.9
14 12.7
$ / gallon
12 11.3 11.3 11.3

10.5 10.7
10.0
10 8.9 8.8
9.0 8.8 8.5 8.6 8.5 8.2 8.2 8.2
7.8
8
5.2 5.5
6
4.1
4 3.1 3.1 3.1
1.7 2.2
2 1.0
0
2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E
Sales per gallon Cost per gallon Gross profit per gallon
This implies gross profit of around $3 per gallon in 2016, which is a painful 44%
decrease compared to 2015 and more in keeping with historic levels.
An obvious question to ask is why should the price not fall more and yield the $1-2 per
gallon profits observed in 2010 and 2011? In that period, considerable inventory
needed to be absorbed (much worse than in 2015) after China flooded the market and
ended up loss making. Even Monsanto generated practically no EBIT from glyphosate.
We do not expect market conditions to reach such extremes in 2016 but see no reason
for higher margins either.
Our total divisional gross profit forecasts, including a small contribution from traded
products and Roundup sold through other channels, are summarised in Fig 213.
Fig 213: Agricultural Products: gross profit split: 2010-18E

2,500
2,000
Gross profit / $m
417 324
1,500
407
1,000 326 326 326
387 1,561 1,581
387 1,163
500 890 890 890
333 599
215 386
0
2010 2011 2012 2013 2014 2015 2016E 2017E 2018E
Roundup herbicides Lawn, garden and traded products
Divisional sales, gross profit and margins

Historic sales and our forecasts for the smaller Monsanto divisions, which include
cotton, vegetables and other crop seeds, can be found in the group sales table (Fig 214).
Fig 214: Monsanto sales by product: 2011-18E

$m 2011 2012 2013 2014 2015 2016E 2017E 2018E
Corn seed and traits 4,805 5,814 6,596 6,401 5,953 6,148 6,561 7,064
Soybean seed and traits 1,542 1,771 1,653 2,102 2,276 2,528 2,886 3,171
Cotton seed and traits 1,009 928 695 665 523 555 571 575
Vegetable seeds 733 702 821 867 816 810 826 843
Other crops 493 586 575 705 675 629 642 655
Agricultural productivity 3,240 3,715 4,521 5,117 4,758 3,960 4,005 4,005
Net sales 11,822 13,516 14,861 15,857 15,001 14,630 15,491 16,313
Gross profits for all product groups and divisions are shown in Fig 215. Note that
although group earnings are set to fall in 2016, this is overwhelmingly due to the
chemicals business. The result in seeds and traits should increase. Guidance is for a
mid-to-high single digit increase in gross profits for 2016.
Fig 215: Monsanto gross profit by product: 2011-18E

$m 2011 2012 2013 2014 2015 2016E 2017E 2018E
Corn seed and traits 2,864 3,589 3,929 3,932 3,557 3,791 3,997 4,310
Soybean seed and traits 1,045 1,160 948 1,364 1,510 1,688 1,892 2,051
Cotton seed and traits 725 623 519 461 408 436 440 443
Vegetable seeds 451 381 337 401 372 370 380 388
Other crops 221 306 350 438 430 410 392 399
Seeds and traits 5,306 6,059 6,083 6,596 6,277 6,629 7,102 7,590
Agricultural productivity 773 986 1,570 1,978 1,905 1,216 1,216 1,216
Group gross profit 6,079 7,045 7,653 8,574 8,182 7,845 8,318 8,807
Fig 216 shows historic and implied gross margins from our forecasts for each business.
Fig 216: Monsanto gross margin by products: 2011-18E

Margin % 2011 2012 2013 2014 2015 2016E 2017E 2018E
Corn seed and traits 59.6% 61.7% 59.6% 61.4% 59.7% 61.7% 60.9% 61.0%
Soybean seed and traits 67.7% 65.5% 57.3% 64.9% 66.4% 66.8% 65.6% 64.7%
Cotton seed and traits 71.9% 67.2% 74.6% 69.4% 78.0% 78.6% 77.1% 77.0%
Vegetable seeds 61.5% 54.3% 41.0% 46.3% 45.6% 45.7% 46.0% 46.0%
Other crops 44.8% 52.2% 60.9% 62.1% 63.7% 65.2% 61.0% 61.0%
Seeds and traits 61.8% 61.8% 58.8% 61.4% 61.3% 62.1% 61.8% 61.7%
Agricultural productivity 23.9% 26.5% 34.7% 38.7% 40.0% 30.7% 30.4% 30.4%
Group gross profit 51.4% 52.1% 51.5% 54.1% 54.5% 53.6% 53.7% 54.0%
Cash flows, returns and valuation

We understand that uncertainties remain on the trading environment for the
agricultural business in 2016. Frankly, we are not convinced that the outlook is any
better for other chemical companies, with practically no visibility for many industries
and a binary outcome for energy. Yet, compared to its peers, Monsanto screens well on
some of our most favoured metrics.
Free cash flow generation appears much more stable (Fig 217) and conversion from
operating income is averaging at above 60% between 2009 and 2015.
Fig 217: Monsanto free cash flow, operating income and FCF conversion ($m): 2009-18E
5,000 100%
4,000 80%
Cash conversion
FCF or EBIT
3,000 60%
2,000 40%
1,000 20%
0 0%
2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E
FCF Operating income FCF conversion

The company pays a dividend and although it is modest, at an implied 2% yield for
2016, there is a positive outlook for growth. We model that the company will continue
to invest c$1bn per year in capital expenditure.
Unlike some agrichemicals peers, Monsantos FCF generation continues to be well

above the cash needed to pay the dividend. Fig 218 shows that only c40% of FCF is
being used to fund this type of shareholder return.
Fig 218: Monsanto FCF vs dividend cash flows: 2009-18E

3,000 100%
2,500
Dividend CF coverage
80%
Dividend or FCF
2,000
60%
1,500
40%
1,000
500 20%
0 0%
2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E
Dividend cash outflow FCF Dividend as % FCF
Instead, the company prefers to use excess cash flows to buy back shares. This occurs
in all years to some extent, as management believes growth prospects are solid,
innovations will continue to preserve high profitability in the core businesses and
many US investors like this means of gaining a higher share of future earnings. Fig 219
details the share repurchase history and proportion of FCF consumed for this means
of returning capital back to shareholders, together with dividends.
Fig 219: Monsanto cash flow return vs FCF generation: 2011-18E

Year-end August ($m) 2011 2012 2013 2014 2015 2016E 2017E 2018E
Dividend cash outflow 602 642 802 904 938 891 943 1,008
Dividend as % FCF 27% 27% 40% 44% 44% 52% 43% 40%
Buyback cash outflow 502 432 1,095 7,082 835 3,000 1,000 1,000
Buybacks as % FCF 22% 18% 55% 346% 39% 174% 45% 39%
Cash return as % FCF 49% 45% 95% 390% 83% 225% 88% 79%
Net debt/EBITDA (0.1x) (0.3x) (0.4x) 1.1x 1.1 x 1.8 x 1.5 x 1.3 x
Net debt/EBITDA RBN def* 0.1x (0.2x) (0.3x) 1.2x 1.2 x 1.8 x 1.6 x 1.3 x
* Redburn's net debt definition is to include pension debt
We like that management is prepared to support the share price during the tough
years of the cycle, and a $3bn buyback programme is in place for 2016. We detail our
Monsanto cash flow model in Fig 220, which shows the potential for higher FCF yield.
Fig 220: Monsanto cash flow model: 2011-18E

Year-end August ($m) 2011 2012 2013 2014 2015 2016E 2017E 2018E
Net income all operations 1,639 2,093 2,525 2,762 2,325 1,938 2,673 3,056
Non cash D&A 613 622 615 691 723 705 744 783
Provisions Pension (291) (83) (75) (64) (27) (50) (50) (50)
Provisions Business 3 3 27 41 45 0 0 0
Provisions Compensation 104 128 100 120 111 100 100 100
Tax benefits from stock options (36) (50) (79) (72) (44) (50) (50) (50)
Deferred income taxes 135 292 176 12 (349) 0 0 0
Deferred sales 62 (43) 50 (163) 32 0 0 0
Associate income (21) (19) (17) 4 7 0 0 0
Divestment gains/losses (5) (4) (17) (11) (2) 0 0 0
Other items (149) 63 (491) (153) 416 (50) (100) (100)
NWC 740 49 (74) (113) (122) 136 (112) (203)
Operating cash flow 2,794 3,051 2,740 3,054 3,108 2,728 3,204 3,536
Capex (540) (646) (741) (1,005) (967) (1,000) (1,000) (1,000)
as % sales 4.6% 4.8% 5.0% 6.3% 6.4% 6.8% 6.5% 6.1%
capex to D&A 0.9 x 1.0 x 1.2 x 1.5 x 1.3 x 1.4 x 1.3 x 1.3 x
FCF 2,254 2,405 1,999 2,049 2,141 1,728 2,204 2,536

FCF yield 5.9% 5.4% 3.6% 3.4% 4.1% 4.1% 5.5% 6.5%
Impressive returns and set to recover

The demands from additional working capital and capex will increase Monsantos
average annual capital employed, from $15.6bn in 2016 to $16.2bn by 2018. However,
this equates to barely a 2% CAGR; operating income is expected to grow at a stronger
pace from the rebased levels expected in 2016.
After adjusting for tax, we calculate that NOPAT could increase by a 7% CAGR
between 2016 and 2018. As such, post-tax ROCE is likely to recover and return back to
levels seen in the past (Fig 221).
Fig 221: Monsanto ROCE (post tax): 2007-18E

25%
18.2% 19.2% 20.5% 19.5% 21.3%
20% 18.5% 18.3%
12.3% 16.7% 16.0%
ROCE post-tax
15%
9.6% 10.9%
10%
5%
0%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
ROCE - post tax Long-run average

Given the growth, concentrated market positioning and history of cash return,
Monsanto shares have always traded at a premium to the levels implied by the
companys return (Fig 222). That premium has begun to erode slightly, as investors
question whether the historic trends are set to stagnate.
Fig 222: Monsanto EV/IC vs ROCE/WACC and ROCE: 2010-18E

23% 5.0 x
21.3%
20.5% 4.5 x
21% 19.5%
19.2%
18.5% 18.3% 4.0 x
EV / IC vs ROCE / WACC
19%
ROCE vs WACC
16.0% 3.5 x
17%
3.0 x
15%
2.5 x
13%
10.9% 2.0 x
11% 9.6%
1.5 x
9% 1.0 x
7% 0.5 x
5% 0.0 x
2010 2011 2012 2013 2014 2015 2016E 2017E 2018E
EV / IC ROCE / WACC WACC ROCE - post tax
We think this is overly pessimistic. Even if we are wrong, there is little in the share
price by fiscal year 2017. And this is a year when restructuring should cease to be a
drag on NOPAT and the contribution from recently launched traits such as Intacta soy
and Smartstax Pro corn should be lifting margins.
Growth for a commodity multiple

Monsanto shares underperformed the S&P Index by 23% so far in 2015 (Fig 223).
Partly, this reflects investor caution over any companies that are exposed to the soft
commodity cycle. But there has also been currency pressure (a $250m hit to gross
profit in 2015) and the negative implications of a major shift from corn acres to
soybeans (another $255m impact to income in 2015).
If we exclude these factors and $100m of restructuring charges, then gross profit
increased by around $250m for the seeds and traits business, on an underlying basis.
We think this is impressive in a tough year and points to the business model being far
from broken, as some suggest.
Fig 223: Monsanto shares relative to S&P Index: 2005-15

0.12
Monsanto rel. S&P
0.1
0.08
0.06
0.04
0.02
Nov 05 Nov 06 Nov 07 Nov 08 Nov 09 Nov 10 Nov 11 Nov 12 Nov 13 Nov 14 Nov 15
Monsanto share relative to S&P Indexx
In Fig 224, we show that the company has historically traded on a rolling 12-month
forward P/E of over 20x EPS. Even excluding the soft commodity bubble in 2006-07,
Monsantos long-run P/E averaged 19.3x from 2008 to 2015.
The shares are now trading on P/Es of 17.6x, 15.1x and 12.9x our EPS for fiscal years
2016 to 2018. This is not only lower than for Syngenta, but also falls below the
valuation multiples for many commodity companies, with weak business models and
returns struggling to remain at parity with cost of capital.
Fig 224: Monsanto P/E rolling 12m forward

45x
40x
35x
30x
PE
25x
20x
15x
10x
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
P/E rolling 12m forward Long-term average
If we take the view that the market is prepared to pay over 18x for Syngentas EPS
ending in December 2016, a company with lower returns and much less appealing
cash flow generation, then we can also apply a similar multiple to Monsanto.
It seems likely that there is still an acquisition premium reflected in the Syngenta
valuation, noting that the current price, at CHF352/share is above the level before any
Monsanto approach. Therefore, valuing Monsanto on 18x our August 2017 EPS, at
$6.2/share, implies it is worth $112/share. We believe such an approach is justifiable
with the potential for strong growth. This implied fair value is 20% above the current
share price.
Zero-growth plus pipeline valuation

Using the same valuation approach we have used for Syngenta to work out the
valuation of the base business under a zero-growth scenario, and adding on the
pipeline, implies that there is 19% upside to the share price (Fig 225).
Our methodology is to use a three-year average for operating income and other
components, to reach the zero growth FCF, at $3bn. We have also included a small
adjustment in the equity calculation to reflect the value of Monsantos FieldView asset,
which is yet to generate earnings, but could become a material contributor to gross
profit over the long term.
Also including the dividend yield suggests that the total shareholder return would
reach 21%.
Fig 225: Zero-growth cash flow valuation plus pipeline

Year-end August ($m) Cash flow/calculation
Operating income 3,520
Non-cash adjustment for depreciation 724
Net working capital (33)
Provision cash flows (43)
Maintenance capex (297)
Cash tax (826)
Free cash flow 3,046
Capitalise FCF at WACC 8%
EV zero-growth valuation 38,073
Value of FieldView assets 1,000
EV adjusted for FieldView 39,073
Net debt adjustment (7,506)
Pension debt adjustment (286)
Implied equity valuation 32,281
Shares outstanding in 2016 446
Fair value per share at zero growth 72
Pipeline NPV per share 38
Implied total fair value 111
Share price 93
Implied return 18.6%
Dividend yield 2.1%
Total shareholder return 20.7%
DCF valuation
Our analysis of Monsantos R&D pipeline implies at least a decade of innovations set
to be released and sustain growth. As such, a discounted cash flow valuation provides a
useful sense check to assessing what the shares could be worth if sales expansion and
margins were to be sustained.
We model the companys cash flows using the sales, EBIT and NOPAT derived from
our forecasts for 2016 to 2020, followed by a normalised growth period. The major
assumptions in the DCF are as follows:
x Revenue growth. Beyond our 2020 forecasts, we assume that revenue expands by a
3.2% CAGR, which implies additional revenue of around $0.6bn per year. The
average of the risk-adjusted incremental sales in our Monsanto pipeline model is
$0.6bn between 2020 and 2027, so we think the DCF assumption is defendable.
x EBIT margin. Higher trait sales, mix improvement and resultant operational
gearing from a controlled cost base should increase EBIT margin to 29% by 2020.
However, to account for increased innovation costs and the likely need to invest to
sustain growth, we assume EBIT margin fades to 28% over the normalised period.
x Tax rate. We assume no change to the tax rate as a function of operating income, at
24-25% over the long run.
x D&A and capex. We assume that annual capital expenditure remains at $1bn, so
begins to reduce from 6.4% of sales to 5.7% by 2020. This is because a material
contribution to growth comes from trait sales, which require limited investments.
Depreciation and capex are forecast to trend to 5.0% by 2028.
x Discount rate. We maintain an 8% WACC during the forecasted and normalised

growth periods, together with the terminal calculation.
x Terminal growth. A 2.5% growth rate is used in the terminal cash flow, well below
the levels of growth forecast and implied by our pipeline modelling.
These assumptions yield a DCF-derived fair value of $125/share, which is 34% above
the current share price and 9% above our average fair value.
Fig 226: DCF valuation summary ($m)

Cash flow component Cash flow
Forecast cash flows 12,241
Normalised cash flows 16,586
Terminal cash flows 32,563
Total cash flows 61,389
Net debt adjustment (5,343)
Pension adjustment (336)
Minorities adjustment (15)
Implied market cap 55,695
We show a two-way DCF sensitivity table in Fig 227, to highlight the impact from
changing cost of capital and terminal growth rate.
Fig 227: Fair value sensitivity table to terminal growth and discount rate
-------------------------------------------- Terminal growth rate -------------------------------------------
1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 4.50%
--------------- Discount rate -------------
7.0% 116 122 129 138 149 164 183 209

7.3% 113 119 126 134 143 156 172 195
7.5% 111 116 122 129 138 149 164 183
7.8% 109 113 119 126 134 143 156 172
8.0% 107 111 116 122 129 138 149 164
8.3% 105 109 113 119 126 134 143 156
8.5% 103 107 111 116 122 129 138 149
8.8% 101 105 109 113 119 126 134 143
9.0% 99 103 107 111 116 122 129 138
No value in Fig 227 is lower than the current share price, which suggests to us that
many fear the outlook for growth in agrichemicals is over.
We conclude our Monsanto valuation review with a summary chart (Fig 228). The
implied fair value is $115/share, which we set as our price target. As this is 23% above
the current share price, we launch coverage with a Buy recommendation.
Fig 228: Monsanto valuation summary

Current share price Valuation summary
$93.5/share average: $115/s
DCF
P/E on 2017 EPS
Zero growth + pipeline
EV/IC vs ROCE/WACC
90 95 100 105 110 115 120 125 130

Fair value $ / s
Syngenta financial model and metrics

Fig 229: Syngenta profit and loss statement
Year-end December ($m) 2013 2014 2015E 2016E 2017E 2018E
EAME 4,223 4,547 3,861 3,947 4,027 4,108
North America 3,848 3,582 3,280 3,172 3,086 3,080
Latin America 3,991 4,279 3,702 3,804 3,951 4,099
Asia Pacific 1,935 2,033 1,831 1,913 1,981 2,051
Non-regional 0 0 0 0 0 0
Lawn and garden 691 693 635 635 635 635
Net sales 14,688 15,134 13,309 13,472 13,680 13,974
Cost of goods sold (7,986) (8,192) (7,014) (7,141) (7,289) (7,432)
Gross profit 6,702 6,942 6,295 6,330 6,391 6,542
Gross margin 45.6% 45.9% 47.3% 47.0% 46.7% 46.8%
Marketing costs (2,394) (2,497) (2,199) (2,179) (2,183) (2,190)
R&D (1,376) (1,430) (1,379) (1,379) (1,379) (1,379)
SG&A cost (667) (704) (640) (629) (608) (592)
Restructuring costs (179) (206) (281) (260) (262) (265)
D&A (630) (615) (627) (660) (696) (726)
Depreciation (352) (337) (356) (412) (456) (496)
Amortisation (278) (278) (271) (248) (240) (231)
EBITDA 2,895 2,926 2,704 2,803 2,916 3,107
EBIT 2,265 2,311 2,077 2,143 2,221 2,381
EBIT margin 15.4% 15.3% 15.6% 15.9% 16.2% 17.0%
Special items (179) (206) (281) (260) (262) (265)
Operating income 2,086 2,105 1,796 1,883 1,958 2,116
Net finance costs (200) (217) (268) (249) (302) (343)
Profit before tax 1,934 1,895 1,535 1,641 1,664 1,780
Income tax (285) (273) (261) (246) (266) (303)
Profit from cont ops 1,649 1,622 1,274 1,395 1,397 1,478
Profit to minorities (5) (3) (3) (3) (3) (3)
Net income reported 1,649 1,622 1,274 1,395 1,397 1,478
Net income adjusted 1,785 1,787 1,498 1,607 1,609 1,688
EPS reported ($) 17.88 17.66 13.94 16.10 16.12 17.05
EPS adjusted ($) 19.30 19.42 16.43 18.59 18.61 19.52
Fig 230: Syngenta cash flow statement

Non-cash adjustments 692 602 627 660 696 726
Net working capital (884) 44 (227) (94) (109) (109)
Provisions (199) (254) (250) (250) (250) (250)
Restructuring (37) (26) (120) (100) (100) (50)
Cash tax and other (292) (330) (268) (253) (273) (310)
Net cash from operations 1,214 1,931 1,297 1,604 1,627 1,788
Capital expenditure (625) (600) (592) (599) (609) (622)
Net acquisitions (147) (129) (200) (150) (150) (150)
Cash flow from investing (772) (729) (792) (749) (759) (772)
Dividends paid (921) (1,032) (1,012) (1,052) (1,041) (1,084)
Share buybacks (93) (104) (308) (1,539) 0 0
Debt adjustments (61) 716 400 1,600 0 0
Financing cash flows (39) 0 0 0 0 0
Cash used in financing (1,114) (420) (920) (990) (1,041) (1,084)
FX impact on cash flow (25) (46) 0 0 0 0
Net change in cash (697) 736 (415) (135) (172) (68)
Free cash flow 589 1,331 705 1,005 1,018 1,166
Fig 231: Syngenta balance sheet

Intangible assets 3,381 3,186 2,915 2,667 2,427 2,197
PPE 3,506 3,562 4,118 4,555 4,958 5,284
Other non-current assets 1,983 1,616 1,623 1,630 1,637 1,644
Fixed assets 8,870 8,364 8,656 8,853 9,023 9,125
Inventories 5,576 4,861 4,804 4,891 4,992 5,090
Trade receivables 3,445 3,698 3,646 3,691 3,748 3,828
Prepaid expenses and other 1,423 1,368 1,368 1,368 1,368 1,368
Other current assets 902 1,638 1,223 1,088 915 847
Current assets 11,346 11,565 11,041 11,038 11,024 11,134
Equity (9,491) (8,889) (8,803) (7,619) (7,932) (8,283)
Pensions and provisions (766) (676) (496) (316) (136) 44
Other long-term liabilities (794) (665) (665) (665) (665) (665)
Long-term debt (1,796) (2,976) (3,376) (4,976) (4,976) (4,976)
Non-current liabilities (3,356) (4,317) (4,537) (5,957) (5,777) (5,597)
Trade and accounts payable (3,817) (3,472) (3,136) (3,174) (3,223) (3,292)
Other current liabilities (3,552) (3,251) (3,221) (3,140) (3,113) (3,087)
Current liabilities (7,369) (6,723) (6,357) (6,314) (6,337) (6,379)
Total assets 20,216 19,929 19,697 19,890 20,046 20,259
Total equity and liabilities 20,216 19,929 19,697 19,890 20,046 20,259
Net working capital 5,204 5,087 5,314 5,408 5,517 5,626
Capital employed two-year average 11,748 12,059 12,071 12,524 12,856 13,121
Fig 232: Syngenta divisional EBIT, margins and growth

Divisional EBIT
EAME 1,448 1,499 1,305 1,322 1,369 1,417
North America 1,074 923 1,051 981 927 956
Latin America 1,020 1,095 951 978 1,017 1,066
Asia Pacific 540 564 518 561 590 611
Non-regional (1,936) (1,885) (1,844) (1,818) (1,804) (1,790)
Lawn and garden 119 115 95 121 121 121
Group 2,265 2,311 2,077 2,143 2,221 2,381
Margins
EBITDA 19.7% 19.3% 20.3% 20.8% 21.3% 22.2%
EBIT underlying 15.4% 15.3% 15.6% 15.9% 16.2% 17.0%
EBIT reported 14.2% 13.9% 13.5% 14.0% 14.3% 15.1%
EBIT EAME 34.3% 33.0% 33.8% 33.5% 34.0% 34.5%
EBIT North America 27.9% 25.8% 32.0% 30.9% 30.0% 2.9%
EBIT Latin America 25.6% 25.6% 25.7% 25.7% 25.8% 26.0%
EBIT Asia Pacific 27.9% 27.7% 28.3% 29.3% 29.8% 29.8%
EBIT Lawn and garden 17.2% 16.6% 15.0% 19.0% 19.0% 19.0%
Growth (%)
Revenue 3.4% 3.0% (12.1%) 1.2% 1.5% 2.1%
EAME 6.3% 7.7% (15.1%) 2.2% 2.0% 2.0%
North America (2.1%) (6.9%) (9.7%) (3.2%) (2.7%) (0.2%)
Latin America 7.5% 7.2% (11.9%) 1.8% 3.9% 3.7%
Asia Pacific 5.9% 5.1% (10.5%) 4.5% 3.5% 3.5%
Lawn and garden (7.4%) (0.0%) (8.3%) 0.0% 0.0% 0.0%
EBIT underlying (10.3%) 2.0% (10.1%) 3.2% 3.6% 7.2%
EAME 13.7% 3.5% (12.9%) 1.3% 3.5% 3.5%
North America (21.7%) (14.1%) 13.8% (6.7%) (5.5%) 3.1%
Latin America 1.3% 7.4% (13.1%) 2.8% 4.1% 4.7%
Asia Pacific 6.9% 4.4% (8.1%) 8.2% 5.3% 3.5%
Lawn and garden 52.6% (3.4%) (17.1%) 26.7% 0.0% 0.0%
EPS growth (13.4%) 0.6% (15.4%) 13.1% 0.1% 4.9%
DPS growth 5.3% 10.0% 4.5% 4.3% 4.2% 4.0%
Fig 233: Syngenta financial metrics and valuation

Year-end December (x) 2013 2014 2015E 2016E 2017E 2018E
Share price (CHF) 377 325 352 352 352 352
Share price ($) 406 356 350 350 350 350
Market capitalisation ($m) 37,353 32,666 31,940 30,293 30,293 30,293
Minorities ($m) 13 16 19 22 25 28
Net debt ($m) 2,265 2,423 3,238 4,973 5,146 5,214
Pension debt ($m) 766 676 496 316 136 (44)
Associates ($m) (204) (188) (195) (202) (209) (216)
Enterprise value ($m) 40,193 35,593 35,498 35,403 35,391 35,275
EV/sales 2.7 2.4 2.7 2.6 2.6 2.5

EV/EBITDA 13.9 12.2 13.1 12.6 12.1 11.4
EV/EBIT 17.7 15.4 17.1 16.5 15.9 14.8
EV/FCF 68.2 26.7 50.4 35.2 34.8 30.3
EV/IC 3.3 3.0 2.9 2.8 2.7 2.7
ROCE/WACC 2.0 2.1 1.8 1.9 1.9 1.9
Free cash flow yield 1.6% 4.1% 2.2% 3.3% 3.4% 3.8%
Dividend yield 2.7% 3.4% 3.3% 3.4% 3.6% 3.7%
P/E 21.0 18.3 21.3 18.8 18.8 17.9
P/B 3.9 3.7 3.6 4.0 3.8 3.7
Fig 234: Syngenta returns, debt metrics and capital structure

Year-end December (x) 2013 2014 2015E 2016E 2017E 2018E
Return on equity 17.3% 18.2% 14.4% 18.3% 17.6% 17.8%
ROCE pre tax 19.3% 19.2% 17.2% 17.1% 17.3% 18.1%
ROCE post tax 16.4% 16.4% 14.3% 14.5% 14.5% 15.1%
Return on sales 11.2% 10.7% 9.6% 10.3% 10.2% 10.6%
Coverage
EBIT/net interest 11.3 10.6 12.4 10.8 8.8 8.1
Dividend cover 1.8 1.6 1.2 1.3 1.3 1.3
Net debt/EBITDA 0.8 0.8 1.2 1.8 1.8 1.7
NWC to sales 35% 34% 40% 40% 40% 40%
Capital structure
Net debt/book value of equity 24% 27% 37% 65% 65% 17%
Net debt/EV 6% 7% 9% 14% 15% 15%
WACC 8.1% 7.9% 7.7% 7.7% 7.7% 7.7%
Monsanto financial model and metrics

Fig 235: Monsanto profit and loss statement
Year-end August ($m) 2013 2014 2015 2016E 2017E 2018E
Corn seed and traits 6,596 6,401 5,953 6,148 6,561 7,064
Soybean seed and traits 1,653 2,102 2,276 2,528 2,886 3,171
Cotton seed and traits 695 665 523 555 571 575
Vegetable seeds 821 867 816 810 826 843
Other crops 575 705 675 629 642 655
Agricultural productivity 4,521 5,117 4,758 3,960 4,005 4,005
Net sales 14,861 15,857 15,001 14,630 15,491 16,313
COGS (7,208) (7,283) (6,819) (6,785) (7,173) (7,507)
Gross profit 7,653 8,574 8,182 7,845 8,318 8,807
Gross margin 51.5% 54.1% 54.5% 53.6% 53.7% 54.0%
SG&A (2,550) (2,774) (2,686) (2,713) (2,659) (2,605)
R&D (1,533) (1,725) (1,580) (1,612) (1,644) (1,677)
Restructuring 0 0 (393) (500) 0 0
Total opex (4,083) (4,499) (4,659) (4,824) (4,302) (4,282)
Operating income 3,570 4,075 3,523 3,021 4,015 4,525
Operating margin 24.0% 25.7% 23.5% 20.6% 25.9% 27.7%
Exceptional items (126) (113) 592 500 0 0
EBIT adjusted 3,444 3,962 4,115 3,521 4,015 4,525
Depreciation 615 691 723 705 744 783
EBITDA 4,059 4,653 4,838 4,226 4,759 5,308
Net financing expense (141) (248) (362) (429) (404) (395)
Income tax (915) (1,078) (864) (674) (939) (1,074)
Group tax rate 26.7% 28.2% 27.3% 26.0% 26.0% 26.0%
Net income continuing ops 2,514 2,749 2,297 1,918 2,673 3,056
Discontinued operations 11 13 28 20 0 0
Minority interests (43) (22) (11) (15) (15) (16)
Net income reported 2,482 2,740 2,314 1,923 2,657 3,040
Net income adjusted 2,460 2,747 2,758 2,363 2,657 3,040
Shares outstanding diluted 540 525 481 446 429 420
EPS reported 4.60 5.22 4.81 4.32 6.20 7.24
EPS adjusted 4.56 5.23 5.73 5.30 6.20 7.24
Fig 236: Monsanto cash flow statement

Net income all operations 2,525 2,762 2,325 1,938 2,673 3,056
D&A 615 691 723 705 744 783
Current provisions 127 161 156 100 100 100
Deferred income tax 176 12 (349) 0 0 0
Change in working capital (74) (113) (122) 136 (112) (203)
Deferred sales 50 (163) 32 0 0 0
Pension contributions (75) (64) (27) (50) (50) (50)
Other items (604) (232) 377 (100) (150) (150)
Cash from operating activities 2,740 3,054 3,108 2,728 3,204 3,536
Capex (741) (1,005) (967) (1,000) (1,000) (1,000)
Short-term investments 48 214 (7) 0 0 0
Long-term securities (165) (922) (8) 0 0 0
Acquisitions (88) (415) (78) 0 0 0
Other 169 33 41 0 0 0
Cash from investing activities (777) (2,095) (1,019) (1,000) (1,000) (1,000)
Dividends paid (802) (904) (938) (891) (943) (1,008)
Share repurchase net (838) (6,834) (698) (3,000) (1,000) (1,000)
Change in debt 23 5,498 1,193 0 0 0
Other 132 (19) 13 0 0 0
Cash from financing activities (1,485) (2,259) (430) (3,891) (1,943) (2,008)
Impact of FX on cash flows (85) (1) (325) 0 0 0
Net change in cash 393 (1,301) 1,334 (2,163) 261 528
Free cash flow 1,999 2,049 2,141 1,728 2,204 2,536
Fig 237: Monsanto balance sheet

Cash and cash equivalents 3,668 2,367 3,701 1,538 1,799 2,327
Inventory 2,947 3,597 3,496 3,439 3,636 3,805
Trade receivables 1,715 2,014 1,636 1,643 1,698 1,788
Miscellaneous receivables 748 817 803 803 803 803
Deferred tax assets 579 635 743 743 743 743
Other current assets 420 245 246 246 246 246
Current assets 10,077 9,675 10,625 8,412 8,925 9,712
PPE 4,654 5,082 4,973 5,268 5,525 5,742
Goodwill 3,520 4,319 4,061 4,061 4,061 4,061
Other intangible assets 1,226 1,554 1,332 1,332 1,332 1,332
Non-current deferred tax assets 454 450 277 277 277 277
Other fixed assets 733 901 652 652 652 652
Fixed assets 10,587 12,306 11,295 11,590 11,847 12,064
Total assets 20,664 21,981 21,920 20,003 20,771 21,776
Short-term debt (51) (233) (615) (615) (615) (615)
Accounts payable (995) (1,111) (836) (922) (1,061) (1,117)
Accrued compensation (492) (500) (304) (304) (304) (304)
Accrued marketing programs (1,078) (1,394) (1,492) (1,492) (1,492) (1,492)
Miscellaneous accruals (812) (962) (961) (961) (961) (961)
Deferred sales (517) (438) (370) (370) (370) (370)
Other current liabilities (391) (474) (599) (599) (599) (599)
Current liabilities (4,336) (5,112) (5,177) (5,263) (5,402) (5,458)
Long-term debt (2,061) (7,528) (8,429) (8,429) (8,429) (8,429)
Employee and pension liabilities (357) (345) (336) (286) (236) (186)
Long-term deferred sales (138) (47) (47) (47) (47) (47)
Long-term deferred tax liabilities (469) (509) (340) (340) (340) (340)
Other long-term liabilities (575) (526) (586) (586) (536) (486)
Long-term liabilities (3,600) (8,955) (9,738) (9,688) (9,588) (9,488)
Shareholder equity (12,559) (7,875) (6,990) (5,023) (5,737) (6,768)
Minority interests (169) (39) (15) (30) (45) (61)
Total equity (12,728) (7,914) (7,005) (5,052) (5,782) (6,830)
Net assets 12,728 7,914 7,005 5,052 5,781 6,829
Total liabilities and equity (20,664) (21,981) (21,920) (20,003) (20,772) (21,776)
Net working capital 4,415 5,317 5,099 4,963 5,075 5,278
Capital employed 13,815 16,272 15,465 15,625 15,993 16,413
Average capital employed 13,707 15,044 15,869 15,545 15,809 16,203
Fig 238: Monsanto divisional gross profit, margins and growth

Gross profit
Corn seed and traits 3,929 3,932 3,557 3,791 3,997 4,310
Soybean seed and traits 948 1,364 1,510 1,688 1,892 2,051
Cotton seed and traits 519 461 408 436 440 443
Vegetable seeds 337 401 372 370 380 388
Other crops 350 438 430 410 392 399
Seeds and traits 6,083 6,596 6,277 6,629 7,102 7,590
Agricultural productivity 1,570 1,978 1,905 1,216 1,216 1,216
Group gross profit 7,653 8,574 8,182 7,845 8,318 8,807
Margins
Corn seed and traits 59.6% 61.4% 59.7% 61.7% 60.9% 61.0%
Soybean seed and traits 57.3% 64.9% 66.4% 66.8% 65.6% 64.7%
Cotton seed and traits 74.6% 69.4% 78.0% 78.6% 77.1% 77.0%
Vegetable seeds 41.0% 46.3% 45.6% 45.7% 46.0% 46.0%
Other crops 60.9% 62.1% 63.7% 65.2% 61.0% 61.0%
Seeds and traits 58.8% 61.4% 61.3% 62.1% 61.8% 61.7%
Agricultural productivity 34.7% 38.7% 40.0% 30.7% 30.4% 30.4%
Group gross margin 51.5% 54.1% 54.5% 53.6% 53.7% 54.0%
Operating margin 24.0% 25.7% 23.5% 22.0% 25.9% 27.7%
EBIT margin 23.3% 24.9% 27.4% 24.1% 25.9% 27.7%
Gross profit growth

Corn seed and traits 9.5% 0.1% (9.6%) 6.6% 5.4% 7.8%
Soybean seed and traits (18.3%) 43.9% 10.8% 11.8% 12.1% 8.4%
Cotton seed and traits (16.8%) (11.1%) (11.5%) 6.8% 1.0% 0.6%
Vegetable seeds (11.5%) 19.0% (7.2%) (0.6%) 2.7% 2.0%
Other crops 14.4% 25.1% (1.8%) (4.5%) (4.6%) 2.0%
Seeds and GM traits 0.4% 8.4% (4.8%) 5.6% 7.1% 6.9%
Agricultural productivity 59.2% 26.0% (3.7%) (36.2%) 0.0% 0.0%
Group gross profit 8.6% 12.0% (4.6%) (4.1%) 6.0% 5.9%
Group growth
Sales 10.0% 6.7% (5.4%) (2.5%) 5.9% 5.3%
EBITDA 9.7% 14.6% 4.0% (12.7%) 12.6% 11.5%
Operating income 13.4% 14.1% (13.5%) (14.2%) 32.9% 12.7%
EBIT adjusted 11.9% 15.0% 3.9% (14.4%) 14.0% 12.7%
EPS 23.3% 14.8% 9.5% (7.4%) 16.8% 16.8%
DPS 17.2% 18.7% 6.7% 5.3% 10.0% 9.1%
Fig 239: Monsanto financial metrics and valuation

Valuation (x) 2013 2014 2015 2016E 2017E 2018E
Share price (CHF) 104.0 115.4 108.5 93.5 93.5 93.5
Market capitalisation ($m) 56,139 60,569 52,222 41,645 40,076 39,263
Net debt ($m) (1,556) 5,394 5,343 7,506 7,245 6,717
Pension provision ($m) 357 345 336 286 236 186
Minorities adjustment ($m) 169 39 15 30 45 61
Enterprise value ($m) 55,109 66,347 57,916 49,467 47,601 46,227
EV/sales 3.7 4.2 3.9 3.4 3.1 2.8

EV/EBITDA 13.6 14.3 12.0 11.7 10.0 8.7
EV/EBIT 16.0 16.7 14.1 14.0 11.9 10.2
EV/FCF 27.6 32.4 27.1 28.6 21.6 18.2
EV/IC 4.0 4.4 3.6 3.2 3.0 2.9
ROCE/WACC 2.3 2.5 2.7 2.4 2.6 2.8
Free cash flow yield 3.6% 3.4% 4.1% 4.1% 5.5% 6.5%
Dividend yield 1.4% 1.5% 1.8% 2.1% 2.4% 2.6%
P/B 4.5 7.7 7.5 8.3 7.0 5.8
P/E 22.8 22.0 18.9 17.6 15.1 12.9
P/FCF 28.1 29.6 24.4 24.1 18.2 15.5
Fig 240: Monsanto returns, debt metrics and capital structure

(%) 2013 2014 2015 2016E 2017E 2018E
Return on equity 19.5% 34.6% 33.0% 38.1% 46.0% 44.5%
ROCE pre tax 25.2% 26.3% 25.9% 22.7% 25.4% 27.9%
ROCE post tax 19.4% 19.9% 20.5% 18.3% 19.5% 21.3%
WACC 8.3% 7.9% 7.7% 7.6% 7.6% 7.5%
Asset turnover 1.1 1.1 0.9 0.9 1.0 1.0
Return on sales 16.7% 17.3% 15.4% 13.1% 17.2% 18.6%
Debt metrics and coverage

Net debt/(cash) (1,556) 5,394 5,343 7,506 7,245 6,717
EBIT/net interest 20.0 16.0 9.5 7.2 9.2 10.4
Net debt/EBITDA (0.4) 1.2 1.1 1.8 1.5 1.3
Net debt/EBITDA RBN def * (0.3) 1.2 1.2 1.8 1.6 1.3
Dividend cover (EPS/DPS) 3.1 2.9 2.5 2.2 2.8 3.0
Dividend cover (Divi CF/FCF) 11.4% 11.7% 11.9% 14.7% 11.5% 10.0%
Capital structure
Net debt/EV (2.8%) 8.1% 9.2% 15.2% 15.2% 14.5%
* Redburn net debt includes pension debt
Appendix 1: PA technical definitions

Field mapping
What is it? A map of farmland overlaid with geo-referenced data points
pertaining to plant health, disease, nutrient levels, etc. Field
mapping forms a key input for various other processes in
precision agriculture.
How does it work? Drones or satellites image the field and by analysing the spectrum
of the electromagnetic waves reflected from the plants, various
properties can be determined. For example, the Normalised
Difference Vegetation Index is a simple indicator of live green
vegetation. Plants absorb a high proportion of light with energy
within the bounds useful to photosynthesis and are highly
reflective to infrared and near-infrared light to prevent
overheating. Thus, by analysing the proportions of the various
wavelengths, the amount of plant growth can be analysed. Each
data point is then tagged with a GPS location.
Soil conductivity mapping/soil sampling

What is it? A type of field mapping. The electrical conductivity of the arable
land is measured and can then be used to determine various
physical and chemical properties of the soil. Conductivity is
determined by water content, salinity level, cation exchange
capacity, top soil depth, and various other factors important to
plant growth. Soil conductivity mapping forms a key input for
various other processes in precision agriculture. Soil sampling is a
more direct approach to testing direct components of the soil.
How does it work? Unlike most field mapping, the equipment needs to be close to the
ground, often towed by vehicle. Conductivity is measured either
directly by electrodes running across the surface or by induction
of electric field and measurement of its strength.
Input selection tools/yield optimisation

What is it? Predictive models of crop yield are created by analysing large data
sets. These are then used to optimise inputs on a field at a
specified resolution.
How does it work? Agricultural companies have gathered enormous amounts of data
on the variables that impact yield, including genetics, soil type,
fertiliser application, climate, etc. These are then used to build
models into which local data from field mapping can be entered
to determine the optimal set of inputs to maximise yield.
Auto-guidance systems
What is it? Auto-guidance systems have no control over the machinery but
alert the operator if he is driving off the optimal course, thereby
preventing overlap and reducing missed areas.
How does it work? They tend to be known as lightbar systems, as a result of the row
of LEDs that sit on the dashboard indicating how much further
right or left the operator needs to steer. The system is set up by
driving a lap of the field to define a boundary, logged via GPS. It
then tracks the vehicle and suggests corrections to steering.
Auto-steer systems
What is it? Autonomous farm machinery. This covers a broad range of
equipment, both land- and air-based. Drones can be pre-
programmed with flight plans; similarly, tractors can be
programmed with a route, and will follow it using GPS. Both fuel
and labour costs can be significantly reduced using these systems.
How does it work? Routes are either entered manually or algorithms determine
optimal routes. The machinery then follows the route using a
combination of GPS and gyroscopic sensors.
Variable rate systems planting and spraying

What is it? Systems that vary the rate of application of seeds, fertilisers or
pesticides to maximise operating profit per acre.
How does it work? Systems either take field maps as inputs and then dispense the
materials accordingly or use sensing equipment to make rate
decisions in real time. By ensuring the optimal amount of product
is dispensed on each area, opex can be greatly reduced.
Appendix 2: Soybean demand versus supply dynamics

Appendix 2: Soybean demand versus
supply dynamics
Historic trends for the major components of soybean demand and supply are shown
in this appendix. We also present a detailed demand versus supply model in Fig 245.
As has been the case for corn, yields for soybeans have been at record levels over the
past few years. USDA estimates assume no mean reversion (Fig 241).
Fig 241: US soybean yield: 2000-16E

50
45
Yield / bu acre
Long-term average
40
35
30
2000 2002 2004 2006 2008 2010 2012 2014 2016E
Despite higher yields, rising demand and strong exports into Asia have kept stocks at
manageable levels in recent years. However, lower sales from the US to China are
expected to contribute to a fall in overseas demand in 2016 (Fig 242).
Fig 242: US soybean exports: 2000-16E

2,100
1,600
Exports / m bu
1,100
600
100
2000 2002 2004 2006 2008 2010 2012 2014 2016E
Growth in soybean consumption has mainly come from exports (Fig 243). Between
2000 and 2014, sales to overseas markets increased by 7.4% compound growth,
whereas use in seed applications and crushing (to extract the oil) has hardly changed.
Exports have been rising, especially to China, for use in animal feed.
Appendix 2: Soybean demand versus supply dynamics
Fig 243: Soybean demand split by end use: 2000-16E

4,000
3,000
Use / m bu
2,000
1,000
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E
Crushings Seed Residual Exports

The consequence of the high yield and soybean production expected for 2016,
combined with reduced export opportunities, is for a significant pick-up for the
stocks-to-use ratio (Fig 244).
Fig 244: Soybean stocks-to-use ratio: 2000-16E

20%
15%
Stocks / Use
10%
5%
0%
2000 2002 2004 2006 2008 2010 2012 2014 2016E
US soybean stocks / use Long-term average
In Fig 245, we detail the historic drivers of supply and demand since 2000.
Lower soybean prices are forecast for 2016, given the return to surplus soybean
inventory.
Fig 245: Soybean demand vs supply components: 2000-16E
220
Units 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E
Acres planted m acre 73.7 74.3 74.1 74.0 73.4 75.2 72.0 75.5 64.7 75.7 77.5 77.4 75.0 77.2 76.8 83.3 83.2
Acres harvested m acre 72.4 72.4 73.0 72.5 72.5 74.0 71.3 74.4 64.1 74.7 76.4 76.6 73.8 76.1 76.3 82.6 82.4
% harvested % 98.2% 97.4% 98.5% 98.0% 98.8% 98.4% 99.0% 98.5% 99.1% 98.7% 98.6% 99.0% 98.4% 98.6% 99.3% 99.2% 99.0%
Yield bu/ac 36.6 38.1 39.6 38.0 33.9 42.2 43.0 42.9 41.7 39.7 44.0 43.5 41.9 40.0 44.0 47.5 47.2
historic avg bu/ac 40.6 40.6 40.6 40.6 40.6 40.6 40.6 40.6 40.6 40.6 40.6 40.6 40.6 40.6 40.6 40.6 40.6
Open stocks m bu 348 289 248 208 179 113 258 449 574 205 138 151 242 196 141 92 191
Production m bu 2,654 2,758 2,891 2,756 2,454 3,124 3,063 3,197 2,677 2,967 3,359 3,329 3,094 3,042 3,358 3,927 3,888
Imports m bu 4 4 2 5 6 6 3 9 10 13 15 14 16 41 72 33 30
Total supply m bu 3,006 3,051 3,141 2,969 2,639 3,243 3,324 3,655 3,261 3,185 3,512 3,494 3,352 3,279 3,570 4,052 4,109
Crushings m bu 1,578 1,640 1,700 1,615 1,530 1,696 1,739 1,808 1,803 1,662 1,752 1,648 1,703 1,689 1,734 1,875 1,880
Seed m bu 90 91 90 89 92 88 93 80 89 90 90 87 90 89 97 97 92
Residual m bu 74 78 79 42 17 104 101 77 5 16 20 16 (2) 16 9 46 38
Domestic use m bu 1,742 1,808 1,869 1,746 1,639 1,887 1,934 1,965 1,897 1,768 1,862 1,751 1,791 1,794 1,840 2,018 2,010
Exports m bu 975 996 1,064 1,044 887 1,097 940 1,116 1,159 1,279 1,499 1,501 1,365 1,317 1,638 1,843 1,675
Total use m bu 2,717 2,804 2,933 2,790 2,526 2,984 2,875 3,081 3,056 3,047 3,361 3,252 3,156 3,111 3,478 3,861 3,685
Ending stocks m bu 289 248 208 179 113 258 449 574 205 138 151 242 196 168 92 191 423
Stocks/use % 10.6% 8.8% 7.1% 6.4% 4.5% 8.6% 15.6% 18.6% 6.7% 4.5% 4.5% 7.4% 6.2% 5.4% 2.6% 4.9% 11.5%
historic avg % 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8%
Realized farm price $/bu 4.6 4.5 4.4 5.5 7.3 5.7 5.7 6.4 10.1 10.0 9.6 11.3 12.5 14.4 13.0 10.1 9.2
Important note: see regulatory disclosures on page 221 of this report.

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Monsanto & Syngenta
The Grapes of Wrath
Tony Jones Since 1910, the search for yield in agriculture

Tony read Pure Chemistry at
Leeds University. Prior to has seen three distinct phases. 1910-60 was
joining Redburn, he worked at the age of mechanisation and displacement
Kodak and Hoechst and in
operational management at
of labour; between 1960 and 2000, scientific
ICI and Croda. Tony holds an advance brought fertilisers, hybrid seeds and
MBA from London Business crop protection sprays; since 2000, GM crops
School.
have helped to reinvigorate farm economics.
In his modern-day Grapes of Wrath, Tony

T +44 20 7000 2128
M +44 7912 649 946 Jones argues that agriculture, at a distressed
tony.jones@redburn.com point in the commodity cycle, is entering a
fourth phase. Given increased resistance to
crop protection compounds, patent expiries
and, for Syngenta, a relatively modest
London
pipeline of new products, farm suppliers are
10 Aldermanbury, London, EC2V 7RF exploring disruptive technologies such as
+44 20 7000 2020 enhanced GM seeds, precision agriculture
contactlondon@redburn.com and biological pesticides.
New York This is a revolutionary moment for farmers,

565 Fifth Avenue, 26th Floor, New York, NY 10017 suppliers and managements. The crop
+1 212 803 7300 protection products responsible for supplier
contactnewyork@redburn.com growth over the last half-century are
competing against a new generation of
San Francisco technologies. These, like Steinbecks grapes,
44 Montgomery Street, Suite 3730, San Francisco, CA 94104 are growing heavy, growing heavy for the
+1 415 464 6889
vintage.
contactsanfrancisco@redburn.com
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Monsanto

TONY JONES CHEMICALS 12 NOVEMBER 2015

+44 20 7000 2128

+44 20 7000 2133

+44 20 7000 2058

Monsanto & Syngenta Monsanto (Buy, New)

The Grapes of Wrath Next news:

should be more resilient and we launch Monsanto as a Buy. With

Seeds and traits Fertilizer Crop protection

Important note: see regulatory disclosures on page 221 of this report. 3

Monsanto Buy (New)

Sales by product (2015) Gross profit by product (2015)

Corn seed and traits Corn seed and traits

Cotton seed and traits Cotton seed and traits

Vegetable seeds 5% Vegetable seeds

Source: Redburn, company Source: Redburn, company

Monsanto S&P 500 1 STDV Red. Cons.

Summary financials and valuation

4 Important note: see regulatory disclosures on page 221 of this report.

Sales by region (2014) Gross profit by region (2014)

North America North America

Latin America 27% Latin America

Source: Redburn, company Source: Redburn, company

1 STDV Red. Cons.

Summary financials and valuation (including EPS changes)

Important note: see regulatory disclosures on page 221 of this report. 5

02/ Pressures on growth.............................................................................................. 33

03/ A new generation of technology choices .............................................................. 57

04/ The fourth agricultural phase .............................................................................. 82

05/ The last dance: M&A prospects .......................................................................... 108

06/ Pipeline analysis .................................................................................................. 118

07/ Syngenta forecasts and valuation ....................................................................... 162

08/ Monsanto forecasts and valuation ..................................................................... 183

6 Important note: see regulatory disclosures on page 221 of this report.

Syngenta financial model and metrics ..................................................................... 207

Important note: see regulatory disclosures on page 221 of this report. 7

Fig 2: US farm cost component bridge: 1960-2000

8 Important note: see regulatory disclosures on page 221 of this report.

Fig 3: US farm cost component bridge: 2000-15

95% 2.5% -1.4% 3.0% -2.0%

Important note: see regulatory disclosures on page 221 of this report. 9

Do farmers reduce inputs when farm revenue drops?

0.18 0.17 0.15

10 Important note: see regulatory disclosures on page 221 of this report.

Fig 5: Corn price vs US stocks-to-use ratio: 2000-16E

expected scenario for 2016

We also forecast crop protection spending will decrease 2% to $27/acre, as marginal

Important note: see regulatory disclosures on page 221 of this report. 11

accounting for the remainder. We show Herfindahl-Hirschman indices (HHI) for

Fig 6: Herfindahl-Hirschman Index by farming industry participant

Source: Redburn, companies, Phillips McDougall, CRU, FAO Stat

Industry trends set to reshape farming decisions

Resistancy to old crop protection chemistry

12 Important note: see regulatory disclosures on page 221 of this report.

Resistance arises when a pesticides mode of action (MOA) is no longer efficacious in

Greater seed and trait complexity

Precision agriculture to gather momentum

This is potentially revolutionary and the infrastructure is expanding rapidly. One

It is already offering a three-tiered product, FieldView, which allows growers to obtain

Important note: see regulatory disclosures on page 221 of this report. 13

RNA interference (RNAi)

Secondly, sprayable RNAi-based crop protection products are under development.

Biologicals manufactured from bacterial fermentation represent the largest segment

14 Important note: see regulatory disclosures on page 221 of this report.