Monsanto Stands To Gain From Ukraine Crisis

Summary

• Monsanto will complete a $140 million seed facility in Ukraine this year.
• Ukraine has the eighth-largest agricultural area in use. It is by far the largest in Europe, excluding Russia.
• Economic circumstances that emerged since the Ukraine crisis will push it to move towards more commercial farming meant to produce for export, providing Monsanto with a great opportunity.

As the crisis in Ukraine continued to drag on last year on the ground with violent conflict, as well as a deterioration of the economic situation due to other effects, such as declining trade with Russia, the IMF came to the conclusion that the initial bailout agreed to in April for $27 billion will not be enough. It identified a gap of $15 billion in Ukraine's finances. As a result, we are now looking at a new agreement being hammered out, which expands the size of the IMF-led bailout to $40 billion.

I will cut right to the chase and explain why this situation is likely to become very beneficial to Monsanto (NYSE:MON). Ukraine has 32 million hectares (79 million acres) of farmland, which makes it by far the most important potential agricultural producer in Europe, west of Russia. Ukraine is in eighth place globally in terms of farmland currently in use. The use of it, however, is very different compared to most other major global agricultural players. There are many small family plots, which are operated at more or less subsistence levels rather than for commercial purposes. In 1999, six million rural residents were allotted 4.2 hectare (10 acre) plots. A large portion of land was also left in government hands. Both these categories are now likely to go up for sale. The government as well as individual families are being squeezed hard by the economic hardship Ukraine is facing today, therefore both are likely to be forced to sell whatever they have left of some significant value.

It is unclear at the moment to what extent farmland is being purchased or leased by big farming companies. Ukrainian law currently forbids the sale of farmland to foreign entities, but that will likely change as the IMF will bring with it the wish list of its contributors. There are many reports of companies positioning themselves for a change in the restrictive law by signing long-term lease agreements. Local commercial farmers will also get in on the action, as they will look to expand their holdings.

The government will have no choice but to facilitate this change. It needs the money it can get from the sale of the land it still has in possession. It also needs to see an increase in the export of agricultural products, in order to make up for the collapsing trade with Russia. Ukraine's FX currency reserves have been declining at a rate of about $1.5-2 billion per month in the past few months. The IMF-led bailout will help shore up its reserve situation temporarily, but the bailout program expects Ukraine to become self-reliant again within a few years. Earning foreign cash through enhancing exports has to be one of the pillars of stability, and at the moment, there seem to be few other choices for massive export aside from agricultural products.

Individual families sitting on small plots of land will, in many cases, be forced to sell by the harsh circumstances they are experiencing. Some families may chose the opposite and use the land to supplement their meager earnings, assuming they can secure any wage income at all. Others will sell in order to cover debts or make up for their income gaps in the short-to-medium term. As of this month, the net average monthly income in Ukraine is about $100. The minimum wage is down to $40/month. In 2013, the net average wage was about $350/month and the minimum wage was about $150/month. For many families in Ukraine, there will now be no other choice but to move to another country. Immigration means that they need to liquidate their assets, which, in the case of many households, includes a small plot of farmland.

Consolidation of farmland into fewer and larger farms will become inevitable. Monsanto is in a great position to take advantage of any large-scale commercial farming uptick in Ukraine, because it had already decided to invest in a $140 million conventional seed plant in 2013, which is scheduled to come on-line this year. Commercial farmers will be likely to look for more uniformity of product in order to be able to access the global market. More farmland will be dedicated to cash crops. Monsanto can provide for this need by selling seeds that are increasingly standard.

I think there will also be many opportunities to further expand the company's presence in Ukraine. It can expand its current facility, or purchase new properties as they go on sale. If Ukraine lifts its ban on GM crops, it will be in a great position to expand into that as well.

At the same time, we should mention that there are some dangers to its investments. None of this will be profitable if Ukraine fails as a state. Given that it is in the grips of a civil war, and there are militias only loosely tied to the government fighting on its side, which have strong connections to extremist movements, and also given Ukraine's continued economic slide, a situation of complete collapse is not out of question. An intensification of the proxy war between the US and Russia, with both sides intensifying their support for their side, would also endanger Monsanto's activities there. The odds of an all-out war or a complete collapse of the Ukrainian state are not, in my opinion, all that high as things stand right now, but are not impossible. Default and a long period of extreme poverty is the more likely outcome of the crisis. Emerging from this crisis will most likely involve Ukraine making use of its most valuable resource, and Monsanto is in a great position to be part of it and profit from it.