By Ian Gilson, CFA
S&W Seed (SANW) has signed agreements with Monsanto and Forage Genetics (part of Land O'Lakes) to produce and sell Genetically Modified Organism alfalfa seeds. GMO based crops have a strong presence in US markets but are banned in many international markets so the modified seeds will be sold in the US. There are very few providers of Roundup Ready alfalfa and the world-wide market is growing rapidly.
GMO based alfalfa sells at a significant premium to other proprietary alfalfa seeds, often as much as a 50% premium. The cost of growing GMO alfalfa is not significantly different than the cost of growing S&W Seed's propriety alfalfa. There is a royalty payment to Monsanto but gross profit margins are still much higher.
GMO based crops are not allowed in the Imperial Valley where the company has close to 70% of its acreage owned or under contract (including the recent acquisitions), so the new seeds will be grown in the San Joaquin Valley.
The seeds will be modified in fiscal 2013 and a test crop grown. Assuming the seeds incorporate the new gene the acreage will be expanded to include seed for sale and internal use in the fiscal 2014 growing season. At this point we do not know the number of acres that will be used or the yield per acre for the new seeds. Assuming the GMO seeds will be proprietary non-dormant species the market would be in the south western US where S&W Seed has existing customers. Growing GMO alfalfa on1,000 acres in the Central Valley has the potential of generating over $5 million of revenue and $2 million in net income.
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