Seeds Of Growth For Monsanto?

June 25, 2009

Monsanto's third-quarter earnings just came out. Are they an alternative for investors looking to go pick-and-shovel?
  • Roundup casualties
  • Seed sale volumes soaring
  • A different path to ags


We talk about ag futures and ETFs, we talk about investing in the fertilizer market, but there is another aspect to the supply chain in the agriculture market we haven't touched on lately - the seed business. Unlike, say, gold and oil, where simply buying one or two companies gets you huge exposure to the entire supply chain, with ags, the chain is a lot more disjointed.

Traditionally farmers would allow their crops to go to seed, and then collect and clean the seeds for planting in the spring - capitalizing on the circle of life. But because of the technological changes in seed strains (i.e., genetic modifications), that isn't an option - some GMO crops don't yield usable seeds, and of those that do, buyers aren't allowed to harvest those seeds and reuse them. It's patent protection, and right or wrong, this means that Monsanto has a built-in market each spring.

Monsanto is the largest seed company in the market, controlling large shares of the market in the U.S., Brazil and Argentina, as well as around the world. And while the second quarter traditionally is best at forecasting how the company will perform over the entire year (due to the majority of corn and soy seed sales occurring during those three months), the third quarter does supply good information on where the company is going - especially this quarter.



First, the news the company focused on during its earnings call yesterday: The company that created the herbicide "Roundup," and subsequent "Roundup Ready" seed lines, has announced a restructuring of its Roundup business. Monsanto is putting all of its Roundup product lines into one group in response to "recent market activity" - said activity being declining sales. Roundup has lost market share as low-priced competitors have come on fast and furiously since the U.S. patent on the chemical formulation expired in 2000 - Roundup has become a kind of generic drug. Subsequently, the generic industrial price of the chemical itself (not an actual gallon of goo sold to a farmer) dropped from $10 a kilo last August to $3 a kilo currently, which the company is expecting to be the new norm.

By concentrating the product line into a single group, Monsanto hopes to contain costs and milk whatever profits it can to fund R&D elsewhere in the company, with a goal of $1 billion in profits by 2012. That's not a "stretch" goal in the traditional sense - it's half of what the company is expecting for 2009. This is just an attempt to stem the bleeding. Exactly what price/value/volume equation management will be aiming for is still being worked out, but the company probably will not be holding farmers to the same $20-a-gallon price that has been losing them so much market share."

Additionally, Monsanto is forecasting that by 2012, the profit from Roundup will only account for 15% of the company's gross profit, as it intends to concentrate on the seed business, down from a historical 30-40%. That's a big change from the emphasis on chemicals in the beginning of the company's history. They're not getting out of the business though - Carl Casale, EVP of Strategy and Operations expects that demand for Roundup will continue to grow - but the growth is really just in single digits in the coming years.


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