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Monsanto Company (MON)Stock (Agricultural Chemicals Industry, Agriculture Industry)
 As the most prominent company in the "frankenfoods" industry, Monsanto has come under fire from various environmental groups for a long time. However, recent action against its Roundup-Ready line of herbicide-proof crop seeds could jeopardize Monsanto's position as number one in the biotechnology/seeds industry. A trial before the EU has also hurt Monsanto's public image and marketability. Because of its heavy research into genetically modified corn, Monsanto's fate is intimately connected with that of ethanol, a corn-based alternative fuel. A recent rising demand for corn, both from ethanol refineries and from other sources, has boosted Monsanto's sales. Despite its efforts to expand in other directions (soybeans and cotton, for example), Monsanto remains heavily reliant on its corn seed industry. The company has remained steady during 2008-its seeds and traits sales increased 27% while its agricultural productivity sales climbed by 43%, leading to a net 35% increase in company sales during Q3 2008.[3] Furthermore, the company's operating margin reached 17.6% during the quarter, up 5.8% since 2005.[3]
[edit] Business Overview Founded in 1901, the original Monsanto Company began producing agricultural chemicals named with a Western theme in 1945. The series eventually culminated in the commercialization of Roundup, flagship of Monsanto's Agricultural Productivity division and still one of the most commonly used herbicides today. Monsanto remained at the forefront of agronomics, the science of agriculture, as the first company to market genetically engineered seeds for large-acre crops, and today continues to channel much of its resources into research and development of new biotechnology. [edit] Business SegmentsMonsanto's products fall into two main categories: [edit] Agricultural Productivity (42% of Revenue, 29.7% of Gross Profit)"Ag Productivity" includes a variety of herbicides and lawn/turf treatments as well as animal supplements and selectively bred/genetically modified swine. In 2007, agricultural productivity sales increased 9% worldwide, reaching $3.6 billion.[4] Additionally, sales of herbicices and crop protection products increased an additional 43% in Q3 2008.[3]
[edit] Seeds and Genomics (58% of Revenue, 70.3% of Gross Profit)Monsanto is a leading marketer of genetically modified corn, cotton, soybean, and canola seeds. Through its recent acquisition of Seminis, the world's largest grower, developer, and marketer of fruit and vegetable seeds, Monsanto has also gained substantial holdings in the market for genetically modified tomatoes/peppers and melons/watermelons. In 2007, seeds and genomics sales increased 25%, reaching $4.96 billion-this growth was primarily attributed to the rise in demand of corn and resulting 57% increase in sales of corn seeds.[2] In Q3 2008, sales increased an additional 27%.[3] Monsanto's seeds are primarily sold under the Asgrow and DEKALB brands, in the following varieties:
Today, Monsanto's Roundup products remain important to the annual profit margin, but the company is also increasing investment in its Seeds and Genomics product category, banking much of its future profitability on the anticipated success of ethanol and the resulting demand for high-yield, high-starch corn.
Source: Goldman Sachs [edit] Trends and Forces[edit] Exposure to agricultural industry's overall healthBecause of Monsanto's exclusive focus on agronomics, any factor which affects the industry will in turn impact Monsanto's performance. Crop prices, weather patterns, harvest strength, and pest epidemics all influence farmers' buying capacity for Monsanto's products. Planting patterns are also important, especially because Monsanto derives much more profit from some crop seeds than from others.
Trends in the agricultural industry's preferences about crops and brands are also important. Farmers concerned about the marketability of their genetically modified crops may turn away from Monsanto's offerings. Brand loyalty also plays a large role because it is often difficult to draw a hard-facts comparison between two companies' similar seed offerings. For instance, farmers sometimes can't be certain that Company A's seed is more resistant to certain corn pests than Company B's similar offering, targeting same target pests. [edit] When Soy/Corn Farmers Strike, MON WinsConsider the soybean strike occurring in Argentina currently. Argentine President Christina Fernandez has recognized the growth in the global soybean market, and as one of the largest producers of soybeans in the world, President Fernandez looked to her own markets to push along the Argentine economy. Early in 2008, President Fernandez raised the export tax on soybeans from 35% to 46% (a 11% raise) while raising the corn and wheat both only 1% in comparison. [5] As the soybean export market in Argentina has slammed to a halt, the global demand most certainly has not decreased and soybean prices jumped $ 0.40 a bushel in response to news of the Argentine strike. [6] In this example, State risk has caused uncertainty in supply of soybeans, while the strike itself has not caused a change in global demand. As non-Argentine farmers scramble to benefit from the higher soybean market prices, they run to companies such as Monsanto for seeds. [edit] Research and development (R&D)Monsanto spends hugely on developing its product pipeline--almost US$ 2 million a day. Recently, it has even spotlighted its Research and Development emphasis by taking an 18-wheel "Mobile Technology Unit" on the road. (The drive around the country tries to bring the experience of visiting Monsanto's Chesterfield lab to the growers whose loyalty Monsanto hopes to win.) [edit] "Stacked-trait" seeds boost profitsMonsanto's cutting-edge biotechnology is its greatest advantage over its competitors. DuPont and Syngenta AG (SYT) are just now beginning to market triple-stacked seeds (seeds combining or "stacking" three different and desired traits--e.g., insect resistance, drought resistance, and increased starch content). For the 2007 planting year, Monsanto has already sold 10 million acres of triple-stacked seed, capturing significant acreage from competitors in the process. According to Monsanto, this extra acreage was an important part of this year's large (2%) gain in market share for US corn seed. Biotech seed companies also derive greater profit from stacked-trait seeds than from unstacked or less stacked seeds: stacked-trait seeds are not more expensive to produce, but their much higher selling price results in greater net profit. Monsanto also derives some profit from sub-licensing its technological discoveries and/or providing source germplasm (basic DNA) and seed stock for other seed companies to use and manipulate. Maintenance of its technological primacy is vital for the retention of this market. [edit] What's in Monsanto's R&D Future:
[edit] Success tied to ethanol Monsanto has a higher stake in corn-based ethanol's success than any of its competitors, since it has both a 20% market share in US corn seed and a heavy focus on developing corn seeds. A clean-burning alternative fuel, ethanol has experienced strong recent demand--due in part to several US government initiatives to increase the use of renewable energy. For ethanol to be a viable large-scale US fuel source, massive amounts of corn starch would be required for refinement--more than is currently produced. Thus, the ethanol market will favor corn seeds modified for higher yield and starch content. Monsanto stands to gain from this, with its effective monopoly on triple-stacked corn until 2008. And by then, the company hopes to have introduced its quadruple-stacked seed, combining insect/disease resistance with higher-yield and higher-starch qualities. The quadruple-stack will also raise the corn's lysine content, increasing the nutritional value of the ethanol refinery byproduct Distiller's Dry Grain, used for chicken and livestock feed. Since livestock feed companies would pay refiners more for this enriched grain, farmers using quadruple-stack can charge much higher prices for their corn--and pay higher prices to Monsanto for the seeds. In fact, Monsanto Co. (MON), on 25th August 2008, is selling off its rights to a synthetic milk-producing hormone in order to focus its attention more closely on its core business of developing genetically modified seeds and pesticides. U.S. pharmaceutical company Eli Lilly and Company (LLY) will pay Monsanto $300 million for Posilac, the brand name for recombinant bovine somatotropin or rBST. The deal includes the global sale rights and a Georgia-based manufacturing plant. Growing consumer opposition to the use of hormones in dairy products has been swelling over recent years. Sales of such products are already outlawed in Canada and parts of the European Union. In the United States, leading grocer The Kroger Co. (KR), coffee-chain Starbucks Corp. (SBUX) and the largest domestic milk processor Dean Foods Co. (DF) all refuse to use milk that contains rBST. [edit] Public wary of corn-ethanolEthanol's success is by no means guaranteed. An influx of cheap oil could drastically reduce government and public support for this still-budding industry, and a spike in corn prices above $6/bushel could spell doom. Also, some experts still hold the (largely discredited) view that ethanol costs more energy to produce than it generates. Many others object to the use of so much of the world's food-producing acreage for relatively inefficient fuel production. And increased use of ethanol would require an extensive revamping of existing gasoline infrastructure, from car engines to pipelines. [edit] Competing biofuelsMonsanto has invested primarily in areas that are dependent on the success of corn-based ethanol. However, other biofuels are also competing with corn-based ethanol, including bio-butanol and cellulosic ethanol. Bio-butanol has a higher energy content than ethanol and is compatible with the existing gasoline infrastructure. In addition, ethanol processing plants can be easily refitted to refine bio-butanol. A switch to bio-butanol could be disastrous for Monsanto, since it targets different crops and traits than the ethanol market does. Monsanto's primary competitor DuPont also has significant investment in bio-butanol, which would mean further losses to Monsanto in the form of market share. Cellulosic ethanol is derived from cellulose-containing biomass such as household food waste, corn husks, grass, and tree fiber. Manufacturing cellulosic ethanol does not require as much food-producing acreage to produce as corn-based ethanol, which may address one of the concerns about corn-based ethanol. If cellulosic ethanol succeeds, it too would be a severe challenge for Monsanto's future as the industry leader. As with bio-butanol, Monsanto's competitor DuPont also has an investment in cellulosic ethanol. [edit] Risk: tighter environmental/health legislationEverything that Monsanto produces must first be approved by countries for growing and exporting/importing. Lax government policies and quick approval periods are a big plus for the company, while tighter restrictions against genetically modified foods significantly cut earnings. Government support for alternative fuels can indirectly impact Monsanto by supporting or weakening the ethanol effort. Litigation can also have significant impacts on the company, forcing it either to settle on unprofitable terms, or to engage in long, drawn-out battles that damage its public reputation. (Monsanto is currently embroiled in one such dispute with France over allegedly illegal imports of genetically modified corn.) Finally, Monsanto relies on government cooperation in ensuring that the company is paid for its products--in Argentina, for instance, government refusal to recognize the patent on Roundup-Ready seeds results in massive earnings losses from "pirated" seeds and seed technology. [edit] CompetitionAlthough Monsanto is in many ways the industry leader, it faces stiff and rising competition from chemicals giant DuPont and seed and agrochemical company Syngenta AG (SYT). DuPont could prove to be an especially significant threat, with its comparable market share but dramatically different approach to the future alternative fuels market. By casting its R&D "net" as widely as possible, DuPont has set itself up to take the lead in seed sales and technology if corn-based ethanol fails.
Source: Phillips McDougal
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