Monsanto (MON) reaffirmed fiscal 2009 earnings guidance, but said earnings will fall in fiscal 2010 as the large supply generic herbicides is forcing the company to slash prices of Roundup weed killer. Weed killers generated 32% of 2008 gross profit, but will account for only 11% in 2010.
As I explained in late June, Monsanto’s premium price for Roundup couldn’t possibly be sustainable with such a large supply of generic brands on the market. Monsanto estimated in June that generic inventories would finish the year at a level equal to 40% of next year’s consumption, which puts extreme pricing pressure on both generic and branded products. Further pressuring Roundup’s price is the fact that distributors are slashing prices in order to move this excess inventory and generate cash.
I think there is a very good possibility that Monsanto divests the Roundup business after making it a separate unit and completing restructuring.
On the bright side, the seed and genomics franchise appears to continue gaining market share and trait penetration. Despite near-term concerns about Roundup, there is little reason to believe that the seed business won’t continue its break-neck growth and ultimately increase the bottom line. Genetically modiefied seed is already the standard in corn and soy in the U.S., while Brazil and Argentina are driving a new wave of growth. Don’t be surprised if China, Russia, and Easter Europe provide the next wave.
MON shares finished -5.01%
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Peter J. Lazaroff, Investment Analyst
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