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Monsanto Is Getting a Bit Big for Its Britches

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Monsanto (NYSE: MON  ) announced recently that it will raise prices of its DeKalb brand of corn seeds by 5% to 10% next year, citing increased costs and strong demand. What makes this odd is that the company lowered prices just a year ago when it began losing market share to DuPont (NYSE: DD  ) . At the time, CEO Hugh Grant (no, not the actor) was confident that price cuts would get customers back and spur the company on to 15% profit gains this year. Now, management thinks price increases will get the company that 15%. The question is, will it work, and whom will it affect?

Let's start with the second question. The obvious answer is that farmers will get hurt, but a casual glance at a corn-price chart over the past year shows that they can pretty easily recoup such a modest increase in costs. Of course, another casual glance at an Iowa weather report reveals that times aren't really that great after all for farmers in the Corn Belt. Whatever the price of corn, it's hard to recoup the costs of production if yields are too low.

However, part of Monsanto's rationale for raising prices is that the seeds have been revamped with new genetic traits that it thinks will help increase yields. If they do, there will be more corn for farmers to sell in order to recoup the cost, so it's not clear whether the net impact will be positive or negative.

Less likely to benefit are massive buyers of corn, from poultry farms like Tyson Foods (NYSE: TSN  ) to high-fructose corn syrup-dependent soda manufacturers like Coca-Cola (NYSE: KO  ) and Pepsi (NYSE: PEP  ) . Although the seeds may have a higher yield, Monsanto itself claims only about a 3.8% improvement over its competitors, so any new improvements are unlikely to affect global supplies enough to matter. At the same time, the increased cost of production will probably get priced in.

As for whether it will boost Monsanto's profits, the competition is getting intense. DuPont has continued to grow its market share and is even planning its own round of price increases. Monsanto, meanwhile, is losing some of its competitive edge, as it continues to battle RoundUp-resistant "superweeds" and recently discovered corn rootworms resistant to its pest-killing corn genes. DuPont's own pest-resistant corn, developed with Dow Chemical (NYSE: DOW  ) , has so far had no problems. Don't be surprised if Monsanto's pricing reverse-course doesn't quite work out as planned.

Stay updated with the seed wars by adding these companies to your My Watchlist.

Fool contributor Jacob Roche holds no position in any of the stocks mentioned. Check out his Motley Fool CAPS profile or follow his articles using Twitter or RSS. The Motley Fool owns shares of Coca-Cola and PepsiCo. Motley Fool newsletter services have recommended buying shares of Coca-Cola and PepsiCo, creating a diagonal call position in PepsiCo, and creating a synthetic long position in Monsanto. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (3)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 15, 2011, at 12:43 AM, donjoanie wrote:

    This is a silly article with an irrelevant headline. There is nothing "odd" about raising prices for the 2012 season when Monsanto declared earlier this year that it would begin to raise prices as needed in 2012 and beyond after dropping prices significantly in 2011. No surprise here. And, there is no evidence that it is "obvious that farmers will get hurt." Farmers are not stupid. They can do the math. They will purchase Monsanto seed at a higher price if they are convinced that Monsanto seed will deliver additional value that will make them more profitable. Farmers know that in the past, Monsanto seed has delivered greater value and profitability.

  • Report this Comment On September 15, 2011, at 10:39 AM, ajkmsteph wrote:

    Also their mian competition Dupont said they will also raise prices. Also if the writers bothered to listen or read recent communications from the company they would see that the increase is on new products not existing so much - if the growers who want to get more profit they buy the new porduct and the value fair is about 70% grower to 30% company for these type of new products - so in this case the fool is really a fool. They mention this later but the last typoe there was an increase it was much bigger and Pioneer played to undercut the price to gain share rather than profit. There is also a limit for Monsanto's share - even at 35% or so their competitors complain of monopoly so the best way for MON to make more money is slightly increase share but charge more for better products -if they slashed their prices it would kill their competitos then ypou would reall say they are getting too big for the britches

  • Report this Comment On September 15, 2011, at 11:01 AM, dlsocialgood wrote:

    Regardless of the soundness of their profitability or pricing strategy in light of competition, I will never invest in MON because they have a consistent track record of exploitative and environmentally harmful business practices. Any amount of brief researching online will uncover countless examples of how MON is doing much more harm than good. I will not reward them by investing until they change the way they operate their business to the benefit of the people affected by their products and practices.

  • Report this Comment On September 15, 2011, at 12:14 PM, TMFTheDoctor wrote:

    @donjoanie: I agree that the farmers will be ok. By "obvious answer" I meant that they would be the most clearly affected by a price increase, but a further look reveals that they should be able to deal with it. However, continuing poor weather conditions have resulted in a really terrible yield this season, and some may have trouble recouping their cost of business if they don't have enough product to sell. Thanks for reading. - Jacob

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