A Look Ahead: Monsanto in 2013

If your first exposure to agriculture king Monsanto (NYSE: MON  ) involved a glimpse of its most recent quarterly results, you need to know that there's far more to the company's story than that probably temporary slide of year-over-year earnings. Indeed, unless you can make a case that mankind is on the verge of giving up on eating three squares per day, the St. Louis-based company appears to include an unusually compelling investment story.

You likely know that Monsanto was once a wide-ranging chemicals, bio-industry, and medical company. Early in the past decade, however, the agricultural division of the earlier, rather complex, entity was spun out to become what is today's Monsanto, the world's largest producer of, among other things, engineered seeds. Monsanto currently leads that world in this area, ahead of such competitors as DuPont (NYSE: DD  ) and Switzerland's Syngenta AG (NYSE: SYT  ) .

The seed business includes brands of large-acre crops, such as corn, cotton, soybean, and canola. Beyond that, the company produces small-acre crops, like vegetables. It also operates a crop protection segment that produces primarily agricultural and industrial, turf and ornamental herbicide products.

The coolest bugs ever
As I noted to Fools near the close of last summer's drought-plagued adventure, somewhat surprisingly, a number of the engineered seeds that ultimately find their way into the repertoires of Monsanto, DuPont, Syngenta, and a host of other companies, are produced near my home in southwestern Idaho. This area of the state, known as Treasure Valley, benefits from an array of optimum growing and crop experimentation conditions, including its arid climate and winters during which temperatures occasionally dip low enough to chill pesky bugs into oblivion.

The result is progress in producing seeds -- for corn, for instance -- that are able to maintain high yields, even when the rain ceases, as was the case during the summer of 2012. This year's dry spell was more than an inconvenience. It was responsible for Monsanto's seed business, its biggest contributor to the revenue line, experiencing a 10% slide during the most recent quarter vis-a-vis the comparable quarter year earlier.

Largely as a result, Monsanto recorded a loss of $229 million, or $0.42 per share, versus a year-earlier loss of $112 million, or $0.21 a share. It's important to know that, drought or not, the quarter that ends on Aug. 31 is usually seasonally soft, since it occurs at a time when farmers are not typically acquiring seeds.

A glimpse at the future
Looking ahead, however, analysts who follow the company have arrived at a per-share consensus of $0.37 for the yet-to-be-reported November quarter, up from $0.23 from the November 2011 period. For calendar 2013, Monsanto anticipates a 5%-10% increase in corn prices, compared to 2012 levels.

The company maintains that its Dekalb brand of corn seeds result in a yield advantage of eight bushels per acre over its competitors. As evidence of neck-and-neck competition between the two companies, however, DuPont contends that its own new conventionally bred seeds have evidenced an 8% higher yield than their competitors, when they're planted -- the seeds, not the competitors -- in water-scarce areas.

As CEO Hugh Grant (no, not that one) said to analysts during the company's most recent conference call: "... 2013 is setting up nicely. We're carrying good momentum in the U.S., we're on the front edge of some significant acceleration in Latin America, and the latest harvest data ... reinforces our confidence in our products." Relative to the travails of the past summer, he noted: "Our yield advantage is shining through even in one of the most difficult seasons on record for our growers."

A Foolish takeaway
Finally, I'm also inclined to share with you another significant comment about both the company and its industry made by Grant during the same call:

I also recognize that the opportunity for Monsanto in 2013 plays on a much larger stage. With this year's terrible drought that underscores how stretched the world's green resources are, and that reinforces that the drivers of agricultural productivity are real and are ongoing. The world needs sustainable productivity growth and that creates a tremendous runway for agriculture.

The latter consideration, while perhaps relatively obvious, has resulted in my increased attention to agriculture companies, such as the three named above, along with the likes of fertilizer products manufacturer Mosaic (NYSE: MOS  ) and equipment maker Deere. Given expectations of, for instance, a 75% growth in the demand for seeds during just the current decade, I suggest that Foolish investors would be wise to do the same.

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  • Report this Comment On December 12, 2012, at 7:58 PM, ajkmsteph2 wrote:

    Are you saying that the drought caused Monsanto earning to drop 10% -----really ---what is the basis for that ? The only effect of drought what be on RoundUp sales - more drought = less weeds but I am not sure they have ever said that caused a drip in sales. I assume you are writing this section because you are educated and informed and would know that they pulled cotton profits from Q4 to Q1 last Q1 and that would now make this Q4 just gone by as worse than actual. The effect of drought in Brazil can affects sales there which were charged in Q4 (I think). The effect of drought in the US is to increase grain prices - good for MON, increase cost of production- bad for Monsanto, but allows them to increases prices for 2013 season both for seed and RoundUp (Chinese RoundUp prices up at least 10% so far. (listen to their investor sessions). Also positive for the stock was CA not passing the crazy labeling rule, the fed dropping their anti-trust without actions, Judge in case against Dupont (their biggest competitor) saying things that suggest he will increase the $1 billion already awarded to maybe $3 billion and all investment houses saying target is $100-120 in next 12 months So I agree with you the cards are clearly in their favor (needless to say I am long). I suggest it will get to $120 by April 1 if not sooner if we deal with that Cliff thing in DC

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