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Monsanto Is Getting a Bit Big for Its Britches

By Jacob Roche – Updated Apr 6, 2017 at 6:10PM

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The company plans to increase prices even while losing competitive advantages.

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.

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Stocks Mentioned

The Coca-Cola Company Stock Quote
The Coca-Cola Company
KO
$58.60 (-1.11%) $0.66
Pepsico, Inc. Stock Quote
Pepsico, Inc.
PEP
$168.52 (-0.05%) $0.08
Tyson Foods, Inc. Stock Quote
Tyson Foods, Inc.
TSN
$69.94 (-1.51%) $-1.07
DuPont de Nemours, Inc. Stock Quote
DuPont de Nemours, Inc.
DOW
E. I. du Pont de Nemours and Company Stock Quote
E. I. du Pont de Nemours and Company
DD
Monsanto Company Stock Quote
Monsanto Company
MON

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