Seeing Through the Vale of Tears
08/18/2009 10:28 am EST
I think the recent huge price increase from Monsanto (NYSE: MON) is pretty much like putting a sign on the company's back saying "kick me."
Is hiking seed prices by as much as 42% when much of the developing world is on the edge of a food crisis really the best strategy to maximize long-term shareholder value?
Monsanto is one of the stocks in the long-term Jubak Picks 50. My policy has always been that readers are adults capable of applying their own individual moral compasses to decide what they will and will not buy.
So, here's what Monsanto said on August 13. You decide.
The world's largest seed company said it will charge as much as 42% more for its genetically modified seeds.
Price increases range from 42% for the company's Roundup Ready 2 Yield soybeans (where prices will go to an average of $74 an acre from $52) to 17% for the company's SmartStax corn seeds. The cost of those seeds, developed with Dow Chemical (NYSE: DOW), will go to $130 an acre.
The new seeds, said Monsanto’s chief executive officer Hugh Grant, will boost yields for farmers. For example, the company projects that the new soybean seeds, genetically engineered so that applying Monsanto's Roundup herbicide will kill weeds but not soybean plants, will yield 7.4% more per acre than the old seeds. The SmartStax corn seed has been genetically modified so that it will resist or kill insects. The company projects that the SmartStax seeds will increase yields by 5% to 20% over conventional corn seeds.
The seeds are a key part of the company's drive to double gross profit from 2007 to 2012. That's a lofty goal, since profit margins from the company's Roundup herbicide business are under pressure.
There will have to be a huge, rapid uptake of the new seeds to get there, but Monsanto clearly believes it can get the job done. The company is projecting that SmartStax corn seed will be planted on as many as four million acres, with the long-term potential for planting on 65 million acres in the United States.
Roundup Ready 2 Yield soybean seed will begin with plantings on 1.5 million acres this year, Monsanto projects, with plantings climbing to eight million acres in 2010 and a long-term potential of 55 million acres.
At the same time as Monsanto announced these new products and their prices, the company repeated its forecast of earnings per share of $4.40 to $4.50 for the fiscal year that ends in August. (The stock traded near $81 during Friday’s session.)
In my opinion, Monsanto probably has the pricing power to make this stick, but a 42% price increase for seeds during what is certainly a depression for the world's poor is likely to increase the company's already high negative numbers.
Monsanto is well on its way to becoming the ExxonMobil (NYSE: XOM) of the 21st century—you know, the company that social activists love to hate.
I hope that management has a thick hide.
Click for a follow-up post from Jim about Monsanto's recent pricing announcement