EXCERPT: depressed earnings, losses to share price, and a troubled horizon... stock analysts give mixed reviews of the firm's prospects, many citing concerns that the company is overvalued by Wall Street, and that long-term growth will be below average.

Overall, recommendations to investors range from strong sell to strong buy. According to eight independent equity research firms consulted, opinion on Monsanto is split evenly between three recommendations to buy, two to hold, and three to sell. Yet, there is consensus among analysts that makes one point clear: Monsanto's future will be critically dependent on the success of developing its genetically modified seeds and traits business.
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CONTINUED LOSSES PUT PRESSURE ON MONSANTO PRODUCT LAUNCH
ISB News Report, November 2004
Anastasia L Thatcher
http://www.isb.vt.edu/news/2004/news04.nov.html#nov0405

On Oct 6, 2004, Monsanto posted a net loss of $42M for the fourth quarter, spurring a 3.2% single day drop in share price1. Continued erosion of sales, down 3% from a year earlier, has increased expectations for the agrochemical giant's newest product: low linolenic VISTIVEâ„¢ soybeans.

A Troubled Horizon

Since 2000 when U.S. patent protection expired for its flagship product, Round-Up®, Monsanto has been struggling to keep market share and stay in the black2. Despite increased sales in its growing trait business, which partially offset losses in the herbicide arena, a year ago the company posted significant losses-$188M, or $0.72 per share. This year, despite near perfect global farming weather, Monsanto has been unable to stem the tide of falling sales and prices for its Round-Up brand herbicide, a situation exacerbated by global glyphosate (active ingredient in Round-Up) dumping by Chinese manufacturers. U.S. prices for Round-Up are now predicted to hit $11-$13 per gallon, well below Monsanto’s expectations, and market share to fall near 65%, similar to what Monsanto sees in countries where generic glyphosate has been available for years.

Monsanto has been further hit by the inability to collect royalties on pirated soy seeds in Brazil, Paraguay, and Argentina-globally the top three soybean exporters after the United States. Until very recently, genetically modified crops were illegal in Brazil and are still illegal in Paraguay, although farmers are thought to have been planting genetically modified soy for the last six years3. Monsanto’s Round-Up Ready® soy seeds, genetically modified to withstand Round-Up herbicide, are especially popular because of the reduced time and expense required for their cultivation. Monsanto, as well as producers subject to patent laws who must pay licensing fees to access the technology, believe strongly that everyone who benefits from proprietary technology should have an obligation to pay for it. Licensed producers bear that burden but unlicensed producers do not. Progress was made earlier this year when farmers in Brazil’s Rio Grande do Sul region - where experts estimate close to 90% of the soy is genetically modified - finally agreed to pay a technology fee of $3.50 a ton to Monsanto for use of its seeds. More importantly, the company’s aggressive lobbying paid off when the Brazilian government passed an executive order allowing farmers to plant genetically modified soybeans. Although the bill will give Monsanto legal standing to enforce collection of royalties on unlicensed use of its seeds in the entire country, it will not, however, sanction the sale of genetically modified soybeans

Monsanto faces a more difficult situation in Paraguay. Although 40 50% of soy is believed to be genetically modified, Rosa Oviedo, member of Paraguay’s biosafety commission, comments that, "Monsanto has no right to charge royalties. As of now, none of its varieties is legally sanctioned." A bill has been introduced that would legalize biotech crops, but continued peasant and farmer protests against the bill have delayed its passage indefinitely.

Unlike its neighbors, Argentina's government has allowed Monsanto to build royalties into the price of its seeds. However, the country has been unable to collect these royalties effectively, because pirated Monsanto seeds are widely traded on the black market. In response, Monsanto stopped selling soy seeds in Argentina in 2003. It is also threatening to collect royalties on soy shipments from Argentina to countries where its seeds are patented, if they are found to carry unlicensed Monsanto products.

Other risks to Monsanto include rising oil prices, which could affect its chemical business, and a limited supply of its Posilacâ„¢ bovine growth hormone, where unresolved quality control issues are now expected to extend well into 2005. Syngenta’s pending anti-trust lawsuit, filed in July, 2004, which challenges that Monsanto has illegally monopolized key corn traits in the United States, poses another risk to the company.

Promises of Growth

Despite depressed earnings, losses to share price, and a troubled horizon, Monsanto has promised investors a share price growth of 10 18% in 2005 and another 10% in 20061 - to be driven primarily by its growing genomics business and higher prices for soybean traits. However, stock analysts give mixed reviews of the firm's prospects, many citing concerns that the company is overvalued by Wall Street, and that long-term growth will be below average. Overall, recommendations to investors range from strong sell to strong buy. According to eight independent equity research firms consulted, opinion on Monsanto is split evenly between three recommendations to buy, two to hold, and three to sell. Yet, there is consensus among analysts that makes one point clear: Monsanto's future will be critically dependent on the success of developing its genetically modified seeds and traits business.

Increasing global sales of cotton, corn, and soybean products is the cornerstone of Monsanto’s growth plan. Sales potential has been boosted by the recent decision of the U.S. Patent and Trademark office that Monsanto was the first company to develop Agrobacterium transformation in dicot plants such as cotton4. The decision ends a twelve-year patent dispute between Monsanto and the Max Planck Institute (The Netherlands) and will allow Monsanto to collect fees from companies using the technology to introduce characteristics into dicot plants as well as providing patent protection for its Bollgard® brand insect-protected cotton.

While the win on Agrobacterium transformation is a boon, achieving growth targets will still be an arduous challenge, because existing Monsanto products are quickly reaching market saturation, particularly in the United States. Robert T. Farley, Ph.D., Monsanto’s Chief Technology Officer, sites the company’s belief that the average number of Monsanto traits per acre of crop is 1.5 for cotton and 1.2 for corn in the United States. Round-Up Ready Soybeans are also near full market penetration in the United States. Monsanto will fall short of its growth targets without successful new product launches. Not surprisingly, the company’s less than stellar results recently have raised the stakes and further heightened the pressure to develop and bring to market new agbiotech products... [more on VISTIVE]

Selected References
1. "Slumping Roundup sales hit Monsanto." Oct 6, 2004. CNNmoney. http://money.cnn.com/2004/10/06/news/fortune500/monsanto.reut
2. Melcher, Rachel. Oct 6, 2004. "Monsanto Raises Bar for Fiscal ’05 Earnings." St. Louis Post-Dispatch.
3. Burke, Hillary. (Reuters.) Sept 28, 2004. "Monsanto prods South American nations on soy royalties." http://www.checkbiotech.org
4. "Monsanto Wins Key Patent Dispute Regarding Dicot Plant Transformation." Oct 5, 2004. (PRNewswire-Firstcall.) http://prnewswire.com/news/index_mail.shtml?ACCT=104&STORY=/www/story/10-05-2004/0002266187&EDATE=