I think the recent huge price increase from Monsanto (MON) is pretty much like putting a sign on the company’s back saying “Kick me.”
I wonder if hiking seed prices by as much as 42% when much of the developing world is on the edge of a food crisis is really the best strategy to follow 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 compass to decide what they will and will not buy.
Here’s what Monsanto said on August 13. You decide.
Here’s the gist of the new pricing that Monsanto announced.
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 s0ybeans (where prices will go to an average of $74 an acre from $52 an acre) to 17% for the company’s SmartStax corn seeds. The cost of those seeds, developed with Dow Chemical (DOW) will go to $130 an acre.
The new seeds, Monsanto CEO, Hugh Grant, said 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.
It will take a huge and 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 4 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 8 million acres in 2010 and a long-term potential of 55 million acres.
At the same time as the company announced these new products and their prices, Monsanto repeated its forecast of earnings per share of $4.40 to $4.50 for the fiscal year that ends in August 2009.
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 (XOM) of the 21st century–you know the company that social activists love to hate.
Hope that management has a thick hide.
turniptruck,
amen.
Sliman, you are right that no one forces farmers to buy Monsonto seeds. As a farmer, I would never ever put myself in a position where I have to pay more for seed, risk more environmental and human damage, and potentially hurt my fellow farmers in the process. I see mostly older farmers using their seed because it means less work. A younger generation of organic farmers is developing right now, and we all are gaining a better understanding of soil health, and by the way it doesn’t include Round-Up. It is more work to do it the organic way, for sure, but when did that kill anyone? I believe we may just be heading back to a time when 1/3 of us work on farms, and I see nothing wrong with that. Obesity would drop, communities and more personal relationships would redevelop. Food would cost a little more but it would be well worth it. In my opinion, there is no more fulfilling career than growing healthy food to sustain your fellow human beings while actually leaving the planet in better shape than it was handed to us. That hasn’t happened in many generations.
Sliman, if what you said were true, and the whole the story, I’d agree with you. But it’s not. Monsanto and similar companies have worked to actively prohibit research on the effectiveness as well as the human and environmental impacts of their products:
http://www.nytimes.com/2009/02/20/business/20crop.html
I’ve heard reports that the GMO seeds are having a significant negative ecological impact also, but don’t have that reference handy.
The bottom line for me, though, is that I followed the controversy over Monsanto’s rBST hormone in detail. It’s a growth type hormone given to cows so they’ll produce more milk. rBST is outlawed in Canada, Japan, Europe, Australia, New Zealand because there’s evidence it greatly increases disease in cows, and indications that the growth hormone may survive digestion in humans and increase risk of cancer in humans (in spite of the industry-dominated US FDA finding to the contrary). The whole story of rBST is a full color illustration of how capitalism at its worst can corrupt democracy to not work on behalf of citizens and consumers. Here’s a tiny slice of the sleazy story – see Lawsuit against Fox television:
http://en.wikipedia.org/wiki/Recombinant_bovine_somatotropin
I like that final finding – a news agency has no legal obligation to report the truth in a news story.
I’ve heard so many stories about the monopolistic and borderline criminal behavior of Monsanto, there’s no question for me on this company. These people are basically evil pirates.
As I say, it’s too easy as an investor to just want to take at face value the simple PR that a company presents and take the capital gains and dividends. While I don’t think that any of these things are black and white, if investors don’t try to dig deeper and at least try to make some judgment calls, we’re helping the world going to hell-inna-handbasket. At this point, the gov’t isn’t much good at properly representing and protecting the public, as we have so clearly seen in the recent financial debacle.
Let me get this straight kelvinator seeds that produce more crop with less water and herbicide is BAD for the world. Maybe we should go back to a time when 1/3 of workers were on farms and people had to use 40% of their income to just feed themselves.
Nobody is forcing farmers to buy MON seeds. MON has put out the money to develop a better seed that yields more crop. Any farmer can crunch the numbers and figure out what is the best buy. Capitalism is still alive, isn’t it?
Also, by the way, I won’t own Monsanto after following their horrendous record of bullying, litigating against small farmers and the evidence that their bio-engineered seeds may actually be extremely toxic for the ecosystem. I personally heard Percy Schmeiser speak, the Canadian farmer who fought them to the Canadian supreme court. Monsanto demanded he pay them money because the wind blew their seeds onto his land. I think their business practices stink to high heaven. His story is all about the power of big money corrupting and riding roughshod over individual freedom. Read the story of his fight, and about the potential impact of planting huge acreage with plants that have poisons in every cell, and then consider whether anyone should own a stock of a company that is doing these things on behalf of their shareholders.
It seems an all too common (though not universal) view that morals don’t really have a place in investing. Corporations have historically spanned the spectrum from innovative contributors of great products, jobs and wealth to not much better than raping, pillaging pirate bands with capital backing from the House of Lords, (or John Doe in Hobokun, Iowa). It’s so easy to buy shares in a corporation with a push of a button, that we forget that we are thereby becoming almighty “shareholders”, owners in whose name all kinds of wonderful and terrible things have been done by corporations over time. After all, we feel very remote from any consequences, and so tend to err on the side of giving weight to our potential financial gain – after all, we’re certain to do good things with the money, aren’t we, and minimizing the potential damage that the company might be doing. We’ll personally have no other responsibility than our investment – no criminal liability for malfeasance, no financial liability for financial or environmental damage, claims of theft, fraud or assassination beyond our small amount of capital diversification into that particular profit focused crew. I do investment work for a living, and certainly don’t imagine I always make perfect choices in this regard – but I do have sympathy for those who believe that, in the end, the limited-liability, for-profit, passively and remotely owned corporate structure may, at some point, bring this world down around our ears. It almost did last year, and is still working on it.
Intellectual property agreement
There is little difference between what Monsanto is doing and what Microsoft does everyday.
People pay for what they want, but they want what they need for free!
well said, Dudefish!
Did you copy that straight off MON’s website? Just kidding. Most people truly believe your statement.
I’m an investor, not a social activist but….. food is where I draw the line.
check out this article, very interesting.
http://www.vanityfair.com/politics/features/2008/05/monsanto200805
The XOM haters should love Monsanto. Its innovations are allowing us to produce the food we need with less oil, less land, less pesticides, less soil being tilled.
Agreed, “adults can apply their own individual moral compass in deciding what stocks to buy.” And they should. More difficult however is finding and choosing stocks to buy, if one starts with certain compass points. I would be very grateful to see Jim write something about the SRI funds, considered as investment candidates. Admitted, it’s a niche, but isn’t it an interesting one?
labradore, I can ensure you that all the known ways of making money are immoral (some way or another). Will it make you sleep better?
Jim,
You’re putting it mildly that Monsanto has an image problem. They sell seeds on the condition of an intellectual property agreement with their customers, the farmers. They also actively look for farms that may be “infringing” on their IP. In other words, they go around testing (sometimes covertly) farmers’ fields for the genetic signature of the Monsanto seeds and then they sue anyone who hasn’t paid-up their dues to Monsanto. This will often include farmers who have switched back to non-Monsanto seed but end up with patches of “volunteer” plants growing in their fields due to some of last season’s Monsanto-variety self-seeding the field, or from simple cross-pollination that occurs naturally when two varieties of plant are nearby each other. Farmers have been sued and bankrupted by Monsanto because their non-genetically-modified, non-Monsanto crops were cross-pollinated (wind, bees, etc.) by their neighbors Monsanto, G.M. crops.
Raising prices is one thing. It’s supposed to be an open market and farmers don’t have to buy Monsanto seeds if they’re not worth the cost. However, when Monsanto uses broken I.P. regimes and legal bullying to inflate their profits, they’re no longer morally justified. I didn’t buy MON because I can’t sleep well at night knowing that I’m making money immorally.
Social activists can do a lot to harm MON. Grass roots orgs can provide alternative farming methods and lead third world farmers away from genetic seeds. The danger is that once the farmers see the other ways, they will never go back and Mon loses Roundup and seed sales. Hopefully the dramatic price increases provide the incentive that these people need to see that MON is leading them down a road of dependency upon MON. They may not be able to get the yields that MON can give them, but they can harvest their own seed for free.
Jim,
You are not alone in your views. Half my reason for subscribing to your website is because of your investment advice acumen…the other half because of your character.
Jim, maybe we have all been paying way under market for food and seed for years and this is move to try to right that imbalance. We know there is a food shortage so demand is higher than supply. Usually this would mean that prices should rise. I really don’t see what the problem is here. And as for becoming the next Exxon that might be great judging by Exxon’s record profits last year.
I agree, MON is not the best buy in this sector. While it is on my watch list (which means almost nothing – I have about 100 companies on this list), my trigger point for this stock is <$70/share.
I think DE and POT are better plays on agriculture. I am an investor though and not a social activist, so I don’t really care about this, but it could hurt them. If MON becomes a bargain, I will jump on it
Jim,
You can hate me as well, but I am taking MON side here. They are in a business of making money, and if they think that the product they offer worth more, it is their business decision. It is also up to customers decide should they pay more for the new and better seeds (and, hopefully, make more profit) or just stick with something else.
As far as for their stock price, I still think that MON is too high and that their stock grew up to much in 2005-2007 in anticipation of a huge demand for their products.