Monsanto cuts profit forecast on herbicide oversupply

Date:05-28-2010


Monsanto Co., the world’s largest seed company, cut its profit forecast after deciding to reduce the price of its Roundup herbicide because Chinese competitors oversupplied the market. The shares fell the most in seven months.

Profit in the fiscal year through August will be $2.40 to $2.60 a share, excluding some items, compared with a previous forecast of $3.10 to $3.30, St. Louis-based Monsanto said today in a statement. Profit on that basis was estimated to be $3.09 a share, the average of 18 analysts surveyed by Bloomberg.

Chief Executive Officer Hugh Grant has trimmed the outlook for Roundup in the past year as Chinese producers flood markets with generic Roundup. The herbicide, also known as glyphosate, kills weeds while sparing crops containing a genetic modification. Grant said today he’ll price Roundup closer to generics and simplify product offerings.

Monsanto lowering its outlook “reflects an even sharper deterioration in the glyphosate business than we had expected,” Laurence Alexander, a New York-based analyst at Jefferies & Co., said in a note to clients.

Monsanto fell $2.39, or 4.5 percent, to $50.27 at 4 p.m. in New York Stock Exchange composite trading, the biggest decline in the Standard & Poor’s 500 Index and the largest drop since Oct. 26. Monsanto declined 39 percent this year.

Gross Profit

Gross profit from Roundup, the world’s most popular herbicide, will drop to $50 million to $200 million this fiscal year because of lower demand, falling prices and costs to streamline the Roundup portfolio, Chief Financial Officer Carl Casale said on a conference call with analysts. Profit from the business in subsequent years will be a “steady state” of $250 million to $300 million, or about $1 a gallon, he said.

Roundup gross profit more than doubled in 2008 to $1.98 billion and was $1.84 billion last year, prompting producers in China to boost output. Global production capacity is now double what farmers need, Grant said on the conference call.

Multinational competitors are using the generic product as a “loss leader” to sell other chemicals, keeping glyphosate margins at record lows, he said. The U.S. may need to pursue anti-dumping measures against China, Grant said.

‘Ample Supply’

"The generic product is in ample supply and the performance is just as good, so Monsanto had to recognize that,” Mark Gulley, a New York-based analyst at Soleil Securities, said in a telephone interview. “This is particularly acute given lower crop prices.”

Corn futures in Chicago have fallen 12 percent in a year and soybeans have dropped 20 percent.

The business that makes seeds and modified crop genetics, which accounted for two-thirds of Monsanto’s $6.76 billion of gross profit last fiscal year, will drive company earnings growth of about 15 percent a year starting in fiscal 2011, Grant said.

"With Roundup officially graduating to the background of our earnings profile today, it is seeds and traits that officially carry the weight for our mid-teens earnings growth,” Grant said.

Grant is cutting seed prices to accelerate adoption of new products, such as Roundup Ready 2 Yield soybeans and SmartStax corn, which fell short of planting targets. He said last month Monsanto is unlikely to meet his 2007 goal of doubling company gross profit by 2012.

Reduced Forecasts

Monsanto had forecast 2010 profit from the Roundup business would be $1.9 billion until June 2009, when the glut of Chinese generics prompted the first in a series of reductions to the herbicide outlook. The forecast was reduced to $600 million on April 7.

Monsanto will no longer have multiple price tiers for Roundup, enabling cuts in the support infrastructure, Casale said. Roundup will be packaged with other herbicides to help combat weeds that are beginning to survive the chemical in cotton and soybean fields, Grant said.

"Weed resistance is real, but managing it doesn’t have to be complex,” Grant said.

Profit in the current quarter will be 75 cents to 80 cents a share, excluding some items, Monsanto said today. Analysts projected profit of $1.33, the average of 16 estimates in the Bloomberg survey.

Monsanto halved its fiscal-2010 forecast for free cash flow to $400 million to $500 million, from an April projection of $900 million to $1 billion.