Monsanto expected to grow on long-term strategy

The world’s biggest seed company has been firmly focused on farmers, who are crucial to its business.

While prices of agricultural commodities have been rising dramatically since last summer due to poor weather and strong global demand, Monsanto is more interested in longer-term market share. So it has discounted the prices that it charges farmers for its patented, genetically engineered seeds to encourage them to buy and plant more of them in their fields.

Monsanto considers its innovative seeds, rather than its traditional pesticides and herbicides that increasingly face generic competition, to be a primary profit centre for the future. A lot depends on public acceptance here and abroad of genetically engineered food, since farmers take that into account as well when they are deciding which seeds to adopt.

As a growing world population increases the need for more planted acreage and greater efficiency, the strategy makes sense for this company that is sophisticated in both research and development. Deutsche Bank gained attention in April when it upgraded Monsanto to “buy” in an analyst report, predicting the strategy “will drive share gains and mid-teens earnings-per-share growth over the next three years”.

Yet that has translated into a near-term disappointment for investors who expected dramatic 2011 profit gains. Second-quarter profits were up 15 percent compared to the year earlier but chairman, president and CEO Hugh Grant has said that discounts and the losses from Roundup herbicide would weigh on full-year profits.

Monsanto shares are down three percent this year following a decline of 15 percent last year. Investors must remember that weather, commodity prices, the need for popular new products, and government antitrust and environmental scrutiny will always be considerations affecting Monsanto’s prospects.

Consensus analyst recommendation for Monsanto shares is between “buy” and “hold”, according to Thomson Reuters, consisting of four “strong buys”, five “buys” and 12 “holds”.

This St. Louis-based company’s primary products are agricultural and vegetable seeds, plant biotechnology traits, and crop protection materials. It has facilities in 66 countries and serves more than 100 countries.

Monsanto earnings are expected to increase 19 percent this year versus 35 percent expected for the agricultural inputs industry, according to Thomson Reuters.

Next year’s forecast for 18 percent compares to 16 percent predicted industry-wide. Expected five-year annualised return is 15 percent versus 14 percent projected for its peers.