Monsanto Reaps Huge Rewards From Its Blossoming Seed Business

By Jason Simpkins
And William Patalon III
Money Morning Editors

In 2002, Monsanto Co. (MON), a large chemical company, was trading at less than $8 per share. It was reeling from a 14% drop in total sales and a 65% drop in the sales of its main product: herbicide. Monsanto's operating income had also dropped by half and management was moving in a different direction.

Fast-forward to last week, when the company's share price was up 7%, trading at roughly $120 a share.

Shares of the St. Louis-based agri-biotech giant skyrocketed last week when the company announced it nearly tripled its fiscal first quarter earnings, which rose from $90 million in 2006 to $256 million. Sales for the period rose 36% to $2.1 billion.

In fact, the stock was one of 2007's best performers, having jumped more than 120%. The shares hit an all-time high on Thursday after Latin American sales for its seeds and branded "Roundup" herbicide helped Monsanto nearly triple its fiscal-first-quarter profit.

The stunning results are largely due to sales of Monsanto's genetically modified seeds, which have been engineered to repel pests and be immune to herbicides. The seeds are virtually immune to herbicides and repel bugs. Sales have benefited from soaring crop prices and an increased interest in alternative energy sources.

Sales for Monsanto's Seeds and Genomics segment were $742 million for the fourth quarter of the firm's fiscal year 2007, 40% higher than sales in the same period last year.

Total sales for the latest quarter rose to $2.1 billion from $1.54 billion. Analysts had been looking for first-quarter sales of $1.89 billion.

Monsanto said it earned $256 million, or 46 cents a share, compared to earnings of $90 million, or 16 cents a share, in the 2007 fiscal first quarter. Analysts polled by Thomson Financial had forecasted earnings of 35 cents a share.

Monsanto also raised its earnings outlook for fiscal 2008 to $2.50 to $2.60 a share, up from a prior view of about $2.40 a share.

"The agri-boom is alive and well," said Horacio Marquez, a Money Morning contributing editor and a former Wall Street veteran. "The relative lack of rain in the southern United States, Argentina and Brazil promise to restrict supply [of farm-grown crops], while demand is exploding as more and more global consumers come out of poverty and demand better food, including bread, meat and vegetable oils."

According to Marquez, this trend is even more powerful in India and China. Similar trends are playing out in other Latin American, African and Asian countries that export commodities and are being lifted by globalization. Energy trends - including the move into ethanol - also are driving demand for robust seeds.

Genetic engineering was once an immensely controversial concept. A U.S. firm, Calgene Inc., created line of genetically engineered tomatoes and became the first genetic-engineering biotech firm to go public. But it found a lot of resistance, particularly in overseas markets, and Calgene ended up selling out - to Monsanto - in 1997.

Once viewed as controversial, genetically engineered crops are now viewed as essential, if not crucial. And Monsanto is benefiting from the huge surge in demand that has resulted. The company has established firm footholds in markets around the globe. Farmers in China and India planted more than 17 million acres of biotech crops last year, according to BusinessWeek. Approximately 7% of the world's farmland acreage is planted with genetically modified crops. If Monsanto's profit is any indication, those numbers are likely to increase.

"The need for the big row crops is as great as it's ever been," Chief Executive Officer Hugh Grant said in a conference call with analysts. Indeed, stockpiles of corn, wheat, and soy are at 30-year lows. And with populations and incomes erupting, demand is at an all time high.

Consumption and disposable income aren't the only things driving demand, though. As noted, interest in - and experimentation with - alternative fuels has also dwindled crop supplies.

"For sure, what's gotten the whole [agribusiness] industry raging is corn ethanol," Charlie Rentschler and analyst at stock research firm Wall Street Access told BusinessWeek. "It's the match that lit the bonfire."

While it's true that an overwhelming majority of Monsanto corn produce gets processed into animal feed, there is a marked link between the value of Monsanto's stock and soaring oil prices.

According to BusinessWeek, Monsanto's price gains have been closely correlated with those of oil. When one rises, the other seems to mimic the movement in lockstep. Over the past year, Monsanto's share price has had a 94% correlation with the price of oil.

Interestingly, ExxonMobil Corp. (XOM), which produced about 2.5 billion barrels of oil a day in 2007, was only 84% correlated with the price of crude oil.

Monsanto's stock price only has a 17% correlation with the price of corn.

Many analysts consider this a statistical fluke, but others find it noteworthy. With oil having officially breached the $100 a barrel mark last week, biofuels derived from corn ethanol will certainly be receiving more attention. In conjunction with the growing appetites of emerging nations, Monsanto may only be in the early stages of its corporate turnaround.

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