Roundup outlook dims for Monsanto
A flood of inexpensive Chinese-made herbicide and deep price cuts by its rivals are leading Monsanto to cut profit expectations for its best-selling Roundup weed killer.
The agriculture giant, which has made billions of dollars selling Roundup and crops resistant to its effects, said Tuesday the dip in gross profit from herbicide sales will be swifter and steeper than initially anticipated.
"Roundup is taking it on the chin because of faster than expected competition," Mark Gulley, an analyst at Soleil Securities in New York. "We’ve known renewed competition from China was coming. It’s clearly come a little faster than we thought."
On top of competitive pressures, Monsanto said cooler, wetter weather in parts of the Corn Belt has delayed Roundup applications this spring.
"You put those two together, and you get a more challenging market environment," Brett Begemann, a Monsanto executive vice president, said in an interview.
Monsanto’s earnings for the fiscal year that ends in August will be $4.40 a share — the low point of its previously forecast range of $4.40 to $4.50 a share, and below the $4.59 average estimate of a dozen analysts surveyed by Bloomberg.
The company’s shares fell $5.37, or 6 percent, to $79.88 on Wednesday.
Monsanto developed Roundup, a weed killer containing the chemical glyphosate, in the 1970s. It was first commercialized in the United Kingdom and Malaysia in 1974.
For two decades, it was the exclusive maker of Roundup and piggybacked on the product’s success by developing genetically engineered crops that are resistant to its effects.
Today, the herbicide tolerance trait is at the heart of the company’s multibillion-dollar seed business. But the last patents on Roundup herbicide expired nine years ago, opening the door for rivals like Dow and Syngenta to sell competing products and erode Monsanto’s market share.
Monsanto previously had said profit from Roundup and herbicides will decline to $1.9 billion by 2012, or 15 percent of the company’s gross profit low cost car insurance. Chief Executive Hugh Grant told investors during a presentation Wednesday in New York that the herbicide business will contribute "a lot less" than 15 percent.
Grant acknowledged that the volume of Chinese glyphosate that’s flooding the U.S. market is a surprise. Still, the company will maintain prices to preserve profit margins, even at the expense of market share.
"Clearly, the Chinese built excess glyphosate capacity and are willing to export at a low profitability," Citigroup analyst P.J. Juvekar said last week in a research note.
Overall, Monsanto expects to sell about 200 million gallons of glyphosate-based herbicide in 2009 — 22 percent less than last year. About 55 percent of it will be Roundup.
The company also is continuing the expansion of a glyphosate manufacturing plant in Luling, La., that could increase global supply of the weed killer by about 10 percent, according to Juvekar.
The plant expansion is a by-product of a glyphosate supply crunch less than two years ago that led Monsanto to implement steep Roundup price increases. Today, the company was rationalizing its decision to maintain prices and trying to refocus investors on the company’s seed business.
It was during last month’s earnings conference call that Grant said Roundup would become a "hum in the background" while new and improved seed technologies drove Monsanto’s earnings growth.
Grant made the same point Wednesday, noting that increases in its seed and traits business will enable the company to meet the financial targets it had laid out earlier this year. Meanwhile, executives will look for ways to stabilize the Roundup business and manage it through the transition.
"We literally can’t afford this to be a distraction," Grant said. "I dearly love the product, but it isn’t our future."
Bloomberg News contributed to this report.
Filed under: business by Wolf