Monsanto Earnings Drop on Higher Seed-Production Costs

Monsanto Co., the world’s largest seed company, reported third-quarter earnings fell 3 percent as increased seed-production costs overshadowed rising prices for Roundup herbicide.

Net income dropped to $909 million, or $1.68 a share, in the three months through May, from $937 million, or $1.74, a year earlier, St. Louis-based Monsanto said today in a statement. Per-share profit excluding a legacy tax matter was $1.66, exceeding the $1.59 average of 15 analysts’ estimates compiled by Bloomberg.

Chairman and Chief Executive Officer Hugh Grant said profit fell because last year’s U.S. drought required more seed to be shipped from South America in the quarter, and the company didn’t pass on the higher costs to customers. Gross profit in the unit that makes Roundup herbicide gained 31 percent because of higher prices while profit in the larger seed unit declined 10 percent.

“It’s an earnings beat but it’s not coming from the crown jewel seeds business,” Matt Arnold, a St. Louis-based analyst at Edward Jones who recommends holding the shares, said today by telephone.

Monsanto fell 0.6 percent to $100.84 at the close in New York. The shares have gained 6.5 percent this year.

Sales rose 0.7 percent to $4.25 billion, missing the $4.43 billion average of 16 estimates. Gains were limited by a reduction in planted cotton, Monsanto said, and a patent dispute in Brazil that eroded soybean revenue.

Drought Costs

Profit from the seed unit fell to $1.82 billion from $2.02 billion amid declines in corn, soybeans, cotton and vegetables. Drought-related costs for shipping seeds from South America will be less next year, providing a boost to fiscal 2014 earnings, Chief Financial Officer Pierre Courduroux said today on a conference call with analysts.

Profit in the agricultural productivity unit, which makes Roundup, rose to $447 million from $342 million on higher sales, Monsanto said.

Retail prices for glyphosate, which Monsanto markets under the Roundup brand, have gained about 42 percent from a year ago, Chris Shaw, a New York-based analyst at Monness Crespi Hardt & Co. who recommends buying Monsanto shares, said in a June 24 note.

Agricultural productivity earnings were 11 cents more than estimated while seed earnings were 24 cents less than estimated, Laurence Alexander, a New York-based analyst at Jefferies LLC who recommends holding the shares, said in a note today. A lower-than-expected tax rate added 14 cents to earnings, he said.

Forecast Unchanged

The company reiterated its May forecast for full-year earnings of $4.50 to $4.55 a share, excluding some items, trailing the $4.58 average estimate of 23 analysts. Monsanto said it continues to anticipate that earnings in the fiscal year that begins Sept. 1 will increase by a percentage in the “mid-teens.”

In addition to lower seed-production costs next year, Monsanto will benefit from average corn-seed prices that will be 5 percent to 10 percent higher and continued “strong” earnings in the unit that makes Roundup herbicide, Courduroux said.

Excluded from this year’s forecast is an estimated 20 cents to 25 cents a share of earnings from soybean sales in Brazil, which are the subject of a legal challenge. The company suspended royalty collections for Roundup Ready soybeans late last year because of a legal dispute over patent expiration.

Latin America

Grant is counting on demand outside the core U.S. market, particularly Latin America and Eastern Europe, to drive earnings growth in the coming years. Corn-seed volumes will increase next year even if U.S. acreage shrinks, Monsanto President Brett Begemann said on the conference call.

China this month approved imports of Intacta soybeans, the first beans engineered to control insects, creating a 100 million-acre sales opportunity for Intacta beans grown in Latin America, Begemann said. The company is targeting 3 million acres of Intacta soybean sales in the initial growing season in Brazil, he said.

Monsanto is projecting the possibility of expanding onto at a total of 200 million acres with the addition of two other new types of genetically modified soybeans this decade, Begemann said.

Roundup Ready 2 Yield soybeans will be planted on at least 41 million acres this year in the U.S., he said. And Roundup Ready 2 Extend, which adds dicamba herbicide tolerance to Roundup Ready beans, will be sold in North America, Argentina and Brazil once approved by regulators, he said.

Latin Potential

South America may account for half of the company’s revenue growth next year, Michael E. Cox, a New York-based analyst at Piper Jaffray & Co. who recommends buying the shares, said in a June 24 note.

Monsanto’s seed-testing procedures have come under scrutiny after the USDA said May 29 that experimental white wheat engineered to tolerate Roundup was discovered in an Oregon field eight years after field tests ended. Japan, Korea and Taiwan have suspended imports of U.S. white wheat.

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