UPDATE: Monsanto sees second-quarter profit drop of 19 percent

Wednesday, April 7, 2010 | 4:35 p.m. CDT; updated 4:47 p.m. CDT, Wednesday, April 7, 2010

KANSAS CITY — When Monsanto Co. said three years ago it would double its annual profit by 2012, the company was making a bold bet on its future — selling biotech seeds rather than old-line chemicals.

Now, the company's past is catching up with it. And the future of biotech seed is looking tougher than imagined.

On Wednesday, Chief Executive Hugh Grant said for the first time Wednesday that Monsanto won't likely hit its 2012 goal. The reason is twofold. Unexpected losses in the herbicide division are dragging down the rest of the company, and farmers don't seem willing to pay a premium price for next-generation biotech seeds.

As a result, the world's biggest seed maker is trimming its expectations. Grant said the company would now deliver profit growth in the "mid-teens" annually, rather than hitting its mark for 2012.

The St. Louis-based company said Wednesday its second quarter profit fell 19 percent to $887 million, or $1.60 per share. That's down from $1.09 billion, or $1.97 per share, in the same period a year ago.

Revenue declined to $3.89 billion during the quarter ended Feb. 28, from $4.04 billion a year ago.

Analysts surveyed by Thomson Reuters expected a profit of $1.73 a share on revenue of $3.9 billion, on average.

After pledging to double its profits over five years, Monsanto was caught off-guard by generic competition against its popular herbicide Roundup. Chinese companies flooded the market with cheap varieties. As profits from its historic money maker collapsed, Monsanto's chemical division has sucked money away from the rest of the company, even as sales of biotech seed expanded as planned.

Sales fell $351 million, or 35 percent, last quarter in Monsanto's agricultural productivity segment, which includes it herbicides and chemicals.

At the same time, Grant said farmers appear unwilling to pay premium prices for the company's new lines of biotech seeds, some of which are twice as expensive as the varieties most farmers grow today. Grant said he went on a recent "listening tour," meeting with more than 1,200 farmers. Many were upset about higher prices.

"The feedback I am hearing from farmers is that if our prices were different, their adoption curve would be different," Grant told analysts during a conference call. "I'd like to say it's purely altruistic."

Grant would not specify how far prices will drop, but said Monsanto will gradually raise prices again once it gains customers and they see the crops are worth it.

Monsanto aimed to make roughly $8.7 billion in gross profits by 2012. Losses in the Roundup division will probably siphon away $300 to $400 million of that, said Daniel Ortwerth, an analyst with Edward Jones in St. Louis. He estimated profit for 2012 will come in below $8 billion.

While backing down from the five-year goal is disappointing, it won't slow Monsanto's transition away from chemical sales and into biotech seeds, Ortwerth said. Just five years ago, the seeds division accounted for 40 percent of Monsanto's revenue. Now it accounts for 75 percent, and will continue to rise, Ortwerth said.

"The clear key in this industry is technological leadership, and Monsanto is just pulling away" from the competition, Ortwerth said.

Monsanto affirmed its full-year 2010 ongoing earnings-per-share guidance, saying it will be in the low end of the $3.10 to $3.30 range.

Shares fell roughly 3 percent initially but partially recovered in afternoon trading, falling $1.29 cents to $68.24.

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