The Global Demographic Tailwind

[Democritus_of_Abdera]

MON CFO statement concerning Roundup Franchise...

Carl Casale, explicitly stated that it is MON’s intention to keep the Roundup franchise in the Q&A when he made his presentation to the UBS Best of America Conference on 9/10/09. His stated rationale was:

1. MON synergizes Roundup and seed sales by offering Roundup Rewards (a catastrophic insurance program, i.e. if a farmer buys SmartStax corn together with brandname Roundup, then the crop is ensured against disasters such as floods).

2. The Roundup franchise is a strong cash generator. It earns more than its cost of capital. And, there is little depreciation or CapEx associated with the business.

3. Owning Roundup ensures that there will be an adequate and affordable supply of herbicide to support the Roundup Ready seeds that are sold. (I suspect, for example, that if a shortage develops, MON could package Roundup with the seeds at the time of sale.)

This statement does not preclude your suggestion that MON can increase perceived shareholder value by accounting for Roundup as a discontinued operation under GAAP. However, if they made such a change just to increase perceived value, I would consider that as a negative with regard to my personal investment ... I’m not a big fan of fluff antics.

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Casale is MON’s new CFO (but a long time MON employee who most recently was Exec VP, Strategy and Operations for the company); see: http://www.sec.gov/Archives/edgar/data/1110783/000111078309000100/form8-k.htm

The relevant Q&A dialog was:

<Q>: And can you pretty confidently say that’s the last of your glyphosate downgrades? I mean are you confident that there isn’t significantly more excess supply to come from China to push prices lower still? And then finally is there maybe some benefit in potentially separating the glyphosate business from the seed business, which is clearly significantly more exciting and something that you obviously want to – we all want to spend more time talking about?

<A – Carl Casale>: So if you think about market signals and production I mean 12, 18 months ago the price of acid out of China was $12 a kilo and it’s now free. You know basically supply just kept coming into the market until the market said I want no more. And so basically our strategy is to basically, against that price environment, charge a nominal enough premium for Roundup in that environment that customers, farmers will choose to buy the brand versus the generic alternative because these premiums are so modest.

In a country like the U.S. we offer additional benefits called Roundup Rewards that are associated with the brand. So for example, if I’m a farmer and I buy that SmartStax corn that I just mentioned, it’s a $350 bag of corn seed. Let’s say I plant that corn seed, my field floods and I lost it. Well if I bought Roundup, I get that back. So it costs us very little to self-insure. If you’re that producer, for an extra $0.50 or $1 or $2 an acre to have that insurance is worth a ton to me. And so that’s how we can utilize the brand to create that kind of sustainable but modest premium, relative to the other products that are out there.

One can question at $3 whether costs are being covered on the competitive set, but we do know that last time that the world looked like this was 2006 and $3 seemed to be about the floor at that point in time as well. And so we’re kind of back to where we were and that’s why our assumption going forward is we’re going to take a conservative approach and say we have to earn against a floor at, say, $3.

So the second part of your question long term, if we can stabilize this business at $1 billion of GP, it will throw off plus or minus $400 million in cash, it’s less than 10% of the total company at that point in time. So to me it just doesn’t make sense necessarily in that environment to get rid of it. Plus ensuring that there’s – if you’re in the Roundup Ready crop business, ensuring that there’s an adequate and affordable supply around to spread over the top, it’s pretty integral to being in that business. So get the business stabilized, get it fixed, make sure that it can earn the $1 billion that we’re targeting. At $1 billion it earns more than its cost of capital. Very little depreciation or CapEx associated with the business. And so we feel comfortable that in that environment it makes sense to harvest the cash and have the linkage with the Roundup Ready crops.

where, “that environment” refers to the current situation of excessive generic capacity, production costs of $10/gallon, and MON pricing Roundup at $11-$13/gallon.

see: http://www.monsanto.com/investors/presentations.asp