What You Don't Know About Monsanto's Rising Herbicide Profits

By Markets Fool.com

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Image source: Mike Mozart/Flickr.

Despite creating tremendous value for farmers, consumers, and investors in the last 15 years,Monsanto is often characterized as an evil corporation bent on controlling the global food system and maximizing profits no matter the cost. All it does is develop, commercialize, and sell agricultural tools to farmers. Of course, one of the tools happens to be glyphosate, one of the world's most used herbicides, which doesn't give many people the warm and fuzzies. While it happened to replace much more toxic (from a human and environmental health standpoint) herbicides, the fact that we're applying them to foodstuffs at all still makes people uncomfortable.

The company's herbicide sales and profits increased 38% and 100%, respectively, from 2012 to 2014. That must mean Monsanto is churning out as much glyphosate as possible (and therefore must be evil), right? Not quite.

The percentage gains might be impressive, but that's only the "what" of this situation. Dig a little deeper and you'll find a pretty benign explanation (the "how") for Monsanto's rising herbicide profits.

Rising profits, rising volumes?
Here's the truth: Monsanto has grown both the top and bottom lines of its agricultural productivity segment -- where the financial performance of herbicides sold under the Roundup and Harness brands is reported -- mostly by optimizing product mix. In other words, the driving force behind the segment's improved performance has been the success of premium products with higher selling prices, not larger volumes of herbicides.

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To be fair, herbicide volumes have increased, but not to the extent you might think by looking at the percentage gains alone.

Agricultural Productivity Metric

2014

2012

% Change

Revenue

$5.12 billion

$3.72 billion

37.7%

Gross Profit

$1.98 billion

$0.99 billion

101%

Revenue Impact from Volumes

---

---

11.3%

Revenue Impact from Prices

---

---

30.9%

Source: SEC filings.

That table may catch many off guard. However, the company's recent focus on repositioning its herbicide offerings up the value chainmakes complete sense considering glyphosate is a generic agricultural tool; meaning it is no longer protected by patents; meaning Monsanto isn't the only manufacturer of the product. Of course, focusing on higher margin products is good news for investors.And the fact that the company looks to innovation to drive growth, rather than pumping out ever-higher volumes of an existing product, should be applauded by those concerned with the environmental impact of the company's products.

To further that point, it's important to note that the majority of Monsanto's sales and profits are derived from its seeds and genomics segment, not from selling herbicides. The seeds and genomics business encompasses the performance of 1) genetic traits that allow crops to withstand pests or tolerate the application of herbicides and 2) seeds (some of which contain novel genetic traits).

Here's how the two segments compare:

Segment Results

2014

% of Total

Agricultural Productivity, Revenue

$5.12 billion

32.3%

Agricultural Productivity, Gross Profit

$1.98 billion

23.1%

Seeds and Genomics, Revenue

$10.7 billion

67.7%

Seeds and Genomics, Gross Profit

$6.6 billion

76.9%

Source: SEC filings.

What does it mean?
While Monsanto might be characterized as a company that recklessly manufactures herbicides and puts profits before all else, including environmental safety, that simply isn't the case. Yes, the company generates healthy profits, but it does so by developing, commercializing, and selling innovative products that its customers (farmers) demand. Better yet for farmers -- and investors -- as more and more companies stepped in to manufacture glyphosate, Monsanto didn't chase easy volume gains. Instead, the company repositioned up the value chain to deliver growth and respond to demands from its customers. So although it might be tempting to accept that the company is generating sky-high profits from selling increasing amounts of herbicides, it's always best to consider the facts. The numbers don't lie.

The article What You Don't Know About Monsanto's Rising Herbicide Profits originally appeared on Fool.com.

Maxx Chatsko has no position in any stocks mentioned.Check out hispersonal portfolio,CAPS page,previous writingfor The Motley Fool, and follow him on Twitter to keep up with developments in the synthetic biology field.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.