Monsanto's Cashing In On Corn

 

The day before its earnings release, Monsanto dropped a big one on investors, announcing that it will build a new processing plant and expand another in order to double seed corn production in Nebraska.

 

With the boom and bust of the ethanol industry all over the news in recent weeks, Monsanto's move suggests that the frenzy over the corn-based fuel isn't over yet.

 

Monsanto (nyse: MON - news - people ) shares rose 2.0%, or $1.75, to close at $89.52 on Tuesday after hitting an all-time high of $89.79 following the news that the company plans a $155 million expansion to its existing operation in Kearney, which will add 55 full-time jobs and 2,000 part-time jobs.

 

A new 145-acre processing plant will also be built in York County about 40 miles west of Lincoln, Neb. Construction of the new facility and expansion of the current production is expected to be finished by the end of 2009.

 

"Expanding production capacity in Nebraska is essential in continuing to meet the growing demand for our Dekalb brand corn seed products throughout the Western Corn Belt," said Mark Leidy, executive vice president of manufacturing for Monsanto.

 

Yet the St. Louis-based company's third-quarter profit skyrocketed more than 70% on strong, consensus-beating sales of corn seed and herbicide. (See " Monsanto Grows Investor-Pleasing Profits") Net income, the company said, totaled $570.0 million, or $1.03 per share, versus $334.0 million, or 60 cents per share, from the year-ago period. Profit from continuing operations came in at $565.0 million, or $1.02 per share, up 75.5% from $322.0 million, or 58 cents per share, a year ago.

 

But it was only last month that a Friedman, Billings, Ramsey analyst downgraded his price targets and profit expectations for three ethanol producers and lowered his price forecast for ethanol for 2007 to $2.05 per gallon from $2.20, and his 2008-2010 forecast to $1.80 per gallon from $1.95. (See " Balloon Punctured For Ethanol ").

 

Ethanol prices have fallen 30% since May and analysts expect the decline to continue through 2008. FBR analyst Eitan Bernstein estimated that margins have dropped to 15 cents per gallon from 75 cents per gallon.

 

Although there's no question that while the ethanol industry as a whole has over-expanded, Mark R. Gulley an analyst at Soleil-Gulley & Associates said it doesn't affect corn seed producers.

 

Gulley said that Monsanto has already talked about the need for additional seed production capacity in the United States. "What is more significant is that Monsanto continues to gain market share in corn seed," Gulley said. "It's a big ticket expansion for a seed company and what it further says is that they plan to continue to gain market share."

 

Monsanto's market share for its Dekalb brand is 24%, while DuPont (nyse: DD - news - people )'s Pioneer unit has 30% market share and Syngenta (nyse: SYT - news - people )'s three seed brands have a 12% share. A gain in market share for Monsanto will "raise the ante for competitors," Gulley said.

 

One question that Gulley says the company has not addressed is whether the new plant will allow older, inefficient plants to be offloaded, which may mean overall production will not increase