CAPS Short: Monsanto is losing market share to key competitors
I have been hearing rumblings from my contacts in the ag sector for a couple of weeks now that farmers who are being hammered by falling commodities prices and tight credit are looking for ways to cut costs. One way to do so is to buy cheaper seed. This got me thinking about shorting Monsanto, which sells the most expensive seeds around. I have friends who have done very well shorting MON in real life and I think that it still has room on the down side.
Someone recently forwarded me a research report that confirmed my suspicion about Monsanto. Apparently, the company's refusal to cut prices is costing it market share. Monsanto has been steadily gaining market share for a number of years as high crop prices caused farmers to do anything that they can to increase their yields. Now that crop prices are falling and credit is tight farmers are less willing to cough up the extra cash for Monsanto's premium seeds.
Furthermore, recent studies indicate that the yield advantage that Monsanto's seeds have over its competitors' seeds, like Pioneer, may have been cut by as much as 50%.
Some in the industry expect MON to lose market share to Dupont's Pioneer brand seeds this quarter.
Monsanto raised its seed prices by 28% to 33% when the price of corn was significantly higher than it is today. This compares to a price in crease of only 12% to 17% from a lower base for Pioneer seeds. Farmers appear to be more willing to cut back on seed quality than to reduce the amount of fertilizer they use.
Another major negative for Monsanto is that the current prices of soybeans in relation to corn may cause farmers to shift their acreage from the latter to the former. If this occurs, it is bad for Monsanto, which has a more dominant position in the corn seed market.
Not only does it appear as though Monsanto is poised to lose market share in the seed sector, but farmers are balking at the higher cost of its Roundup brand herbicide as well. Many farmers have switched to generic herbicides and industry sources see this trend accelerating in 2009. Monsanto recently offered dealers the opportunity to pre-order Roundup in an effort to avoid a scheduled 2009 price increase for its products, yet few took advantage of the offer citing the fact that money is tight and what funds they do have is already tied up in fertilizer.
Take a look at Monsanto's stock compared to that of a key competitor DuPont:
MON: P/E 20, Dividend 1.2%
DD: P/E 6.5, Dividend 6.5%
Add to this the fact that Monsanto may begin to lose market share to DuPont and Monsanto sure looks like a CAPS short to me. Yes, I realize that DuPont does a lot more than just seeds, but the company looks like a compelling buy at this level. I am already long DD in CAPS.