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Monsanto: The Dark View

Stocks in this article: MON DD SYT

True to Gilford's Chanos legacy, Christopherson has a morbid long-term view of Monsanto and its business prospects -- the company, he says, is in the midst of a protracted "unraveling process" -- and it has little to do with the sort of criticism leveled at Monsanto from environmentalists or the documentary Food Inc..

Though he's of the opinion that the general commodities bubble could burst after the Federal Reserve pulls out its QE2 props, his thesis really boils down to one thing: corn.

More than any other single product, Monsanto's business and growth goals now depend on corn seeds and traits, including its new SmartStax-branded genetically modified maize product, which debuted on the market last year. Corn-related seeds and traits now account for just shy of 50% of the company's gross profit.

According to Christopherson, this is bad news. He offers up the argument that corn prices, which have pushed above $7 a bushel for the first time ever, depend entirely on ethanol. And the ethanol industry, which bought some 35% to 40% of the U.S. corn harvest last year, depends entirely on government subsidies. And government farm subsidies, despite a powerful lobby in Washington, may come in for attack in the new budget-conscious Zeitgeist on Capitol Hill.

"At some point here, we'll have to address the nuttiness of ethanol, and burning it in cars," Christopherson said. "Everybody in the room knows that's just nuts."

Thus, he believes, if the subsidies go, so do these historically elevated corn prices. Farmers are richer than they've ever been, according to the USDA, which has forecast all-time high income levels for growers this year. If flush ag pros looking to hike yields will allow Monsanto to sell more and higher priced maize seeds, then any drop in corn prices will take its toll on the company's sales, as it will on many correlated agriculture names, like fertilizer producers and tractor makers.

Others counter that the EPA's recent approval of a new ethanol-gasoline blend for cars, called E15, is a sign that the government isn't about to back off on subsidies

Christopherson also argues that growing competition from the likes of Dupont (DD) and Syngenta (SYT) will no longer lend Monsanto the pricing power it had previously held over farmers. Further, there's the worrisome trend of weeds becoming resistant to herbicides like Monsanto's classic RoundUp -- indeed, it has been Monsanto's basic business model to sell seeds genetically programmed to withstand its own chemical weed-killer spray. And, doubly further, Christopherson is unconvinced that the company's SmartStax seeds will offer enough yield gains for farmers to justify their use.

Monsanto begs to differ, of course. The company has pointed out that the yield scare early in the 2010 harvest season, when analysts worried that SmartStax wasn't producing as many bushels as promised, was just that: a scare.

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