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Monsanto & the Global Glyphosate Market: Case Study

June 2012 Pricing 1 Comment

Background

Monsanto Company is a lead agricultural firm providing seeds, biotechnology trait products, and herbicides to farmers worldwide.  Monsanto agricultural products offer efficient solutions to farmers facing yield productivity concerns, cost management issues, and food quality needs.  The business is segmented into two main revenue drivers, Seeds and Genomics, and Agricultural Productivity.  The Agricultural Productivity segment serves nonselective agricultural, ornamental, commercial, industrial, and residential lawn and garden applications for weed management.

Glyphosate is the most widely used broad spectrum systemic herbicide in the world.  Monsanto primarily distributes glyphosate products in the B2B market through distributors, independent retailers and dealers, and agricultural cooperatives.  In some instances in foreign markets, Monsanto sells directly to farmers.  Monsanto’s production process experiences lower lead times and cost savings due to vertically integrated supply chains for raw materials including: disodium iminodiacetic acid and phosphorus.  In addition to lean value chains, Monsanto leases phosphate mines in several locations from government entities, providing ample supply for production needs.

The Agricultural Productivity division has confronted numerous issues due to increased global competition, specifically Asian based herbicide manufacturers.  Since the expiration of Monsanto’s primary glyphosate product, Roundup, in 2000, many firms have entered the market to serve farmer’s requests for cheaper weed control alternatives.  The increase of competition on an international scale and increase in the number of distributors packaging and selling generic glyphosate products have led to declining prices and erosion of margins.  The overcapacity in supply and increase in channel inventory of glyphosate added significant downward pricing pressure.

Challenge Issue

Chinese owned glyphosate manufacturers have increased their international presence in the past ten years.  Chinese firms possessing low cost labor, chemical capital investment in infrastructure, abundant supply of raw materials, had incentive to produce glyphosate when margins were robust during 2007 and 2008.  China currently produces more than 40% of the global glyphosate supply and exports almost 35% of the world supply. The glyphosate industry concentration in the Chinese market in 2010 is held primarily by 5 firms[i].\

The “others” portion consisted of approximately 49 manufacturers in 2010 and have dropped almost 19% in 2011[ii].  The restructuring of the Chinese glyphosate market into a more rational and stable environment has been the result of regulation, increased price of raw materials, over-supply of end products, and price deterioration.

Policy implications banning the production and use of glyphosate 10% SL and 30% levels have forced producers to increase the concentration to be more effective.  This regulatory move will increase marginal costs of production and pair down the competitive field.  The more prevalent players in the Chinese markets, experiencing economies of scale and scope production, have broken away from the pack.

In 2008 and 2009, Monsanto as well as many competing firms realized significant profit from the inflated price of glyphosate.  The ramp up in industry supply of generic glyphosate by Chinese firms to capitalize on bumper profits not only reduced global prices but hurt margins earned by Monsanto in 2010.  The discount price offerings by Chinese manufacturers resulted in transfer of consumer buying patterns to more affordable options while sacrificing effectiveness.  The emergence of large Chinese glyphosate producers in the global export market have provided major reasons for the restructuring of many pricing strategies employed by the top 5 agrochemical suppliers.

Action

The following Monsanto financial data for the Agricultural Productivity sector shows the impact of Chinese generic competitive products and their resulting profit saving actions[iii].

The overcapacity of glyphosate products produced by Chinese manufacturers and increased global export ratios are a few reasons why Monsanto’s gross profit fell 76% from 2009 to 2010 in the Agricultural Productivity sector.  These impacts led to negative earnings before interest and tax deductions.  The reality at hand called for immediate action on Monsanto’s behalf to stand firm in the market they initially created.

In order to remain the key manufacturer and supplier of glyphosate in the U.S., Monsanto implemented a price cut of 50% of the previous year prices for Roundup.  The new price was applied for the beginning of the 2010 growing season to entice farmers to readopt or continue using Monsanto weed control products.  Pricing glyphosate at a discounted rate more consistent with the generic price Chinese firms was exporting, proved to be a risky and possibly detrimental action.

End users of glyphosate, farmers, already compete in a commodity market where profit margins are razor thin and price is already established by what the market will bear.  Due to static prices for the most part, farmers choose cost cutting techniques to bolster profit margins.  Although cost savings may occur in the short run, choosing a watered down version of glyphosate from non-reputable producers in the end negatively affects crop yields.  Glyphosate produced by Monsanto relies heavily on high product quality control and effective weed prevention.  The value created by using Monsanto glyphosate products is far higher than utilizing generic based glyphosate goods.

The positive differential value exceeding comparable alternatives (Generic 10 % SL and 30% Chinese glyphosate) prompted the premium price offering of Roundup.  Eroding this value by pricing below the current exchange value seemed to be misaligning consumer’s perception of effectiveness yet boosting quantity sold and market share.  Matt Helms, Monsanto North America crop protection marketing lead, supported the market action of setting price points $1.00 USD/gallon above generic alternatives.  Offering a trusted brand to a consumer that is priced in the same space as generics, Monsanto invites consumers to up sale without making a significant tradeoff.

Monsanto’s price cut is clearly borderline predatory and in other senses defensive.  Driving volume at the expense of price decreases was the hopeful projection goal.  Continuing to serve the market with superior agrochemical products and maintaining socially responsible farming methods lies at the core.  Understanding end users’ needs and concerns allows for better and more effective marketing methods.

In addition to price cuts, Monsanto restructured their Roundup Rewards loyalty program as a form of a discount pricing structure.  Farmers practicing chemical land management with Monsanto products in compliance with government protocols receive rebates of up to $1.50 per acre.  The farmer support and education initiative also provides farmers incentive to participate and use Roundup products for further rebates of up to $1.00 per acre.  Maintaining loyalty and brand awareness is at the heart of Monsanto’s pricing strategy.  Discounting based on repeat customers and using Monsanto products drives continuous volume.

Complement sales have also been a focal point in Monsanto’s strategy to drum up volume.  Incentives to buy glyphosate bundled with glyphosate resistant seed crops have been a fledging yet impactful way to drive profit.  The integration of transactions occurring simultaneously from the Agricultural Productivity sector and Seeds and Genomics sector as packages creates symbiotic relationships with longstanding benefit.

Conclusion

Engaging in a pricing strategy that cuts glyphosate prices, initiates more customer loyalty programs, and bundles new complement products has begun to pay dividends for Monsanto.  The price decrease alone would have resulted in a sales volume increase, but not as significant as the price decrease paired with education initiatives, customer loyalties programs, and dual product sales.  Even though the price fell almost 50% between 2009 and 2010, volume surpassed the needed volume hurdle of 37% to maintain profit margins experienced in 2008.

Most pricing experts would advise against price depreciation methods to compete with lower end product offerings.  Monsanto did not heed suggestions and aggressively defended market share in the most profitable global areas.  The price decrease coupled with restructuring of the product value proposition resulted in an increase of gross profit by 46% in 2010.  Instead of continuing its premier value orientation and premium price, Monsanto chose loyalty, price concessions for repeat customers, and adjoining inter product category sales.  The development of price structures and a marketing strategy that fully explained and understood the market challenge proved to yield positive returns.  Monsanto will remain an industry leader in the glyphosate market.  Success…

 

References[i] CCM International
[ii] CCM International
[iii] Edgar SEC Filing: Monsanto 10-K 2011


  • Wieke

    do you know how much the global production capacities of glifosat from all state besides China nowdays? thanks before…

About the author

Curry W. Hilton is a senior pricing analyst at Wiglaf Pricing and economics lecturer at Elon University. His primary research interest focuses on price segmentation, negotiations, and firm strategy.

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