Name That Trade – $MON The Miracle Grower

by Enis March 22, 2013 2:30 pm • Commentary

When I was a market maker in Monsanto in 2007 and 2008, it traded more like a high-flying tech stock during the tech bubble than a staid, agricultural products company.  Here is the 10 year weekly chart that shows what I mean:


10 weekly chart of MON, Courtesy of Bloomberg
10 weekly chart of MON, Courtesy of Bloomberg

Options routinely traded with an implied volatility in the 40’s and 50’s, previously unheard for a boring name like MON (it’s currently back to its old, boring ways, around a 20 vol).

Fast forward to today, and after the commodities bubble burst in 2008, MON was fell from near 150 to below 50, in dramatic fashion.  But the stock has been on a slow and steady climb ever since, growing more slowly but also more sustainably.  With earnings growth of 10-15% projected over the next 3 years, life finally feels more secure for Monsanto shareholders.

So what’s my view on the name here, above the psychologically important 100 level?  

Monsanto’s bread and butter business is to sell genetically modified seeds to farmers to improve farmers’ yields, mostly when growing the big cash crops:  corn, soybeans, and wheat.  The company sells 60% of its products in the U.S., and 40% internationally (half of that in Latin America).  Monsanto is in effect a technology company, but for the agricultural industry.  As a result though, its fortunes are often tied to the whims of grains prices.

That’s what makes me nervous with the stock here.  Check out the chart of corn (blue), soybeans (red), and wheat (green) prices vs. Monsanto stock (black) over the last year:

[caption id="attachment_23989" align="alignnone" width="631"]1 year chart of MON vs. corn, soybeans, and wheat futures, Courtesy of Bloomberg 1 year chart of MON vs. corn, soybeans, and wheat futures, Courtesy of Bloomberg[/caption]


The grains topped out last summer after the severe drought conditions subsided, and MON stock has continued higher.  MON reported a stronger than expected quarter on Jan 8, 2013, which has been part of the reason for the outperformance, and the broader stock market gains have contributed as well.  But at the end of the day, if grains prices are lower, farmers’ input spending is usually lower as well.

I considered doing a trade to fade the recent strength, but decided against it as MON reports earnings on Apr 3rd, and I don’t want to risk a trade on whether the number will be strong or weak.  But I have MON on my radar if that divergence continues going forward.