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Digging into Monsanto’s Cost of Doing Business

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Cost structure

Monsanto (MON) is in the commodities business (SOIL), in which it needs to be cautious about its costs. However, MON’s intellectual property on different crops and traits gives it the ability to charge a premium. Let’s have a look at Monsanto’s cost structure.

Cost of sales

Monsanto’s cost of sales includes its seed costs under its Seed & Genomics segment. Whether directly or through a contracted third-party, the company produces seeds. In 2016, the company’s cost of sales accounted for ~48% of its sales. The company’s cost of sales as a percentage of its sales has been fairly stable over the past decade. It’s averaged 47.5% over the period, which is where its costs were in 2016.

To mitigate volatility in costs, companies such as Monsanto, Dow Chemical (DOW), Syngenta (SYT), and PotashCorp (POT) often enter into contracts to lock in the costs of raw materials.

SG&A and R&D

Selling, general, and administrative (or SG&A) costs accounted for ~21% of Monsanto’s sales in 2016. On average, the company’s cost of SG&A has been ~19% of its sales over the past 11 years. These costs also include labor-related costs.

R&D (research and development) is an important cost for Monsanto. Usually, rising R&D costs indicate more investment in innovation, which can boost future earnings. Monsanto’s R&D costs have been ~10.4% of its sales in the past decade. In 2008, its R&D costs fell due to the financial crisis, but they bounced back in the following year.

Next, we’ll discuss Monsanto’s margins.

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