MONSANTO COMPANY		SECOND QUARTER 2009 FORM 10-Q

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended Feb. 28, 2009

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

MONSANTO COMPANY

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		43-1878297 (I.R.S. Employer Identification No.)
800 North Lindbergh Blvd., St. Louis, MO (Address of principal executive offices)		63167 (Zip Code)

(314) 694-1000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 545,748,616 shares of Common Stock, $0.01 par value, outstanding as of March 31, 2009.

 

 

MONSANTO COMPANY		SECOND QUARTER 2009 FORM 10-Q

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

In the interests of our investors, and in accordance with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, this section of our report explains some of the important reasons that actual results may be materially different from those that we anticipate. In this report, and from time to time throughout the year, we share our expectations for our company’s future performance. These forward-looking statements include statements about our business plans; the potential development, regulatory approval, and public acceptance of our products; our expected financial performance, including sales performance, and the anticipated effect of our strategic actions; the anticipated benefits of recent acquisitions; the outcome of contingencies, such as litigation; domestic or international economic, political and market conditions; and other factors that could affect our future results of operations or financial position, including, without limitation, statements under the captions “Overview — Executive Summary — Outlook,” “Seeds and Genomics Segment,” “Agricultural Productivity Segment,” “Financial Condition, Liquidity, and Capital Resources,” “Outlook,” “Critical Accounting Policies and Estimates” and “Legal Proceedings.” Any statements we make that are not matters of current reportage or historical fact should be considered forward-looking. Such statements often include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “will,” and similar expressions. By their nature, these types of statements are uncertain and are not guarantees of our future performance.

Since these statements are based on factors that involve risks and uncertainties, our company’s actual performance and results may differ materially from those described or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, among others: continued competition in seeds, traits and agricultural chemicals; the company’s exposure to various contingencies, including those related to intellectual property protection, regulatory compliance and the speed with which approvals are received, and public acceptance of biotechnology products; the success of the company’s research and development activities; the outcomes of major lawsuits; developments related to foreign currencies and economies; successful operation of recent acquisitions; fluctuations in commodity prices; compliance with regulations affecting our manufacturing; the accuracy of the company’s estimates related to distribution inventory levels; the company’s ability to fund its short-term financing needs and to obtain payment for the products that it sells; the effect of weather conditions, natural disasters and accidents on the agriculture business or the company’s facilities; and other risks and factors described or referenced in Part II — Item 1A — Risk Factors — below and Part I — Item 1A of our Report on Form 10-K for the fiscal year ended Aug. 31, 2008.

Our forward-looking statements represent our estimates and expectations and are based on currently available information at the time that we make those statements. However, circumstances change constantly, often unpredictably, and many events beyond our control will determine whether the expectations encompassed in our forward-looking statements will be realized. As a result, investors should not place undue reliance on these forward-looking statements. We disclaim any current intention or obligation to revise or update any forward-looking statements, or the factors that may affect their realization, whether in light of new information, future events or otherwise, and investors should not rely on us to do so.

MONSANTO COMPANY		SECOND QUARTER 2009 FORM 10-Q

TABLE OF CONTENTS

				Page
PART I—FINANCIAL INFORMATION
Item 1.		Financial Statements			3
		Statements of Consolidated Operations			4
		Condensed Statements of Consolidated Financial Position			5
		Statements of Consolidated Cash Flows			6
		Notes to Consolidated Financial Statements			7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
		Overview			26
		Results of Operations — Second Quarter Fiscal Year 2009			28
		Seeds and Genomics Segment			31
		Agricultural Productivity Segment			32
		Financial Condition, Liquidity, and Capital Resources			33
		Outlook			37
		Critical Accounting Policies and Estimates			40
		New Accounting Standards			40
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			41
Item 4.		Controls and Procedures			42
PART II—OTHER INFORMATION
Item 1.		Legal Proceedings			43
Item 1A.		Risk Factors			44
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			44
Item 4		Submission of Matters to a Vote of Security Holders			44
Item 6.		Exhibits			45
SIGNATURE					46
EXHIBIT INDEX					47
EX-12
EX-31.1
EX-31.2
EX-32

MONSANTO COMPANY		SECOND QUARTER 2009 FORM 10-Q

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

The Statements of Consolidated Operations of Monsanto Company and its consolidated subsidiaries for the three months and six months ended Feb. 28, 2009, and Feb. 29, 2008, the Condensed Statements of Consolidated Financial Position as of Feb. 28, 2009, and Aug. 31, 2008, the Statements of Consolidated Cash Flows for the six months ended Feb. 28, 2009, and Feb. 29, 2008, and related Notes to Consolidated Financial Statements follow. Unless otherwise indicated, “Monsanto” and the “company” are used interchangeably to refer to Monsanto Company or to Monsanto Company and its consolidated subsidiaries, as appropriate to the context. Unless otherwise indicated, “earnings (loss) per share” and “per share” mean diluted earnings (loss) per share. In the notes to the consolidated financial statements, all dollars are expressed in millions, except per share amounts. Unless otherwise indicated, trademarks owned or licensed by Monsanto or its subsidiaries are shown in all capital letters. Unless otherwise indicated, references to “ROUNDUP herbicides” mean ROUNDUP branded herbicides, excluding all lawn-and-garden herbicides, and references to “ROUNDUP and other glyphosate-based herbicides” exclude all lawn-and-garden herbicides.

MONSANTO COMPANY		SECOND QUARTER 2009 FORM 10-Q

Statements of Consolidated Operations

Unaudited		Three Months Ended								Six Months Ended
(Dollars in millions, except per share amounts)		Feb. 28, 2009				Feb. 29, 2008				Feb. 28, 2009				Feb. 29, 2008
Net Sales		$	4,035			$	3,727			$	6,684			$	5,776
Cost of goods sold			1,514				1,516				2,613				2,526
Gross Profit			2,521				2,211				4,071				3,250
Operating Expenses:
Selling, general and administrative expenses			522				529				1,072				985
Research and development expenses			265				219				517				418
Acquired in-process research and development			162				—				162				1
Total Operating Expenses			949				748				1,751				1,404
Income from Operations			1,572				1,463				2,320				1,846
Interest expense			26				32				49				66
Interest income			(18	)			(38	)			(43	)			(70	)
Solutia-related income			—				(204	)			—				(187	)
Other expense — net			32				1				58				3
Income from Continuing Operations Before Income Taxes and Minority Interest			1,532				1,672				2,256				2,034
Income tax provision			440				552				616				657
Minority interest expense (income)			1				(1	)			3				6
Income from Continuing Operations		$	1,091			$	1,121			$	1,637			$	1,371
Discontinued Operations:
Income from operations of discontinued businesses			1				11				19				19
Income tax provision			—				3				8				5
Income on Discontinued Operations			1				8				11				14
Net Income		$	1,092			$	1,129			$	1,648			$	1,385
Basic Earnings per Share:
Income from continuing operations		$	2.00			$	2.05			$	2.99			$	2.51
Income on discontinued operations			—				0.01				0.02				0.02
Net Income		$	2.00			$	2.06			$	3.01			$	2.53
Diluted Earnings per Share:
Income from continuing operations		$	1.97			$	2.00			$	2.94			$	2.45
Income on discontinued operations			—				0.02				0.02				0.03
Net Income		$	1.97			$	2.02			$	2.96			$	2.48
Weighted Average Shares Outstanding:
Basic			546.6				547.8				547.3				547.0
Diluted			555.2				559.2				556.3				558.5
Dividends Declared per Share		$	0.51			$	0.35			$	0.51			$	0.35

The accompanying notes are an integral part of these consolidated financial statements.

MONSANTO COMPANY		SECOND QUARTER 2009 FORM 10-Q

Condensed Statements of Consolidated Financial Position

Unaudited		As of Feb. 28,				As of Aug. 31,
(Dollars in millions, except share amounts)		2009				2008
Assets
Current Assets:
Cash and cash equivalents		$	2,004			$	1,613
Trade receivables, net			2,171				2,067
Miscellaneous receivables			616				742
Deferred tax assets			411				338
Inventory, net			3,112				2,453
Assets of discontinued operations			—				153
Other current assets			156				243
Total Current Assets			8,470				7,609
Total property, plant and equipment			6,560				6,725
Less accumulated depreciation			3,358				3,402
Property, Plant and Equipment, Net			3,202				3,323
Goodwill			3,035				3,132
Other Intangible Assets, Net			1,411				1,531
Noncurrent Deferred Tax Assets			818				1,000
Long-Term Receivables, Net			544				636
Noncurrent Assets of Discontinued Operations			—				236
Other Assets			513				524
Total Assets		$	17,993			$	17,991
Liabilities and Shareowners’ Equity
Current Liabilities:
Short-term debt, including current portion of long-term debt		$	110			$	24
Accounts payable			761				1,090
Income taxes payable			540				161
Accrued compensation and benefits			254				441
Accrued marketing programs			819				754
Deferred revenues			1,022				867
Grower production accruals			308				172
Dividends payable			145				132
Liabilities of discontinued operations			6				26
Miscellaneous short-term accruals			686				772
Total Current Liabilities			4,651				4,439
Long-Term Debt			1,704				1,792
Postretirement Liabilities			562				590
Long-Term Deferred Revenue			518				566
Noncurrent Deferred Tax Liabilities			139				204
Long-Term Portion of Environmental and Litigation Liabilities			215				226
Noncurrent Liabilities of Discontinued Operations			—				52
Other Liabilities			600				748
Shareowners’ Equity:
Common stock (authorized: 1,500,000,000 shares, par value $0.01)
Issued 584,385,582 and 583,581,984 shares, respectively;
Outstanding 545,804,660 and 548,592,933 shares, respectively			6				6
Treasury stock, 38,580,922 and 34,989,051 shares, respectively, at cost			(1,453	)			(1,177	)
Additional contributed capital			9,584				9,495
Retained earnings			2,510				1,138
Accumulated other comprehensive loss			(1,036	)			(78	)
Reserve for ESOP debt retirement			(7	)			(10	)
Total Shareowners’ Equity			9,604				9,374
Total Liabilities and Shareowners’ Equity		$	17,993			$	17,991

The accompanying notes are an integral part of these consolidated financial statements.

MONSANTO COMPANY		SECOND QUARTER 2009 FORM 10-Q

Statements of Consolidated Cash Flows

Unaudited		Six Months Ended
(Dollars in millions)		Feb. 28, 2009				Feb. 29, 2008
Operating Activities:
Net Income		$	1,648			$	1,385
Adjustments to reconcile cash provided by operating activities:
Items that did not require (provide) cash:
Depreciation and amortization			270				281
Bad-debt expense			49				38
Receipt of securities from Solutia settlement			—				(38	)
Stock-based compensation expense			55				41
Excess tax benefits from stock-based compensation			(12	)			(118	)
Deferred income taxes			2				156
Equity affiliate (income) expense, net			(9	)			3
Acquired in-process research and development			162				1
Gain on sale of a business			(6	)			—
Other items			(4	)			(52	)
Changes in assets and liabilities that provided (required) cash, net of acquisitions:
Trade receivables, net			(244	)			(505	)
Inventory, net			(972	)			(439	)
Deferred revenues			158				603
Accounts payable and other accrued liabilities			402				673
Net investment hedge settlement			27				(64	)
Other items			(31	)			(88	)
Net Cash Provided by Operating Activities			1,495				1,877
Cash Flows Provided (Required) by Investing Activities:
Maturities of short-term investments			102				59
Capital expenditures			(461	)			(314	)
Acquisition of businesses, net of cash acquired			(273	)			(103	)
Purchases of long-term equity securities			(7	)			(78	)
Technology and other investments			(26	)			(16	)
Proceeds from divestiture of a business			300				—
Other investments and property disposal proceeds			6				48
Net Cash Required by Investing Activities			(359	)			(404	)
Cash Flows Provided (Required) by Financing Activities:
Net change in financing with less than 90-day maturities			(73	)			(19	)
Short-term debt reductions			—				(9	)
Short-term debt proceeds			55				—
Long-term debt reductions			(69	)			—
Payments on other financing			—				(1	)
Treasury stock purchases			(274	)			(121	)
Stock option exercises			17				82
Excess tax benefits from stock-based compensation			12				118
Dividend payments			(264	)			(192	)
Net Cash Required by Financing Activities			(596	)			(142	)
Effect of Exchange Rate Changes on Cash and Cash Equivalents			(149	)			88
Net Increase in Cash and Cash Equivalents			391				1,419
Cash and Cash Equivalents at Beginning of Period			1,613				866
Cash and Cash Equivalents at End of Period		$	2,004			$	2,285

See Note 17 — Supplemental Cash Flow Information — for further details.

The accompanying notes are an integral part of these consolidated financial statements.

MONSANTO COMPANY		SECOND QUARTER 2009 FORM 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

NOTE 1. BACKGROUND, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Monsanto Company, along with its subsidiaries, is a leading global provider of agricultural products for farmers. Monsanto’s seeds, biotechnology trait products, and herbicides provide farmers with solutions that improve productivity, reduce the costs of farming, and produce better foods for consumers and better feed for animals.

Monsanto manages its business in two segments: Seeds and Genomics and Agricultural Productivity. Through the Seeds and Genomics segment, Monsanto produces leading seed brands, including DEKALB, ASGROW, DELTAPINE, SEMINIS and DE RUITER, and Monsanto develops biotechnology traits that assist farmers in controlling insects and weeds. Monsanto also provides other seed companies with genetic material and biotechnology traits for their seed brands. Through the Agricultural Productivity segment, the company manufactures ROUNDUP brand herbicides and other herbicides and provides lawn-and-garden herbicide products for the residential market. See Note 19 — Segment Information — for further details.

In the fourth quarter of 2008, the company announced plans to divest its animal agricultural products business, which focused on dairy cow productivity (the Dairy business). This transaction was consummated on Oct. 1, 2008. As a result, financial data for this business has been presented as discontinued operations and has been recast and prepared in compliance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Accordingly, for all periods presented herein, the Statements of Consolidated Operations have been conformed to this presentation. See Note 21 — Discontinued Operations — for further details.

The accompanying consolidated financial statements have not been audited but have been prepared in conformity with accounting principles generally accepted in the United States for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, these unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations and cash flows for the interim periods reported. This Report on Form 10-Q should be read in conjunction with Monsanto’s Report on Form 10-K for the fiscal year ended Aug. 31, 2008. Financial information for the first six months of fiscal year 2009 should not be annualized because of the seasonality of the company’s business.

Significant Accounting Policy Update

Marketing and Advertising Costs: Promotional and advertising costs are expensed as incurred and are included in selling, general and administrative expenses in the Statements of Consolidated Operations. Accrued marketing program costs are recorded in accordance with Emerging Issues Task Force (EITF) Issue No. 01-9, Accounting for Consideration Given by a Vendor to a Customer, based on specific performance criteria met by our customers, such as purchase volumes, promptness of payment and market share increases. The company introduced new marketing programs during second quarter 2009 providing certain customers price protection consideration if standard published prices are lowered from the price the distributor paid on eligible products. The associated cost of marketing programs is recorded in net sales in the Statements of Consolidated Operations. As actual expenses are not known at the time of the sale, an estimate based on the best available information (such as historical experience and market research) is used as a basis for the liability. Management analyzes and reviews the marketing programs on a quarterly basis and adjustments are recorded as appropriate. Under certain marketing programs, product performance and variations in weather can result in free product to customers. The associated cost of this free product is recognized as cost of goods sold in the Statements of Consolidated Operations.

NOTE 2. NEW ACCOUNTING STANDARDS

In April 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) SFAS 141R-1 Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, (FSP SFAS 141R-1). This FSP amends and clarifies SFAS No. 141 (revised 2007), Business Combinations (SFAS 141R), to require that an acquirer recognize at fair value, at the acquisition date, an asset acquired or a liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of that asset or liability can be determined during the measurement period. If the acquisition-date fair value of such an asset acquired or liability assumed cannot be determined, the acquirer should apply the provisions of SFAS 5, Accounting for Contingencies, to determine whether the contingency should be recognized at the acquisition date or after it. FSP SFAS 141R-1 is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is after the beginning of the first annual reporting period beginning after Dec. 15, 2008. Accordingly, Monsanto will adopt FSP SFAS 141R-1 in fiscal year 2010. The company is currently evaluating the impact of this FSP on the consolidated financial statements.

In December 2008, the EITF issued EITF Issue No. 08-7, Accounting for Defensive Intangible Assets (EITF 08-7). This issue clarifies the accounting for defensive assets, which are separately identifiable intangible assets acquired in an acquisition which an entity does not intend to actively use but does intend to prevent others from using. EITF 08-7 requires an acquirer to account for these assets as a separate unit of accounting, which should be amortized to expense over the period the asset diminishes in value. This issue is effective for intangible assets acquired on or after the beginning of the first annual reporting

MONSANTO COMPANY		SECOND QUARTER 2009 FORM 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED (continued)

period beginning on or after Dec. 15, 2008. Accordingly, Monsanto will adopt EITF 08-7 in fiscal year 2010. The company is currently evaluating the impact of EITF 08-7 on the consolidated financial statements.

In December 2008, the FASB issued FSP SFAS 132R-1, Employers’ Disclosures about Postretirement Benefit Plan Assets (FSP SFAS 132R-1). This statement provides additional guidance regarding disclosures about plan assets of defined benefit pension or other postretirement plans. This FSP is effective for financial statements issued for fiscal years ending after Dec. 15, 2009. Accordingly, Monsanto will adopt FSP SFAS 132R-1 in fiscal year 2010. The company is currently evaluating the disclosure impact of adopting this FSP on the consolidated financial statements.

In December 2008, the FASB issued FSP SFAS No. 140-4 and FASB Interpretation Number (FIN) No. 46R-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities (FSP SFAS 140-4 and FIN 46R-8). This statement increases the disclosure requirements regarding continuing involvement with financial assets that have been transferred, as well as the company’s involvement with variable interest entities. The FSP is effective for financial statements issued for interim periods ending after Dec. 15, 2008. Accordingly, Monsanto adopted FSP SFAS 140-4 and FIN 46R-8 in second quarter 2009. The adoption of FSP SFAS 140-4 and FIN 46R-8 did not have an effect on Monsanto’s consolidated financial statements.

In June 2008, the FASB issued FSP EITF Issue No. 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1). FSP EITF 03-6-1 requires unvested share-based payment awards that contain rights to receive non-forfeitable dividends or dividend equivalents to be included in the two-class method of computing earnings per share as described in SFAS No. 128, Earnings per Share. This FSP is effective for financial statements issued for fiscal years beginning after Dec. 15, 2008, and interim periods within those years. Accordingly, Monsanto will adopt FSP EITF 03-6-1 in fiscal year 2010. The company is currently evaluating the impact of FSP EITF 03-6-1 on the consolidated financial statements.

In April 2008, the FASB issued FSP SFAS No. 142-3, Determining the Useful Life of Intangible Assets (FSP SFAS 142-3). FSP SFAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142. This FSP must be applied prospectively to intangible assets acquired after the effective date. This FSP is effective for fiscal years beginning after Dec. 15, 2008, and interim periods within those years. Accordingly, Monsanto will adopt FSP SFAS 142-3 in fiscal year 2010. The company is currently evaluating the impact of FSP SFAS 142-3 on the consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS 161). SFAS 161 amends and expands the disclosure requirements of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). It requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. This statement is effective for financial statements issued for fiscal periods beginning after Nov. 15, 2008. Accordingly, Monsanto adopted SFAS 161 in second quarter 2009. See Note 12 — Financial Instruments — for the disclosures required by SFAS 161.

In February 2008, the FASB issued FSP 157-2, Effective Date of SFAS No. 157 (FSP SFAS 157-2), which delays the effective date of SFAS No. 157, Fair Value Measurements (SFAS 157) for nonfinancial assets and liabilities to fiscal years beginning after Nov. 15, 2008. Accordingly, Monsanto will adopt the additional requirements of SFAS 157 that were deferred by FSP SFAS 157-2 in fiscal year 2010. The company is currently evaluating the impact on the consolidated financial statements of adopting the additional requirements of SFAS 157.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 (SFAS 160). SFAS 160 requires an entity to clearly identify and present its ownership interests in subsidiaries held by parties other than the entity in the consolidated financial statements within the equity section but separate from the entity’s equity. It also requires the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; changes in ownership interest be accounted for similarly, as equity transactions; and when a subsidiary is deconsolidated, any retained

MONSANTO COMPANY		SECOND QUARTER 2009 FORM 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED (continued)

noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary be measured at fair value. This statement is effective for financial statements issued for fiscal years beginning after Dec. 15, 2008. Accordingly, Monsanto will adopt SFAS 160 in fiscal year 2010. The company is currently evaluating the impact of SFAS 160 on the consolidated financial statements.

In December 2007, the FASB issued SFAS 141R. Under SFAS 141R, an entity is required to recognize the assets acquired, liabilities assumed, contractual contingencies and contingent consideration measured at their fair value at the acquisition date. It further requires that acquisition-related costs are to be recognized separately from the acquisition and expensed as incurred. In addition, acquired in-process research and development (IPR&D) is capitalized at fair value as an intangible asset and amortized over its estimated useful life. SFAS 141R is effective for business combinations for which the acquisition date is after the beginning of the first annual reporting period beginning after Dec. 15, 2008. Accordingly, Monsanto will adopt SFAS 141R in fiscal year 2010. The company is currently evaluating the impact of SFAS 141R on the consolidated financial statements.

NOTE 3. BUSINESS COMBINATIONS

In the first half of 2009, Monsanto paid approximately $5 million of contingent consideration related to fiscal year 2007 regional U.S. seed company acquisitions.

2009 Acquisition: In December 2008, Monsanto acquired 100 percent of the outstanding stock of Aly Participacoes Ltda. (Aly), which operates the sugarcane breeding and technology companies, CanaVialis S.A. and Alellyx S.A., both of which are based in Brazil, for $264 million (net of cash acquired), inclusive of transaction costs of less than $1 million.

A charge of $162 million was recorded in research and development expenses in fiscal year 2009, for the write-off of acquired IPR&D. The Income Approach valuation method was used to determine the fair value of the research projects. In developing assumptions for the valuation model, Monsanto used historical expense of Aly and other comparable data to estimate expected pricing, margins and expense levels. Management believed that the technological feasibility of the IPR&D was not established and that the research had no alternative future uses. Accordingly, the amount allocated to IPR&D was expensed immediately, in accordance with generally accepted accounting principles. The significant assumptions used to determine the fair value of IPR&D related to the Aly acquisition were as follows:

(Dollars in millions)
Weighted Average Discount Rate			17%
Expected Costs to Complete (undiscounted)			$166
Expected Years of Product Launches			2010 - 2019

The purchase price for this acquisition was primarily allocated to intangible assets, goodwill, and fixed assets. The primary items that generated the goodwill were the premiums paid by the company for the right to control the business acquired and the value of the acquired assembled workforces.

2008 Acquisitions: In June 2008, Monsanto acquired 100 percent of the outstanding stock of De Ruiter Seeds Group, B.V., and a related company, a leading protected-culture vegetable seeds company, for approximately $759 million (net of cash acquired), inclusive of transaction costs of $4 million.

In July 2008, Monsanto acquired Marmot, S.A., which operates Semillas Cristiani Burkard, a privately held seed company headquartered in Guatemala City, Guatemala, for $135 million (net of cash acquired), inclusive of transaction costs of $3 million.

In September 2007, Monsanto acquired 100 percent of the outstanding stock of Agroeste Sementes, a leading Brazilian corn seed company, for approximately $91 million (net of cash acquired), inclusive of transaction costs of approximately $1 million.

In fiscal year 2008, Monsanto completed other acquisitions for approximately $18 million, inclusive of transaction costs of $2 million. The financial results of these businesses were included in the company’s consolidated financial statements from the respective dates of acquisition.

MONSANTO COMPANY		SECOND QUARTER 2009 FORM 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED (continued)

For all fiscal year 2009 and 2008 acquisitions described above, the business operations and employees of the acquired entities were included within the Seeds and Genomics segment from their respective dates of acquisition. These acquisitions were accounted for as purchase transactions. Accordingly, the assets and liabilities of the acquired entities were recorded at their estimated fair values at the dates of the acquisitions. The purchase price allocations for the third and fourth quarter 2008 acquisitions and the fiscal year 2009 acquisition are preliminary and are subject to adjustment pending further assessments, including the valuation of certain assets. Proforma information related to acquisitions is not presented because the impact of the acquisitions on the company’s consolidated results of operations is not considered to be significant.

As of the acquisition dates, management began to assess and formulate plans to restructure the acquired entities. These activities are accounted for in accordance with EITF Issue No. 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination, and primarily include the potential closure of certain acquired subsidiaries. Through Feb. 28, 2009, estimated costs of $3 million have been recognized as long-term liabilities in the purchase price allocations above, and $1 million has been charged against these liabilities, primarily related to payments for employee terminations. As management finalizes plans to integrate or restructure certain activities of the acquired entities, further liabilities may be recorded as part of the purchase price allocation.

NOTE 4. CUSTOMER FINANCING PROGRAMS

Monsanto has established a revolving financing program to provide financing of up to $250 million for selected customers in the United States through a third-party specialty lender. Under the financing program, Monsanto originates customer loans on behalf of the lender, which is a special purpose entity (SPE) that Monsanto consolidates, pursuant to Monsanto’s credit and other underwriting guidelines approved by the lender. Under the program as amended in August 2006, Monsanto services the loans and provides a first-loss guarantee of up to $130 million. Following origination, the lender transfers the loans to multi-seller commercial paper conduits through a nonconsolidated qualifying special purpose entity (QSPE). Monsanto accounts for this transaction as a sale, in accordance with SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities (SFAS 140).

Monsanto has no ownership interest in the lender, the QSPE, or the loans. However, because Monsanto substantively originates the loans through the SPE (which it consolidates) and partially guarantees and services the loans, Monsanto accounts for the program as if it were the originator of the loans and the transferor selling the loans to the QSPE. Because QSPEs are excluded from the scope of FIN No. 46R, Consolidation of Variable Interest Entities (FIN 46R), and Monsanto does not have the unilateral right to liquidate the QSPE, FIN 46R does not have an effect on Monsanto’s accounting for the U.S. customer financing program.

Monsanto accounts for the guarantee in accordance with FIN No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others, an interpretation of SFAS No. 5, 57 and 107, and rescission of FIN No. 34, which requires that a guarantor recognize, at the inception of the guarantee, a liability for the fair value of the guarantee obligation undertaken. Monsanto records its guarantee liability at a value that approximates fair value (except that it does not discount credit losses because of the short-term nature of the loans), primarily driven by expected future credit losses. Monsanto does not recognize any servicing asset or liability because the servicing fee is considered adequate compensation for the servicing activities. Servicing revenues collected and earned net of discounts on the sale of customer loans were $1 million during the six months ended Feb. 28, 2009. Servicing expenses and discounts on the sale of customer loans were $2 million during the six months ended Feb. 29, 2008.

Proceeds from customer loans sold through the financing program totaled $130 million for the first six months of fiscal year 2009. These proceeds are included in net cash provided by operating activities in the Statement of Consolidated Cash Flows. There were no proceeds from customer loans sold for the first six months of fiscal year 2008. The loan balance outstanding as of Feb. 28, 2009, and Aug. 31, 2008, was $8 million and $66 million, respectively. Loans are considered delinquent when payments are 31 days past due. If a customer fails to pay an obligation when due, Monsanto would incur a liability to perform under the first-loss guarantee. As of Feb. 28, 2009, and Aug. 31, 2008, less than $1 million of loans sold through this financing program were delinquent, and Monsanto recorded its guarantee liability at less than $1 million, based on the company’s historical collection experience with these customers and a current assessment of credit exposure. Adverse

MONSANTO COMPANY		SECOND QUARTER 2009 FORM 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED (continued)

changes in the actual loss rate would increase the liability. If Monsanto is called upon to make payments under the first-loss guarantee, it would have the benefit under the financing program of any amounts subsequently collected from the customer.

Monsanto has an agreement with a lender to establish a program that originally provided financing of up to $250 million for selected customers in Brazil. The agreement qualifies for sales treatment under SFAS 140. Proceeds from the transfer of receivables are included in net cash provided by operating activities in the Statements of Consolidated Cash Flows. Proceeds from the transfer of receivables through the program totaled $91 million for each of the first six months of fiscal years 2009 and 2008. Monsanto provides a guarantee of the loans in the event of customer default. The term of the guarantee is equivalent to the term of the bank loans. The liability for the guarantees is recorded at an amount that approximates fair value and is based on the company’s historical collection experience with customers that participate in the program and a current assessment of credit exposure. The guarantee liability recorded by Monsanto was $7 million and $10 million as of Feb. 28, 2009, and Aug. 31, 2008, respectively. If performance is required under the guarantee, Monsanto may retain amounts that are subsequently collected from customers. The maximum potential amount of future payments under the guarantee was $132 million as of Feb. 28, 2009. The loan balance outstanding for these programs was $132 million and $187 million as of Feb. 28, 2009, and Aug. 31, 2008, respectively.

Monsanto also has similar agreements with banks that provide financing to its customers in Brazil through credit programs that are subsidized by the Brazilian government. In addition, Monsanto has similar financing programs in Europe and Argentina. Proceeds from the transfer of receivables are included in net cash provided by operating activities in the Statements of Consolidated Cash Flows and totaled $51 million and $50 million for the first six months of fiscal years 2009 and 2008, respectively. Under most of these programs, Monsanto provides a guarantee of the loans in the event of customer default. The terms of the guarantees are equivalent to the terms of the bank loans. The liability for the guarantees is recorded at an amount that approximates fair value and is based on the company’s historical collection experience with customers that participate in the program and a current assessment of credit exposure. The guarantee liability recorded by Monsanto was $8 million and $11 million as of Feb. 28, 2009, and Aug. 31, 2008, respectively. If performance is required under the guarantee, Monsanto may retain amounts that are subsequently collected from customers. The maximum potential amount of future payments under the guarantees was $75 million as of Feb. 28, 2009. The loan balance outstanding for these programs was $75 million and $92 million as of Feb. 28, 2009, and Aug. 31, 2008, respectively.

Monsanto also sells accounts receivable, both with and without recourse. These sales qualify for sales treatment under SFAS 140 and accordingly, the proceeds are included in net cash provided by operating activities in the Statements of Consolidated Cash Flows. The gross amounts of receivables sold totaled $1 million and $3 million for the first six months of fiscal years 2009 and 2008, respectively. The liability for the guarantees for sales with recourse is recorded at an amount that approximates fair value and is based on the company’s historical collection experience for the customers associated with the sale of the receivables and a current assessment of credit exposure. The liability recorded by Monsanto was less than $1 million as of Feb. 28, 2009, and Aug. 31, 2008. The maximum potential amount of future payments under the recourse provisions of the agreements was $2 million as of Feb. 28, 2009. The outstanding balance of the receivables sold was $2 million and $33 million as of Feb. 28, 2009, and Aug. 31, 2008, respectively.

NOTE 5. RECEIVABLES

Trade receivables on the Condensed Statements of Consolidated Financial Position are net of allowances of $209 million and $218 million as of Feb. 28, 2009, and Aug. 31, 2008, respectively.

Long-term receivables on the Condensed Statements of Consolidated Financial Position are net of allowances of $145 million and $179 million as of Feb. 28, 2009, and Aug. 31, 2008, respectively. This decrease was primarily due to the fluctuation in the currency translation rate of the Brazilian real.

MONSANTO COMPANY		SECOND QUARTER 2009 FORM 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED (continued)

NOTE 6. INVENTORY

Components of inventory are:

		As of Feb. 28,				As of Aug. 31,
(Dollars in millions)		2009				2008
Finished Goods		$	1,614			$	1,023
Goods In Process			1,287				1,267
Raw Materials and Supplies			386				358
Inventory at FIFO Cost			3,287				2,648
Excess of FIFO over LIFO Cost			(175	)			(195	)
Total		$	3,112			$	2,453

NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS

Changes in the net carrying amount of goodwill for the first half of fiscal year 2009, by segment, are as follows:

		Seeds and				Agricultural
(Dollars in millions)		Genomics				Productivity				Total
Balance as of Aug. 31, 2008		$	3,070			$	62			$	3,132
Acquisition Activity (see Note 3)			112				—				112
Effect of Foreign Currency Translation Adjustments and Other			(209	)			—				(209	)
Balance as of Feb. 28, 2009		$	2,973			$	62			$	3,035

In the first half of 2009, preliminary purchase price allocations for some of the 2008 acquisitions were updated.

Information regarding the company’s other intangible assets is as follows:

		As of Feb. 28, 2009												As of Aug. 31, 2008
		Carrying				Accumulated								Carrying				Accumulated
(Dollars in millions)		Amount				Amortization				Net				Amount				Amortization				Net
Acquired Germplasm		$	1,132			$	(574	)		$	558			$	1,174			$	(578	)		$	596
Acquired Biotechnology Intellectual Property			839				(553	)			286				847				(519	)			328
Trademarks			379				(78	)			301				398				(75	)			323
Customer Relationships			296				(72	)			224				305				(62	)			243
Other			75				(33	)			42				71				(30	)			41
Total		$	2,721			$	(1,310	)		$	1,411			$	2,795			$	(1,264	)		$	1,531

See Note 3 — Business Combinations — for additional information relating to other intangible assets.

Total amortization expense of other intangible assets was $39 million and $37 million in second quarter of fiscal years 2009 and 2008, respectively. Total amortization expense of other intangible assets for the six months ended Feb. 28, 2009, and Feb. 29, 2008, was $72 million and $80 million, respectively. Estimated intangible asset amortization expense for each of the five succeeding fiscal years for owned assets as of Feb. 28, 2009, has not changed significantly from the amounts disclosed in Monsanto’s Report on Form 10-K for the fiscal year ended Aug. 31, 2008.

NOTE 8. INVESTMENTS AND EQUITY AFFILIATES

Investments

Other current assets as of Feb. 28, 2009, and Aug. 31, 2008, included $30 million and $132 million, respectively, of short-term investments of fixed-term deposits and commercial paper with original maturities of one year or less, stated at fair value.

MONSANTO COMPANY		SECOND QUARTER 2009 FORM 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED (continued)

During first quarter 2008, Monsanto invested in long-term equity securities, which are considered available-for-sale. As of Feb. 28, 2009, and Aug. 31, 2008, these long-term equity securities are recorded in other assets in the Condensed Statements of Consolidated Financial Position at a fair value of $11 million and $23 million, respectively. Net unrealized losses (net of deferred taxes) of $13 million and $6 million are included in accumulated other comprehensive loss in shareowners’ equity related to these investments as of Feb. 28, 2009, and Aug. 31, 2008, respectively.

During second quarter 2008, Monsanto received $38 million of Solutia common stock as part of the settlement of its claims against Solutia. During fourth quarter 2008, Monsanto sold the Solutia common stock and realized a loss of less than $1 million. See Note 20 — Solutia-Related Income — for further information.

Equity Affiliates

During second quarter 2008, Monsanto purchased a 19 percent interest in a seed supplier that produces, conditions, and distributes corn and soybean seeds. Monsanto is accounting for this investment as an equity method investment as Monsanto has the ability to exercise significant influence over the seed supplier. As of Feb. 28, 2009, and Aug. 31, 2008, this investment is recorded in other assets in the Condensed Statements of Consolidated Financial Position at $57 million and $50 million, respectively. Monsanto purchased $41 million and $140 million of inventory from the seed supplier for the three and six months ended Feb. 28, 2009, respectively, and $24 million for the three and six months ended Feb. 29, 2008. There were no sales of inventory to the seed supplier in either 2009 or 2008. As of Feb. 28, 2009, and Aug. 31, 2008, the amount payable to the seed supplier is approximately $23 million and $1 million, respectively, and is recorded in accounts payable in the Condensed Statements of Consolidated Financial Position.

NOTE 9. DEFERRED REVENUE

In first quarter 2008, Monsanto entered into a corn herbicide tolerance and insect control trait technologies agreement with Pioneer Hi-Bred International, Inc., a wholly-owned subsidiary of E. I. du Pont de Nemours and Company. As a result of the agreement which requires fixed annual payments, the company recorded a receivable and deferred revenue of $635 million in first quarter 2008. Cumulative cash receipts will be $725 million over an eight-year period. Revenue related to this agreement of $20 million was recorded for the three months ended Feb. 28, 2009, and Feb. 29, 2008, and revenue of $40 million was recorded for the six months ended Feb. 28, 2009, and Feb. 29, 2008. As of Feb. 28, 2009, and Aug. 31, 2008, the remaining receivable balance is $534 million and $629 million, respectively. The majority of this balance is included in long-term receivables, and the current portion is included in trade receivables. As of Feb. 28, 2009, and Aug. 31, 2008, the remaining deferred revenue balance is $516 million and $555 million, respectively. The majority of this balance is included in long-term deferred revenue, and the current portion is included in deferred revenue in the Condensed Statements of Consolidated Financial Position. The interest portion of this receivable is reported in interest income and totaled $5 million and $10 million for the three and six months ended Feb. 28, 2009, respectively. Interest income for the three and six months ended Feb. 29, 2008, was $5 million and $11 million, respectively.

In third quarter 2008, Monsanto and Syngenta entered into a Roundup Ready 2 Yield Soybean License Agreement. The agreement grants Syngenta access to Monsanto’s Roundup Ready 2 Yield Soybean technology in consideration of royalty payments from Syngenta, based on sales. Under this agreement Syngenta will fulfill the contractual sales volumes over a nine-year period. The minimum obligation from Syngenta over this period is $81 million. As of Feb. 28, 2009, and Aug. 31, 2008, $68 million and $67 million, respectively, is included in long-term receivables on the Condensed Statements of Consolidated Financial Position related to the net present value of expected payments under this agreement. The interest portion of this receivable is reported in interest income in the Statement of Consolidated Operations and is less than $1 million and $1 million for the three and six months ended Feb. 28, 2009, respectively. As of Feb. 28, 2009 and Aug. 31, 2008, the remaining deferred revenue balance of $67 million is included in long-term deferred revenue in the Condensed Statements of Consolidated Financial Position.

MONSANTO COMPANY		SECOND QUARTER 2009 FORM 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED (continued)

NOTE 10. INCOME TAXES

Management regularly assesses the tax risk of the company’s tax return filing positions for all open years and establishes reserves accordingly. During the first half of 2009 several domestic and ex-US tax audits were resolved favorably. On Oct. 3, 2008, the retroactive extension of the research and development credit was enacted as part of the Emergency Economic Stabilization Act of 2008. In the first half of 2009, Monsanto recorded an income tax benefit of $95 million primarily as a result of these items. Monsanto has total unrecognized tax benefits of $331 million as of Feb. 28, 2009, of which $223 million would favorably impact the tax rate if recognized.

NOTE 11. FAIR VALUE MEASUREMENTS

In September 2006, the FASB issued SFAS 157. As required, effective Sept. 1, 2008, Monsanto adopted SFAS 157, FSP SFAS 157-2 and FSP SFAS 157-3, Determining Fair Value of a Financial Asset in a Market That Is Not Active. SFAS 157 provides a framework for measuring fair value. SFAS 157 also eliminates the deferral of gains and losses at inception associated with certain derivative contracts whose fair value was not evidenced by observable market data. SFAS 157 requires that the impact of this change in accounting for derivative contracts be recorded as an adjustment to opening retained earnings in the period of adoption. Monsanto did not have any deferred gains or losses at inception of derivative contracts and therefore no adjustment to opening retained earnings was made upon adoption of SFAS 157.

Monsanto determines the fair market values of its derivative contracts and certain other assets based on the fair value hierarchy established in SFAS 157, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The hierarchy contains three levels as follows, with Level 3 representing the lowest level of input:

     Level 1 — Values based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.

     Level 2 — Values based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, or model-based valuation techniques for which all significant assumptions are observable in the market.

     Level 3 — Values generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions would reflect our own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques could include use of option pricing models, discounted cash flow models and similar techniques. Monsanto does not currently have any instruments with fair value determined using Level 3 inputs.

MONSANTO COMPANY		SECOND QUARTER 2009 FORM 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED (continued)

The following table sets forth by level Monsanto’s assets and liabilities that were accounted for at fair value on a recurring basis as of Feb. 28, 2009. As required by SFAS 157, assets and liabilities are classified in their entirety based on the lowest level of input that is a significant component of the fair value measurement. Monsanto’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the classification of fair value assets and liabilities within the fair value hierarchy levels.

		Fair Value Measurements at Feb. 28, 2009 Using
														Amount Reported in
		Quoted Prices in Active												Condensed Statement
		Markets for Identical				Significant Other								of Consolidated
		Items				Observable Inputs				Cash Collateral				Financial Position as of
(Dollars in millions)		(Level 1)				(Level 2)				Offset(1)				Feb. 28, 2009
Assets at Fair Value:
Cash Equivalents		$	1,744			$	—			$	—			$	1,744
Short-Term Investments			30				—				—				30
Equity Securities			11				—				—				11
Derivative Assets Related to:
Foreign Currency			—				172				—				172
Commodities			10				—				(10	)			—
Total Assets at Fair Value		$	1,795			$	172			$	(10	)		$	1,957
Liabilities at Fair Value:
Derivative Liabilities Related to:
Foreign Currency			—				31				—				31
Commodities			150				46				(150	)			46
Total Liabilities at Fair Value		$	150			$	77			$	(150	)		$	77

For assets that are measured using quoted prices in active markets, the total fair value is the published market price per unit multiplied by the number of units held without consideration of transaction costs. Assets and liabilities that are measured using significant other observable inputs are primarily valued by reference to quoted prices of markets that are not active. The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

Cash equivalents: The carrying value of cash equivalents approximates fair value as maturities are less than three months. Monsanto’s cash equivalents are primarily money market funds that trade on a regular basis in active markets and are therefore classified as Level 1.

Short-term investments: Monsanto’s short-term investments primarily consist of fixed-term deposits and commercial paper, which are classified as available-for-sale and are included in other current assets on the Condensed Statements of Consolidated Financial Position. These investments are measured at fair value using quoted market prices in an active market and are classified as Level 1.

Equity securities: Monsanto’s equity securities are classified as available-for-sale and are included in other assets on the Condensed Statements of Consolidated Financial Position. They are measured at fair value using quoted market prices and are classified as Level 1 as they are traded in an active market for which closing stock prices are readily available.

Foreign currency hedges: The foreign currency derivative instruments that Monsanto currently uses are forward and option contracts and futures, as well as net investment hedges to offset the translation adjustments arising from investment in the company’s Brazilian subsidiaries. Valuations are based on broker-quoted prices based on similar instruments in active markets, adjusted for credit risk, which are classified as Level 2. The foreign currency assets are included in miscellaneous receivables and other assets and foreign currency liabilities are included in miscellaneous short-term accruals on the Condensed Statements of Consolidated Financial Position.

Commodity hedges: Monsanto’s commodity contracts relate to corn, soybeans, natural gas and diesel. The commodity derivative instruments that the company currently uses are futures and swaps. The corn and soybean instruments are traded on the Chicago Board of Trade (CBOT). The CBOT is an active market with quoted prices, and therefore these instruments are classified as Level 1. The natural gas and diesel contracts settle based on quoted prices from the New York Mercantile Exchange and Energy Information Administration, respectively, but are held with various banks, not directly with the

MONSANTO COMPANY		SECOND QUARTER 2009 FORM 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED (continued)

exchanges. As a result, the natural gas and diesel swaps are classified as Level 2 fair value measurements and the fair values are adjusted for credit risk.

As discussed above, Monsanto utilizes information from third parties, such as pricing services and brokers, to assist in determining fair values for certain assets and liabilities; however, management is ultimately responsible for all fair values presented in the company’s consolidated financial statements. The company performs analysis and review of the information and prices received from third parties to ensure that the prices represent a reasonable estimate of fair value. This process involves quantitative and qualitative analysis. As a result of the analysis, if the company determines there is a more appropriate fair value based upon the available market data, the price received from the third party is adjusted accordingly.

NOTE 12. FINANCIAL INSTRUMENTS

Monsanto’s business and activities expose it to a variety of market risks, including risks related to changes in commodity prices, foreign-currency exchange rates and interest rates. These financial exposures are monitored and managed by the company as an integral part of its market risk management program. This program recognizes the unpredictability of financial markets and seeks to reduce the potentially adverse effects that market volatility could have on operating results. As part of its market risk management strategy, Monsanto uses derivative instruments to protect fair values and cash flows from fluctuations caused by volatility in currency exchange rates, commodity prices and interest rates.

Cash Flow Hedges

The company uses foreign-currency options and foreign-currency forward contracts as hedges against anticipated sales or purchases denominated in foreign currencies. The company enters into these contracts to protect itself against the risk that the eventual net cash flows will be adversely affected by changes in exchange rates.

Monsanto’s commodity price risk management strategy is to use derivative instruments to minimize significant unanticipated earnings fluctuations that may arise from volatility in commodity prices. Price fluctuations in commodities, mainly in corn and soybeans, can cause the actual prices paid to production growers for corn and soybean seeds to differ from anticipated cash outlays. Monsanto uses commodity futures and options contracts to manage these risks. Monsanto’s energy risk management strategy is to use derivative instruments to minimize significant unanticipated manufacturing cost fluctuations that may arise from volatility in natural gas prices and diesel prices.

Monsanto’s interest rate risk management strategy is to use derivative instruments to minimize significant unanticipated earnings fluctuations that may arise from volatility in interest rates of the company’s borrowings and to manage the interest rate sensitivity of its debt.

For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.

The maximum term over which the company is hedging exposures to the variability of cash flow (for all forecasted transactions, excluding interest payments on variable-rate debt) is 30 months for foreign-currency hedges and 54 months for commodity hedges. During the next 12 months, a pre-tax net loss of approximately $24 million will be reclassified from other comprehensive income into earnings. No cash flow hedges were discontinued during second quarter 2009.

Fair-Value Hedges

The company uses commodity futures and options contracts as fair-value hedges to manage the value of its soybean inventory. For derivative instruments that are designated and qualify as a fair-value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings.

The difference between the carrying value and the fair value of hedged items classified as fair-value hedges was offset by the change in fair value of the related derivatives. Accordingly, hedge ineffectiveness for fair-value hedges, determined in accordance with SFAS 133 and SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging

MONSANTO COMPANY		SECOND QUARTER 2009 FORM 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED (continued)

Activities, had an immaterial effect on earnings in the three months ended Feb. 28, 2009. No fair-value hedges were discontinued during second quarter 2009.

Net Investment Hedges

In order to protect itself against adverse changes in the Brazilian real, the company hedges a portion of its net investment in Brazilian subsidiaries. Gains or losses on derivative instruments that are designated as a net investment hedge are included in accumulated foreign currency translation adjustment and reclassified into earnings in the period during which the hedged net investment is sold or liquidated.

Derivatives Not Designated as Hedging Instruments

The company uses foreign-currency contracts to hedge the effects of fluctuations in exchange rates on foreign-currency-denominated third-party and intercompany receivables and payables. The gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings.

The company uses commodity option contracts to hedge anticipated cash payments to corn growers in Mexico and Brazil, which can fluctuate based on changes in corn price. Since these option contracts do not meet the provisions specified by SFAS 133, they do not qualify for hedge accounting treatment. Accordingly, the gain or loss on these derivatives is recognized in current earnings.

Financial instruments are neither held nor issued by the company for trading purposes.

The notional amounts of the company’s derivative instruments outstanding as of Feb. 28, 2009, were as follows:

(Dollars in millions)		Notional Amount
Derivatives Designated as Hedges:
Foreign Exchange Contracts		$	1,457
Commodity Contracts			847
Total Derivatives Designated as Hedges		$	2,304
Derivatives Not Designated as Hedges:
Foreign Exchange Contracts		$	1,555
Commodity Contracts			4
Total Derivatives Not Designated as Hedges		$	1,559

MONSANTO COMPANY		SECOND QUARTER 2009 FORM 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED (continued)

The fair values of the company’s derivative instruments outstanding as of Feb. 28, 2009, were as follows:

(Dollars in millions)		Balance Sheet Location		Fair Value
Asset Derivatives:
Derivatives Designated as Hedges:
Foreign Exchange Contracts		Miscellaneous receivables		$	106
Foreign Exchange Contracts		Other assets			59
Commodity Contracts		Other current assets(1)			10
Total Derivatives Designated as Hedges					175
Derivatives Not Designated as Hedges:
Foreign Exchange Contracts		Miscellaneous receivables			7
Total Derivatives Not Designated as Hedges					7
Total Asset Derivatives				$	182
Liability Derivatives:
Derivatives Designated as Hedges:
Foreign Exchange Contracts		Miscellaneous short-term accruals		$	17
Commodity Contracts		Other current assets(1)			125
Commodity Contracts		Other assets(1)			23
Commodity Contracts		Miscellaneous short-term accruals			26
Commodity Contracts		Other liabilities			20
Total Derivatives Designated as Hedges					211
Derivatives Not Designated as Hedges:
Foreign Exchange Contracts		Miscellaneous short-term accruals			14
Commodity Contracts		Other current assets(1)			2
Total Derivatives Not Designated as Hedges					16
Total Liability Derivatives				$	227

The gains and losses on the company’s derivative instruments during second quarter 2009 were as follows:

		Amount of Gain or (Loss)						Amount of Gain or
		Recognized in AOCI(1)				Income Statement		(Loss) Recognized in
(Dollars in millions)		(Effective Portion)				Classification		Income(2)(3)
Derivatives Designated as Hedges:
Fair-Value Hedges:
Commodity Contracts(4)						Cost of goods sold		$	5
Cash Flow Hedges:
Foreign Exchange Contracts		$	—			Net sales			10
Foreign Exchange Contracts			7			Cost of goods sold			10
Commodity Contracts			(49	)		Cost of goods sold			20
Interest Rate Contracts			—			Interest expense			(1	)
Net Investment Hedges:
Foreign Exchange Contracts			(2	)		N/A(5)			—
Total Derivatives Designated as Hedges			(44	)					44
Derivatives Not Designated as Hedges:
Foreign Exchange Contracts						Other expense, net			3
Commodity Contracts						Cost of goods sold			—
Total Derivatives Not Designated as Hedges									3
Total Derivatives		$	(44	)				$	47

Most of the company’s outstanding foreign-currency derivatives are covered by International Swap Dealers’ Association (ISDA) Master Agreements with the counterparties. There are no requirements to post collateral under these agreements;

MONSANTO COMPANY		SECOND QUARTER 2009 FORM 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED (continued)

however, should the company’s credit rating fall below a specified rating immediately following the merger of the company with another entity, the counterparty may require all outstanding derivatives under the ISDA Master Agreement to be settled immediately at current market value, which equals carrying value. Any foreign-currency derivatives that are not covered by ISDA Master Agreements do not have credit-risk-related contingent provisions. Most of the company’s outstanding commodity derivatives are listed commodity futures, and the company is required by the relevant commodity exchange to post collateral each day to cover the change in the fair value of these futures. Any non-exchange traded commodity derivatives are covered by the aforementioned ISDA Master Agreements and are subject to the same credit-risk-related contingent provisions. The aggregate fair value of all derivative instruments under ISDA Master Agreements that are in a liability position on Feb. 28, 2009, is $70 million, which is the amount that would be required for settlement if the credit-risk-related contingent provisions underlying these agreements were triggered.

NOTE 13. POSTRETIREMENT BENEFITS — PENSIONS, HEALTH CARE AND OTHER

The majority of Monsanto’s employees are covered by noncontributory pension plans sponsored by the company. The company also provides certain postretirement health care and life insurance benefits for eligible retired employees, the latter through insurance contracts. The company’s net periodic benefit cost for pension benefits, and health care and other postretirement benefits include the following components:

		Three Months Ended Feb. 28, 2009												Three Months Ended Feb. 29, 2008
Pension Benefits (Dollars in millions)		U.S.				Outside the U.S.				Total				U.S.				Outside the U.S.				Total
Service Cost for Benefits Earned During the Period		$	12			$	1			$	13			$	10			$	2			$	12
Interest Cost on Benefit Obligation			26				4				30				25				3				28
Assumed Return on Plan Assets			(28	)			(5	)			(33	)			(28	)			(4	)			(32	)
Amortization of Unrecognized Net Loss			9				2				11				10				—				10
Total Net Periodic Benefit Cost		$	19			$	2			$	21			$	17			$	1			$	18

		Six Months Ended Feb. 28, 2009												Six Months Ended Feb. 29, 2008
Pension Benefits (Dollars in millions)		U.S.				Outside the U.S.				Total				U.S.				Outside the U.S.				Total
Service Cost for Benefits Earned During the Period		$	24			$	3			$	27			$	20			$	3			$	23
Interest Cost on Benefit Obligation			53				8				61				48				6				54
Assumed Return on Plan Assets			(58	)			(9	)			(67	)			(55	)			(8	)			(63	)
Amortization of Unrecognized Net Loss			19				2				21				19				1				20
Total Net Periodic Benefit Cost		$	38			$	4			$	42			$	32			$	2			$	34

Health Care and Other Postretirement Benefits		Three Months Ended								Six Months Ended
(Dollars in millions)		Feb. 28, 2009				Feb. 29, 2008				Feb. 28, 2009				Feb. 29, 2008
Service Cost for Benefits Earned During the Period		$	3			$	3			$	6			$	6
Interest Cost on Benefit Obligation			4				4				9				8
Amortization of Unrecognized Net Gain			(4	)			(1	)			(8	)			(1	)
Total Net Periodic Benefit Cost		$	3			$	6			$	7			$	13

In the first half of 2009 and 2008, Monsanto contributed $30 million and $60 million, respectively, to its U.S. qualified plan and $4 million and $3 million, respectively, to plans outside the United States. As of Feb. 28, 2009, management expects to make additional contributions of approximately $30 million and $4 million to the company’s pension plans in the United States and outside the United States, respectively, in fiscal year 2009. However, as a result of the recent global financial market downturn and decline in plan asset values, Monsanto is currently assessing the impact on its benefit plans funded status. Pending a final determination, additional plan contributions exceeding these amounts are reasonably possible.

In December 2008, the assets of the Seminis Vegetable Seeds Retirement Plan were transferred into the Monsanto Savings and Investment Plan.

MONSANTO COMPANY		SECOND QUARTER 2009 FORM 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED (continued)

Employee Savings Plan

The Monsanto leveraged employee stock ownership plan (Monsanto ESOP) debt was restructured in November 2008 to level out the future allocation of stock thereunder in an impartial manner intended to ensure equitable treatment for and generally to be in the best interests of current and future plan participants consistent with the level of benefits that Monsanto intended for the plan to provide to participants. To that end, the terms of the restructuring were determined pursuant to an arm’s length negotiation between Monsanto and an independent trust company serving as fiduciary for the plan for this restructuring. In this role, the independent fiduciary determined that the restructuring, including certain financial commitments and enhancements that were made or will be made in the future by Monsanto to benefit participants and beneficiaries of the plan, was completed in accordance with the best interests of plan participants. As a result of these commitments and enhancements related to this restructuring, an additional liability of $8 million due to the Monsanto ESOP from the company was recorded in first quarter 2009 and is included in other liabilities on the Condensed Statement of Consolidated Financial Position.

NOTE 14. STOCK-BASED COMPENSATION PLANS

The following table shows total stock-based compensation expense included in the Statements of Consolidated Operations for the three and six months ended Feb. 28, 2009, and Feb. 29, 2008. Stock-based compensation cost capitalized in inventory was $8 million and $5 million as of Feb. 28, 2009, and Aug. 31, 2008, respectively.

		Three Months Ended								Six Months Ended
(Dollars in millions)		Feb. 28, 2009				Feb. 29, 2008				Feb. 28, 2009				Feb. 29, 2008
Cost of Goods Sold		$	4			$	2			$	8			$	4
Selling, General and Administrative Expenses			19				16				35				30
Research and Development Expenses			6				4				12				7
Pre-Tax Stock-Based Compensation Expense			29				22				55				41
Income Tax Benefit			(10	)			(8	)			(19	)			(15	)
Net Stock-Based Compensation Expense		$	19			$	14			$	36			$	26

During the six months ended Feb. 28, 2009, Monsanto granted 2,825,230 stock options and 175,180 restricted stock units to employees under the Monsanto Company Long-Term Incentive Plan (LTIP), as amended, and the Monsanto Company 2005 Long-Term Incentive Plan (2005 LTIP). No restricted stock awards were granted under the LTIP or the 2005 LTIP during the six months ended Feb. 28, 2009. In addition, during the six months ended Feb. 28, 2009, 12,035 shares of deferred stock and 853 shares of restricted stock were granted to directors under the Monsanto Non-Employee Director Equity Incentive Compensation Plan (Director Plan).

The weighted-average grant-date fair value of non-qualified stock options granted during the six months ended Feb. 28, 2009, was $37.45 per share. Pre-tax unrecognized compensation expense for stock options, net of estimated forfeitures, was $107 million as of Feb. 28, 2009, and will be recognized as expense over a weighted-average period of 2.4 years.

The weighted-average grant-date fair value of restricted stock units granted during the six months ended Feb. 28, 2009, was $81.79 per share. Pre-tax unrecognized compensation expense, net of estimated forfeitures, for nonvested restricted stock and restricted stock units was $1 million and $99 million, respectively, as of Feb. 28, 2009, which will be recognized as expense over the weighted-average remaining requisite service periods. The weighted-average remaining requisite service periods for nonvested restricted stock and restricted stock units were 1.8 years and 2.9 years, respectively, as of Feb. 28, 2009. The weighted-average grant-date fair value of directors’ deferred stock and directors’ restricted stock granted during the six months ended Feb. 28, 2009, was $114.25, per share. Pre-tax unrecognized compensation expense for awards granted under the Director Plan was $1 million as of Feb. 28, 2009, and will be recognized as expense over a weighted-average period of six months.

NOTE 15. COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) includes all nonshareowner changes in equity and consists of net income, foreign currency translation adjustments, net unrealized losses on available-for-sale securities, postretirement benefit plan activity, and net

MONSANTO COMPANY		SECOND QUARTER 2009 FORM 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED (continued)

accumulated derivative gains and losses on cash flow hedges not yet realized. Information regarding comprehensive income is as follows:

		Three Months Ended								Six Months Ended
(Dollars in millions)		Feb. 28, 2009				Feb. 29, 2008				Feb. 28, 2009				Feb. 29, 2008
Comprehensive Income		$	947			$	1,357			$	690			$	1,893

The components of accumulated other comprehensive loss are as follows:

		As of Feb. 28,				As of Aug. 31,
(Dollars in millions)		2009				2008
Accumulated Foreign Currency Translation Adjustments		$	(695	)		$	192
Net Unrealized Loss on Investments, Net of Tax			(13	)			(5	)
Net Accumulated Derivative Income (Loss), Net of Tax			(30	)			43
Postretirement Benefit Plan Activity, Net of Tax			(298	)			(308	)
Accumulated Other Comprehensive Loss		$	(1,036	)		$	(78	)

The significant decreases in comprehensive income and accumulated foreign currency translation adjustments are primarily related to fluctuations in the currency translation rates of the Brazilian real and European euro.

NOTE 16. EARNINGS PER SHARE

Basic earnings per share (EPS) was computed using the weighted-average number of common shares outstanding during the period shown in the table below. For the three months and six months ended Feb. 28, 2009, and Feb. 29, 2008, diluted EPS was computed taking into account the effect of dilutive potential common shares, as shown in the table below. Potential common shares consist primarily of stock options using the treasury stock method and are excluded if their effect is antidilutive.

Approximately 5 million and 2.4 million stock options were excluded from the computations of dilutive potential common shares as they were antidilutive for the three and six months ended Feb. 28, 2009, and Feb. 29, 2008, respectively. Of those antidilutive options, approximately 5 million and less than 0.1 million stock options were excluded from the computations of dilutive potential common shares for the three and six months ended Feb. 28, 2009, and Feb. 29, 2008, respectively, as their exercise prices were greater than the average market price of common shares for the period.

		Three Months Ended								Six Months Ended
(Shares in millions)		Feb. 28, 2009				Feb. 29, 2008				Feb. 28, 2009				Feb. 29, 2008
Weighted-Average Number of Common Shares			546.6				547.8				547.3				547.0
Dilutive Potential Common Shares			8.6				11.4				9.0				11.5

MONSANTO COMPANY		SECOND QUARTER 2009 FORM 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED (continued)

NOTE 17. SUPPLEMENTAL CASH FLOW INFORMATION

Cash payments for interest and taxes were as follows:

		Six Months Ended
(Dollars in millions)		Feb. 28, 2009				Feb. 29, 2008
Interest		$	55			$	57
Taxes			105				159

During the first half of fiscal 2009 and 2008, the company recorded the following noncash investing and financing transaction: In second quarter 2009 and 2008, the board of directors declared a dividend which was payable in third quarter 2009 and 2008, respectively. As of Feb. 28, 2009, and Feb. 29, 2008, a dividend payable of $145 million and $96 million, respectively, was recorded.

NOTE 18. COMMITMENTS AND CONTINGENCIES

Environmental and Litigation Liabilities: Monsanto is involved in environmental remediation and legal proceedings related to its current business and, pursuant to its indemnification obligations, related to Pharmacia’s former chemical and agricultural businesses. In addition, Monsanto has liabilities established for various product claims, including claims related to pollination variations in South Africa. With respect to certain of these proceedings and claims, Monsanto has a liability recorded of $315 million and $272 million as of Feb. 28, 2009, and Aug. 31, 2008, respectively, for the estimated contingent liabilities. Information regarding the environmental liabilities appears in Monsanto’s Report on Form 10-K for the fiscal year ended Aug. 31, 2008.

Litigation: The above liability also includes amounts related to certain third-party litigation with respect to Monsanto’s business, as well as tort litigation related to Pharmacia’s former chemical business, including lawsuits involving polychlorinated biphenyls (PCBs), dioxins, and other chemical and premises liability litigation. Following is a description of one of the more significant litigation matters reflected in the liability.

•

As described in Monsanto’s Report on Form 10-K for the fiscal year ended Aug. 31, 2008, and Monsanto’s Report on Form 10-Q for the quarterly period ended Nov. 30, 2008, on Dec. 17, 2004, 15 plaintiffs filed a purported class action lawsuit, styled Virdie Allen, et al. v. Monsanto, et al., in the Putnam County, West Virginia, state court against Monsanto, Pharmacia and seven other defendants. This is a companion case to Carter, et al. v. Monsanto, et al., that was filed in the same state court Aug. 4, 2000, and alleges property damage due to dioxin contamination. Monsanto is named as the successor in interest to the liabilities of Pharmacia in both cases. The alleged class consists of all current and former residents, workers, and students who, between 1949 and the present, were allegedly exposed to dioxins/furans contamination in counties surrounding Nitro, West Virginia. The complaint alleges that the source of the contamination is a chemical plant in Nitro, formerly owned and operated by Pharmacia and later by Flexsys, a joint venture between Solutia Inc. and Akzo Nobel Chemicals, Inc. (Akzo Nobel). Akzo Nobel and Flexsys were named defendants in the case but Solutia was not, due to its then pending bankruptcy proceeding. The suit seeks damages for property cleanup costs, loss of real estate value, funds to test property for contamination levels, funds to test for human exposure, and future medical monitoring costs. The complaint also seeks an injunction against further contamination and punitive damages. Monsanto has agreed to indemnify and defend Akzo Nobel and the Flexsys defendant group. On Jan. 8, 2008, the trial court issued an order certifying the Carter and Allen (now Zina G. Bibb et al. v. Monsanto et al., because Bibb replaced Allen as class representative) cases as class actions matters. The court has not set a trial date for these cases. On Oct. 1, 2007, 78 separate, single plaintiff civil actions were filed in Putnam County, West Virginia, against Monsanto, Pharmacia, Akzo Nobel (and several of its affiliates), Flexsys America Co. (and several of its affiliates), Solutia, and Apogee Coal Company, LLC. Except for the name of the plaintiff, each complaint is identical and each alleges personal injury occasioned by exposure to dioxin generated by the Nitro Plant during production of 2,4,5 T (1949-1969) and thereafter. These cases are related to, and were filed in the same court as, the Allen and Carter actions described above. Monsanto has agreed to accept the tenders of defense in the matters by Akzo Nobel and Flexsys America. These 78 personal injury cases have not been certified for class action status. On Nov. 21, 2008, Monsanto removed all cases,

MONSANTO COMPANY		SECOND QUARTER 2009 FORM 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED (continued)

including the personal injury matters, to federal court based on recent revelations from plaintiffs that afford the opportunity to assert Federal Officers’ defense to the litigation. Plaintiffs filed a motion to remand the cases to West Virginia state court and the federal court granted that motion, in part, on Dec. 19, 2008. The personal injury cases and the Bibb case were remanded to the state court but the federal court retained jurisdiction in the Carter case.

Including litigation reflected in the above liability, Monsanto is involved in various legal proceedings that arise in the ordinary course of its business or pursuant to Monsanto’s indemnification obligations to Pharmacia, as well as proceedings that management has considered to be material under SEC regulations. Some of the lawsuits seek damages in very large amounts or seek to restrict the company’s business activities. Monsanto believes that it has meritorious legal arguments and will continue to represent its interests vigorously in all of the proceedings that it is defending or prosecuting. Although the ultimate liabilities resulting from such proceedings, or the proceedings reflected in the above liability, may be significant to profitability in the period recognized, management does not anticipate they will have a material adverse effect on Monsanto’s consolidated financial position or liquidity. A description of one of these proceedings appears below.

•

As described in Monsanto’s Report on Form 10-K for the fiscal year ended Aug. 31, 2008, and Monsanto’s Report on Form 10-Q for the quarterly period ended Nov. 30, 2008, on June 23, 2004, two former employees of Monsanto and Pharmacia filed a purported class action lawsuit in the U.S. District Court for the Southern District of Illinois against Monsanto and the Monsanto Company Pension Plan, which is referred to as the “Pension Plan.” The suit claims that the Pension Plan has violated the age discrimination and other rules under the Employee Retirement Income Security Act of 1974 from Jan. 1, 1997 (when the Pension Plan was sponsored by Pharmacia, then known as Monsanto Company) and continuing to the present. In January 2006, a separate group of former employees of Pharmacia filed a similar purported class action lawsuit in the U.S. District Court for the Southern District of Illinois against Pharmacia, the Pharmacia Cash Balance Plan, and other defendants. On July 7, 2006, the plaintiffs amended their lawsuit to add Monsanto and the Pension Plan as additional defendants. On Sept. 1, 2006, the Court consolidated these lawsuits with two purported class action lawsuits also pending in the same Court against the Solutia Company Pension Plan, under Walker v. Monsanto, the first filed case. All parties have agreed the case should proceed as a class action and also agreed on a definition of the respective classes. The classes were certified by Court Order on May 22, 2008. On July 11, 2008, all parties filed motions for summary judgment on the issue of liability. These motions are set to be heard by the Court on April 29, 2009. In addition, on Sept. 29, 2008, the Court ruled on the parties’ joint motion to bifurcate the liability and remedies phases of the case, directing that within 30 days of a ruling on summary judgment, the parties should contact the magistrate for a status conference to address requests for further discovery and proceedings with respect to remedies. The amount of a potential loss, if any, is not currently determinable.

Guarantees: Disclosure regarding the guarantees Monsanto provides for certain customer loans in the United States, Brazil, Europe and Argentina can be found in Note 4 — Customer Financing Programs — of this Form 10-Q. Except as described in that note, there have been no significant changes to guarantees made by Monsanto since Aug. 31, 2008. Disclosures regarding these guarantees made by Monsanto can be found in Note 23 — Commitments and Contingencies — of the notes to the consolidated financial statements contained in Monsanto’s Report on Form 10-K for the fiscal year ended Aug. 31, 2008.

NOTE 19. SEGMENT INFORMATION

Monsanto conducts its worldwide operations through global businesses, which are aggregated into reportable segments based on similarity of products, production processes, customers, distribution methods and economic characteristics. The operating segments are aggregated into two reportable segments: Seeds and Genomics and Agricultural Productivity. The Seeds and Genomics segment consists of the global seeds and related traits businesses and biotechnology platforms. Within the Seeds and Genomics segment, Monsanto’s significant operating segments are corn seed and traits, soybean seed and traits, cotton seed and traits, vegetable seeds and all other crops seeds and traits. The sugarcane business acquired in second quarter 2009 is included in the all other crops seeds and traits operating segment. The Agricultural Productivity segment consists of the crop protection products and lawn-and-garden herbicide products. The Dairy business, which was previously included in the Agricultural Productivity segment, was divested in fiscal year 2009 and is included in discontinued operations. Within the Agricultural Productivity segment, the significant operating segments are ROUNDUP and other glyphosate-based products

MONSANTO COMPANY		SECOND QUARTER 2009 FORM 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED (continued)

and all other agricultural products. EBIT is defined as earnings (loss) before interest and taxes and is the primary operating performance measure for the two business segments. EBIT is useful to management in demonstrating the operational profitability of the segments by excluding interest and taxes, which are generally accounted for across the entire company on a consolidated basis. Sales between segments were not significant. Certain selling, general and administrative expenses are allocated between segments primarily by the ratio of segment sales to total Monsanto sales, consistent with the company’s historical practice. Based on the Agricultural Productivity segment’s increasing contribution to total Monsanto operations, the allocation percentages were changed at the beginning of fiscal year 2009.

Data for the Seeds and Genomics and Agricultural Productivity reportable segments, as well as for Monsanto’s significant operating segments, is presented in the table that follows:

		Three Months Ended								Six Months Ended
(Dollars in millions)		Feb. 28, 2009				Feb. 29, 2008				Feb. 28, 2009				Feb. 29, 2008
Net Sales(1)
Corn seed and traits		$	2,078			$	1,747			$	2,706			$	2,214
Soybean seed and traits			615				455				827				617
Cotton seed and traits			33				40				80				82
Vegetable seeds			209				206				366				336
All other crops seeds and traits			107				97				162				132
Total Seeds and Genomics		$	3,042			$	2,545			$	4,141			$	3,381
ROUNDUP and other glyphosate-based herbicides		$	776			$	982			$	2,135			$	1,990
All other agricultural productivity products			217				200				408				405
Total Agricultural Productivity		$	993			$	1,182			$	2,543			$	2,395
Total		$	4,035			$	3,727			$	6,684			$	5,776
EBIT(2)(3)
Seeds and Genomics		$	1,212			$	1,077			$	1,277			$	1,057
Agricultural Productivity			326				601				999				985
Total		$	1,538			$	1,678			$	2,276			$	2,042
Depreciation and Amortization Expense(4)
Seeds and Genomics		$	105			$	94			$	208			$	193
Agricultural Productivity			30				44				62				88
Total		$	135			$	138			$	270			$	281

A reconciliation of EBIT to net income for each period follows:

		Three Months Ended								Six Months Ended
(Dollars in millions)		Feb. 28, 2009				Feb. 29, 2008				Feb. 28, 2009				Feb. 29, 2008
EBIT(1)		$	1,538			$	1,678			$	2,276			$	2,042
Interest Expense (Income) — Net			8				(6	)			6				(4	)
Income Tax Provision(2)			438				555				622				661
Net Income		$	1,092			$	1,129			$	1,648			$	1,385

MONSANTO COMPANY		SECOND QUARTER 2009 FORM 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED (continued)

NOTE 20. SOLULTIA-RELATED INCOME

On Dec. 17, 2003, Solutia, Inc. (Solutia) and 14 of its U.S. subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York. In accordance with a plan of reorganization approved by the Bankruptcy Court on Nov. 29, 2007, Solutia emerged from bankruptcy protection on Feb. 28, 2008. Upon Solutia’s emergence from bankruptcy, in satisfaction of Monsanto’s claims against Solutia, Monsanto received from Solutia: (1) approximately $163 million in cash (which represents proceeds from a rights offering from Solutia’s equity holders, third-party reimbursements and Monsanto’s administrative claim for environmental remediation payments it made in Anniston and Sauget during Solutia’s Chapter 11 proceeding in excess of $50 million); (2) approximately 2.5 million shares of common stock of Solutia, representing that portion of the equity of reorganized Solutia allocated to Monsanto under the plan which was not purchased by Solutia’s equity holders; (3) a credit in an amount in excess of $30 million against certain future payments by Monsanto to Solutia under supply contracts used in the production of an intermediate for glyphosate at Monsanto’s facility at Chocolate Bayou, Texas; (4) a release for Monsanto and Pharmacia from certain legacy liabilities associated with Pharmacia’s chemical business that arose prior to Sept. 1, 1997, including liabilities related to retiree medical, retiree life insurance, and disability benefits for individuals who retired or became disabled prior to Sept. 1, 1997; and (5) a release for Monsanto and Pharmacia for the litigation filed by Solutia, the Official Committee of Retirees, and the Official Committee of Equity Holders of Solutia against Monsanto and Pharmacia. Since Monsanto had previously recognized the expenses for the amounts incurred, the settlement amounts resulted in an after-tax gain of approximately $130 million ($210 million pretax), or $0.23 per share. Also, included in the Consolidated Statement of Operations for 2008 are expenses of $23 million related to Solutia-related environmental and legal matters prior to Solutia’s emergence from bankruptcy.

NOTE 21. DISCONTINUED OPERATIONS

Dairy Business Divestiture: During fourth quarter 2008, the company determined that the Dairy business was no longer consistent with its strategic business objectives, and thus entered into an agreement to sell the majority of the Dairy business assets (excluding cash, trade receivables and certain property) to Eli Lilly and Company for $300 million, plus additional contingent consideration. The contingent consideration is a 10 year earn-out with potential annual payments being earned by Monsanto if certain revenue levels are exceeded. On Oct. 1, 2008, Monsanto consummated the sale to Eli Lilly after receiving approval from the appropriate regulatory agencies. As a result, the Dairy business has been segregated from continuing operations and presented as discontinued operations. The Dairy business was previously reported as a part of the Agricultural Productivity segment. During the six months ended Feb. 28, 2009, income from operations of discontinued businesses included a $11 million pre-tax gain related to the sale.

MONSANTO COMPANY		SECOND QUARTER 2009 FORM 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Background

Monsanto Company, along with its subsidiaries, is a leading global provider of agricultural products for farmers. Our seeds, biotechnology trait products, and herbicides provide farmers with solutions that improve productivity, reduce the costs of farming, and produce better foods for consumers and better feed for animals.

We manage our business in two segments: Seeds and Genomics, and Agricultural Productivity. Through our Seeds and Genomics segment, we produce leading seed brands, including DEKALB, ASGROW, DELTAPINE, SEMINIS and DE RUITER, and we develop biotechnology traits that assist farmers in controlling insects and weeds. We also provide other seed companies with genetic material and biotechnology traits for their seed brands. Through our Agricultural Productivity segment, we manufacture ROUNDUP brand herbicides and other herbicides and provide lawn-and-garden herbicide products for the residential market.

In the fourth quarter of 2008, we entered into an agreement to divest the Dairy business. This transaction was consummated on Oct. 1, 2008. As a result, financial data for this business has been presented as discontinued operations and has been recast and prepared in compliance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Accordingly, the Statements of Consolidated Operations have been conformed to this presentation. The Dairy business was previously reported as part of the Agricultural Productivity segment. See Note 21 — Discontinued Operations — for further details.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with Monsanto’s consolidated financial statements and the accompanying notes. This Report on Form 10-Q should also be read in conjunction with Monsanto’s Report on Form 10-K for the fiscal year ended Aug. 31, 2008. Financial information for the first six months of fiscal year 2009 should not be annualized because of the seasonality of our business. The notes to the consolidated financial statements referred to throughout this MD&A are included in Part I — Item 1 — Financial Statements — of this Report on Form 10-Q. Unless otherwise indicated, “Monsanto,” the “company,” “we,” “our” and “us” are used interchangeably to refer to Monsanto Company or to Monsanto Company and its consolidated subsidiaries, as appropriate to the context. Unless otherwise indicated, “earnings (loss) per share” and “per share” mean diluted earnings (loss) per share. Unless otherwise noted, all amounts and analyses are based on continuing operations. Unless otherwise indicated, trademarks owned or licensed by Monsanto or its subsidiaries are shown in all capital letters. Unless otherwise indicated, references to “ROUNDUP herbicides” mean ROUNDUP branded herbicides, excluding all lawn-and-garden herbicides, and references to “ROUNDUP and other glyphosate-based herbicides” exclude all lawn-and-garden herbicides.

Non-GAAP Financial Measures

MD&A includes financial information prepared in accordance with U.S. generally accepted accounting principles (GAAP), as well as two other financial measures, EBIT and free cash flow, that are considered “non-GAAP financial measures.” Generally, a non-GAAP financial measure is a numerical measure of a company’s financial performance, financial position or cash flows that exclude (or include) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP. The presentation of EBIT and free cash flow information is intended to supplement investors’ understanding of our operating performance and liquidity. Our EBIT and free cash flow measures may not be comparable to other companies’ EBIT and free cash flow measures. Furthermore, these measures are not intended to replace net income, cash flows, financial position, or comprehensive income, as determined in accordance with U.S. GAAP.

EBIT is defined as earnings (loss) before interest and taxes. Earnings is intended to mean net income as presented in the Statements of Consolidated Operations under GAAP. EBIT is the primary operating performance measure for our two business segments. We believe that EBIT is useful to investors and management to demonstrate the operational profitability of our segments by excluding interest and taxes, which are generally accounted for across the entire company on a consolidated basis. EBIT is also one of the measures used by Monsanto management to determine resource allocations within the company. See Note 19 — Segment Information — for a reconciliation of EBIT to net income for the six months ended Feb. 28, 2009, and Feb. 29, 2008.

MONSANTO COMPANY		SECOND QUARTER 2009 FORM 10-Q

We also provide information regarding free cash flow, an important liquidity measure for Monsanto. We define free cash flow as the total of net cash provided or required by operating activities and provided or required by investing activities. We believe that free cash flow is useful to investors and management as a measure of the ability of our business to generate cash. This cash can be used to meet business needs and obligations, to reinvest in the company for future growth, or to return to our shareowners through dividend payments or share repurchases. Free cash flow is also used by management as one of the performance measures in determining incentive compensation. See the “Financial Condition, Liquidity, and Capital Resources — Cash Flow” section of MD&A for a reconciliation of free cash flow to net cash provided by operating activities and net cash required by investing activities on the Statements of Consolidated Cash Flows.

Executive Summary

Consolidated Operating Results — Net sales increased $308 million in the three-month comparison and $908 million in the six month comparison. In second quarter 2009, net sales improved primarily as a result of increased sales of corn and soybean seed and traits in the United States partially offset by a decrease in sales of ROUNDUP and other glyphosate-based herbicides in most regions. We recorded an after-tax charge of $107 million ($162 million pretax), or $0.19 per share, associated with the acquisition of Aly Participacoes Ltda. (Aly). In first half 2009, net sales increased primarily as a result of increased sales of corn and soybean seed and traits in the United States combined with higher sales of ROUNDUP and other glyphosate-based herbicides in Brazil. Net income in first half 2009 was $2.96 per share, compared with $2.48 per share in first half 2008.

Financial Condition, Liquidity, and Capital Resources — In first half 2009, net cash provided by operating activities was $1,495 million, compared with $1,877 million in the prior-year first half. This decrease is primarily due to the increase in inventory during the first half of 2009 which was partially offset by higher net income. Net cash required by investing activities was $359 million in first half 2009 compared to $404 million in first half 2008 as higher spending on capital and acquisitions was more than offset by proceeds from the sale of the Dairy business. Free cash flow was $1,136 million in first half of 2009 compared with $1,473 million in the prior-year first half.

Outlook — We plan to continue to improve our products in order to maintain market leadership and to support near-term performance. We are focused on applying innovation and technology to make our farmer customers more productive and profitable by protecting yields and improving the ways they can produce food, fiber and feed. We use the tools of modern biology to make seeds easier to grow, to allow farmers to do more with fewer resources, and to produce healthier foods for consumers. Our current research and development (R&D) strategy and commercial priorities are focused on bringing our farmer customers second-generation traits, on delivering multiple solutions in one seed (“stacking”), and on developing new pipeline products. Our capabilities in biotechnology and breeding research are generating a rich product pipeline that is expected to drive long-term growth. The viability of our product pipeline depends in part on the speed of regulatory approvals globally, and on continued patent and legal rights to offer our products.

We plan to improve and to grow our vegetable seeds business. We have applied our molecular breeding and marker capabilities to our library of vegetable germplasm. In the future, we will continue to focus on accelerating the potential growth of these new businesses and executing our business plans.

ROUNDUP herbicides remain the market leader. We have experienced increased demand in recent years and have increased our average selling prices. We are implementing strategies to meet the future demand for ROUNDUP. We are focused on managing the costs associated with our agricultural chemistry business as that sector matures globally. Our selective acetochlor herbicide products face increasing competitive pressures and a declining market, in part because of the rapid penetration of ROUNDUP READY corn in the United States.

See the “Outlook” section of MD&A for a more detailed discussion of some of the opportunities and risks we have identified for our business. For additional information related to the outlook for Monsanto, see “Caution Regarding Forward-Looking Statements” at the beginning of this Report on Form 10-Q, Part II — Item 1A — Risk Factors below and Part I — Item 1A of our Report on Form 10-K for the fiscal year ended Aug. 31, 2008.

MONSANTO COMPANY		SECOND QUARTER 2009 FORM 10-Q

RESULTS OF OPERATIONS

		Three Months Ended,												Six Months Ended,
		Feb. 28, 2009				Feb. 29, 2008				% Change				Feb. 28, 2009				Feb. 29, 2008				% Change
Net Sales		$	4,035			$	3,727				8	%		$	6,684			$	5,776				16	%
Gross Profit			2,521				2,211				14	%			4,071				3,250				25	%
Operating Expenses:
Selling, general and administrative expenses			522				529				(1	)%			1,072				985				9	%
Research and development expenses			265				219				21	%			517				418				24	%
Acquired in-process research and development			162				—			NM					162				1			NM
Total Operating Expenses			949				748				27	%			1,751				1,404				25	%
Income from Operations			1,572				1,463				7	%			2,320				1,846				26	%
Interest expense			26				32				(19	)%			49				66				(26	)%
Interest income			(18	)			(38	)			(53	)%			(43	)			(70	)			(39	)%
Solutia-related income			—				(204	)		NM					—				(187	)		NM
Other expense — net			32				1			NM					58				3			NM
Income from Continuing Operations Before Income Taxes and Minority Interest			1,532				1,672				(8	)%			2,256				2,034				11	%
Income tax provision			440				552				(20	)%			616				657				(6	)%
Minority interest expense (income)			1				(1	)		NM					3				6				(50	)%
Income from Continuing Operations			1,091				1,121				(3	)%			1,637				1,371				19	%
Discontinued Operations:
Income from operations of discontinued businesses			1				11				(91	)%			19				19				—
Income tax provision			—				3			NM					8				5				60	%
Income on Discontinued Operations			1				8				(88	)%			11				14				(21	)%
Net Income		$	1,092			$	1,129				(3	)%		$	1,648			$	1,385				19	%
Diluted Earnings per Share:
Income from continuing operations		$	1.97			$	2.00				(2	)%		$	2.94			$	2.45				20	%
Income on discontinued operations			—				0.02			NM					0.02				0.03				(33	)%
Net Income		$	1.97			$	2.02				(2	)%		$	2.96			$	2.48				19	%
NM = Not Meaningful
Effective Tax Rate (continuing operations)			29	%			33	%							27	%			32	%
Comparison as a Percent of Net Sales:
Gross profit			62	%			59	%							61	%			56	%
Selling, general and administrative expenses			13	%			14	%							16	%			17	%
Research and development expenses (excluding acquired IPR&D)			7	%			6	%							8	%			7	%
Total operating expenses			24	%			20	%							26	%			24	%
Income from continuing operations before income taxes and minority interest			38	%			45	%							34	%			35	%
Net income			27	%			30	%							25	%			24	%