Summary of MONSANTO CO /NEW/

ITEM 7. 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. Approximately 50 percent of our total company sales, 40 percent of our Seeds and Genomics segment sales, and 63 percent of our Agricultural Productivity segment sales originated from our legal entities outside the United States during fiscal year 2008.
In the fourth quarter of 2008, we entered into an agreement to divest the Dairy business. This transaction was consummated on Oct. 1, 2008. In the fourth quarter of 2007, we sold our U.S. Stoneville® and NexGen® cotton seed brands and related business assets (divested cotton businesses) as part of the U.S. Department of Justice (DOJ) approval for the acquisition of Delta and Pine Land Company (DPL). As a result, financial data for these businesses have been presented as discontinued operations as outlined below. The financial statements have 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 (SFAS 144). Accordingly, for all periods presented herein, the Statements of Consolidated Operations have been conformed to this presentation. Also, the 2008 Statement of Consolidated Financial Position has been conformed to this presentation. The Dairy business was previously reported as part of the Agricultural Productivity segment. The divested cotton businesses were previously reported as part of the Seeds and Genomics segment. See Note 27
- Discontinued Operations - for further details. This MD&A should be read in conjunction with Monsanto's consolidated financial statements and the accompanying notes. The notes to the consolidated financial statements referred to throughout this MD&A are included in Part II - Item 8 - Financial Statements and Supplementary Data - of this Report on Form 10-K. 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. 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 excludes (or includes) 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 (loss), cash flows, financial position, or comprehensive income
(loss), as determined in accordance with U.S. GAAP. EBIT is defined as earnings (loss) before interest and taxes. Earnings (loss) is intended to mean net income (loss) 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

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MONSANTO COMPANY 2008 FORM 10-K

within the company. See Note 24 - Segment and Geographic Data - for a reconciliation of EBIT to net income (loss) for fiscal years 2008, 2007 and 2006.
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 net cash 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
Discontinued Operations - As discussed in Note 27 - Discontinued Operations, we entered into an agreement to divest our Dairy business in 2008. The income on discontinued operations of $17 million aftertax, or $0.03 per share, in 2008 relates only to the Dairy business. In conjunction with the DOJ consent decree, we sold our cotton businesses for $317 million during fourth quarter 2007. We recorded income of discontinued operations of $80 million aftertax, or $0.14 per share in 2007, primarily related to the gain on the sale of the divested cotton businesses which were part of the Seeds and Genomics segment.
Consolidated Operating Results - Net sales in 2008 increased $3 billion from 2007. This improvement was a result of increased sales of Roundup and other glyphosate-based herbicides globally combined with higher sales of corn seed and traits globally, as well as increased sales in the United States of soybean seed and traits and cotton seed and traits. Net income in 2008 was $3.62 per share, compared with $1.79 per share in 2007.
The following non-recurring factors affected the two-year comparison:
2008:
• We recorded an after-tax gain of $130 million ($210 million pretax), or $0.23 per share (Solutia-related gain), associated with the settlement of our claim on Feb. 28, 2008, in connection with Solutia's emergence from bankruptcy. See Note 25 - Solutia-Related and Other Income and Expense - for further discussion.

• In 2008, we expensed non-tax-deductible acquired in-process research and development (IPR&D) of $164 million, or $0.29 per share, primarily related to the De Ruiter acquisition.

2007:
• In 2007, we expensed non-tax-deductible acquired IPR&D of $193 million, or $0.35 per share, related to acquisitions.

• We recorded income on discontinued operations of $80 million aftertax, or $0.14 per share, in 2007, primarily related to the gain on the sale of the divested cotton businesses.

Financial Condition, Liquidity, and Capital Resources - In 2008, net cash provided by operating activities was $2,799 million, compared with $1,854 million in 2007. Net cash required by investing activities was $2,027 million in 2008, compared with $1,911 million in 2007. As a result, our free cash flow, as defined in the "Overview - Non-GAAP Financial Measures" section of MD&A, was a source of cash of $772 million in 2008, compared with a use of cash of $57 million in 2007. We used cash of $1,007 million in 2008 for acquisitions of businesses, compared with $1,679 million in 2007. For a more detailed discussion of the factors affecting the free cash flow comparison, see the "Cash Flow" section of the "Financial Condition, Liquidity, and Capital Resources" section in this MD&A.
Outlook - We aim 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

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biology 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 commercial 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 are applying our molecular and marker-assisted breeding capabilities to our library of vegetable germplasm. Our purchase of the De Ruiter business, a leading protected-culture vegetable seeds company, will allow us to serve our vegetable seeds customers through three dedicated platforms: protected-culture, open field and regional vegetable seed businesses. Our purchase of DPL has expanded our cotton breeding operation. 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 increased our average selling prices and experienced increased demand in recent years. We are implementing strategies to meet the future demand for Roundup. We are focused on managing the costs associated with our agricultural chemistry business. 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" above and Part I - Item 1A - Risk Factors of this Form 10-K.

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                        MONSANTO COMPANY   2008 FORM 10-K
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RESULTS OF OPERATIONS
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                                                                                                                                    Year Ended Aug. 31,
                                                                                              ------------------------------------------------------------------------------------------------
                                                                                                                                                                           Change
                                                                                                                                                              --------------------------------
                                                                                                                                                                2008 vs.            2007 vs.
(Dollars in millions, except per share amounts)                                                    2008                 2007                 2006                 2007                2006
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Net Sales                                                                                       $ 11,365              $ 8,349              $ 7,065                  36 %                18 %
Gross Profit                                                                                       6,177                4,230                3,443                  46 %                23 %
Operating Expenses:
Selling, general and administrative expenses                                                       2,312                1,858                1,604                  24 %                16 %
Research and development expenses                                                                    980                  770                  700                  27 %                10 %
Acquired in-process research and development (see Note 4)                                            164                  193                    -                 (15 )%              NM
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Total Operating Expenses                                                                           3,456                2,821                2,304                  23 %                22 %
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Income from Operations                                                                             2,721                1,409                1,139                  93 %                24 %
Interest expense                                                                                     110                  136                  133                 (19 )%                2 %
Interest income                                                                                     (132 )               (120 )                (54 )                10 %               122 %
Solutia-related (income) expense - net (see Note 25)                                                (187 )                 40                   29                 NM                   38 %
Other expense - net                                                                                    4                   25                   13                 (84 )%               92 %
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Income from Continuing Operations Before Income Taxes and Minority Interest                        2,926                1,328                1,018                 120 %                30 %
Income tax provision                                                                                 899                  403                  330                 123 %                22 %
Minority interest expense                                                                             20                   12                   17                  67 %               (29 )%
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Income from Continuing Operations                                                                  2,007                  913                  671                 120 %                36 %
Discontinued Operations (see Note 27):
Income from operations of discontinued businesses                                                     20                   52                   32                 (62 )%               63 %
Income tax provision (benefit)                                                                         3                  (28 )                  8                  NM                 NM
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Income on Discontinued Operations                                                                     17                   80                   24                 (79 )%              233 %
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Income Before Cumulative Effect of Accounting Change                                               2,024                  993                  695                 104 %                43 %
Cumulative Effect of a Change in Accounting Principle, Net of Tax Benefit (see Note 2)                 -                    -                   (6 )               NM                  NM
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Net Income                                                                                      $  2,024              $   993              $   689                 104 %                44 %
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Diluted Earnings (Loss) per Share:
Income from continuing operations                                                               $   3.59              $  1.65              $  1.22                 118 %                35 %
Income on discontinued operations                                                                   0.03                 0.14                 0.04                 (79 )%              250 %
Cumulative effect of accounting change                                                                 -                    -                (0.01 )               NM                  NM
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Net Income                                                                                      $   3.62              $  1.79              $  1.25                 102 %                43 %
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NM = Not Meaningful

Effective Tax Rate (continuing operations)                                                            31 %                 30 %                 32 %

Comparison as a Percent of Net Sales:
Gross profit                                                                                          54 %                 51 %                 49 %
Selling, general and administrative expenses                                                          20 %                 22 %                 23 %
Research and development expenses (excluding acquired IPR&D)                                           9 %                  9 %                 10 %
Total operating expenses                                                                              30 %                 34 %                 33 %
Income from continuing operations before income taxes and minority interest expense                   26 %                 16 %                 14 %
Net income                                                                                            18 %                 12 %                 10 %


Overview of Financial Performance (2008 compared with 2007)
The following section discusses the significant components of our results of
operations that affected the comparison of fiscal year 2008 with fiscal year
2007.

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Net sales increased 36 percent in 2008 from 2007. Our Seeds and Genomics segment net sales improved 28 percent, and our Agricultural Productivity segment net sales improved 48 percent. The following table presents the percentage changes in 2008 worldwide net sales by segment compared with net sales in 2007, including the effect that volume, price, currency and acquisitions had on these percentage changes:

                                                                          2008 Percentage Change in Net Sales vs. 2007
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                                                                                                                  Impact of
                                                Volume          Price          Currency        Subtotal        Acquisitions(1)        Net Change
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Seeds and Genomics Segment                         10 %             9 %             3 %             22 %                6 %                 28 %
Agricultural Productivity Segment                   5 %            35 %             8 %             48 %                -                   48 %
Total Monsanto Company                              8 %            20 %             5 %             33 %                3 %                 36 %
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(1) See Note 4 - Business Combinations - and "Financial Condition, Liquidity, and Capital Resources" in MD&A for details of our acquisitions in fiscal years 2008 and 2007. In this presentation, acquisitions are segregated for one year from the acquisition date.

For a more detailed discussion of the factors affecting the net sales comparison, see the "Seeds and Genomics Segment" and the "Agricultural Productivity Segment" sections.
Gross profit increased 46 percent, or $1,947 million. Total company gross profit as a percent of net sales increased 3 percentage points to 54 percent in 2008, driven by the increase in Roundupand other glyphosate-based herbicides average net selling prices. Gross profit as a percent of sales for the Seeds and Genomics segment remained at 61 percent. Gross profit as a percent of sales for the Agricultural Productivity segment increased 10 percentage points to 46 percent in the 12-month comparison. See the "Seeds and Genomics Segment" and "Agricultural Productivity Segment" sections of MD&A for details. Operating expenses increased 23 percent, or $635 million, in 2008 from 2007. Selling, general and administrative (SG&A) expenses increased 24 percent, and R&D expenses increased 27 percent, primarily because of the Seeds and Genomics business growth and acquisitions coupled with the increase in our investment in our product pipeline. In addition, we incurred higher incentive compensation expense and charitable and business donations in 2008. As a percent of net sales, SG&A expenses decreased 2 points to 20 percent, and R&D expenses remained at 9 percent of sales in 2008.
Interest expense decreased 19 percent, or $26 million, in fiscal year 2008 from 2007. The decreased expense was primarily due to lower average commercial paper borrowings outstanding during 2008.
Interest income increased 10 percent, or $12 million, in 2008 because of higher average cash balances.
We recorded Solutia-related income of $187 million in 2008 and $40 million of expense in 2007. This improvement was a result of our Solutia-related gain as described in Note 25 - Solutia-Related and Other Income and Expense. Income tax provision for 2008 increased to $899 million, an increase of $496 million over 2007 primarily as a result of the growth in pre-tax income from continuing operations. The effective tax rate on continuing operations was 31 percent, an increase of 1 percentage point from fiscal year 2007. This difference was primarily the result of the following items:
• The effective tax rate for 2008 was affected by our Solutia-related gain for which taxes were provided at a higher U.S.-based rate, a tax benefit of $43 million for the reversal of our remaining net operating loss valuation allowance in Argentina and additional tax expense for a transfer pricing item. We also recorded a tax benefit of $33 million in 2007 for the reversal of a portion of our valuation allowance in Argentina.

• Nondeductible acquired IPR&D charges of $164 million and $193 million were recorded in 2008 and 2007, respectively.

• A tax benefit of $79 million was recorded in 2007 for several discrete tax adjustments. The majority of this benefit is the result of audit settlements, including the conclusion of an Internal Revenue Service (IRS) audit for tax years 2003 and 2004, an ex-U.S. audit, and the resolution of various state income tax matters and, to a lesser extent, a benefit related to the retroactive extension of the R&D tax credit that was enacted as part of the Tax Relief and Health Care Act of 2006 on Dec. 20, 2006.

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Without these items, our effective tax rate for 2008 would have been lower than the 2007 rate, primarily driven by a shift in our earnings mix to lower tax-rate jurisdictions.
The factors noted above explain the change in income from continuing operations. In 2008, we recorded income on discontinued operations of $17 million compared to $80 million in 2007. As noted above and discussed in Note 27 - Discontinued Operations, we realized a pre-tax gain of $46 million, and a tax benefit of $27 million, in 2007 related to the sale of the cotton business. Overview of Financial Performance (2007 compared with 2006) The following section discusses the significant components of our results of operations that affected the comparison of fiscal year 2007 with fiscal year 2006.
Net sales increased 18 percent in 2007 from 2006. Our Seeds and Genomics segment net sales improved 25 percent, and our Agricultural Productivity segment net sales improved 10 percent. The following table presents the percentage changes in 2007 worldwide net sales by segment compared with net sales in 2006, including the effect that volume, price, currency and acquisitions had on these percentage changes:

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