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Summary

  • Agriculture has become a major growth driver for the chemical industry. DuPont's agriculture business segment continues to be the star segment for the company, and will drive future growth.
  • The launch of Encirca farm services is a strategic step that will serve to increase the market share of agriculture products.
  • The separation of the Performance Chemicals business will allow the company to sharpen its focus.

E.I. du Pont de Nemours & Company (NYSE:DD) recently announced the expansion of its research facility at Delmas in South Africa. The primary aim of this is to add value to the company's efforts to improve seed product development in Africa. The expansion of its technology center is widely seen as another step to strengthen its agricultural business segment that is expected to deliver future growth opportunities for the company. Let us discuss the outlook of the market of agricultural products and the company's efforts to capitalize on the growth opportunities in the market.

Agriculture Business

The agriculture business segment is one of the primary segments for the company. The company operates with DuPont Pioneer and DuPont Crop Protection. Pioneer sells and markets seed products primarily under its brand name. During 2013, the segment contributed nearly 32 percent of the total revenues earned by the company. The segment's margin also increased to 18% reflecting an increase of 2% from 2012. The growth was primarily driven by higher seed prices and volumes, particularly in North America and Brazil. The segment-wise breakup of sales can be seen in the figure below.

Source: DuPont's Annual Review

Going forward, the company expects a modest growth rate, driven largely by continued demand in Northern America, coupled with higher global demand. The scenario of growth in global corn, soybean, and other seeds was rightly pictured by the analysts at Trefis.com. Accordingly, the global market is set to grow to up to $81.6 billion by 2020, reflecting an increase of 35% from 2013's level of $53 billion. However, DuPont's market share is not projected to grow with the same pace. Trefis.com expects the market share to marginally improve to 16% by the end of the projected period (by 2020) from the current share of 15.4%.

Encirca Program: Long-term Revenue Driver

I believe that with the recent launch of Encirca farm services, the company has positioned itself to ensure a higher market share, while increasing profitability. The launch of Encirca farm services reflects another step the company is taking to benefit from the growth opportunities in the market.

Given the growth opportunities in the market, the program seems to be an appropriate move, as it ensures a competitive edge in the long term that will serve to strengthen the revenue base of the company. The Encirca farm services will help farmers to improve their yields by offering them informed crop planting decisions. DuPont also launched the whole farm services product as a mobile device application that will serve as an immediate information platform. Accordingly, farmers can have direct access to DuPont's experts for any advice on crop management.

The revenues are planned to be derived through three packages: basic, premium, and yield. The company is set to charge a monthly subscription fee of approximately $150 that also includes market news and analysis, including weather forecasts. Similarly, with Encirca Yield, the company will be charging fee-based services. The package is flexible, and will be tailored according to the requested services. However, the range of the pricing will be around $10-20 per acre.

The step is considered to have a positive impact on the revenues, as it will help the company to increase its presence in the fast-growing precision farming market, and will boost the revenue contribution of the agricultural business segment. The whole idea of Encirca is expected to yield desired results in the next decade and add more than $500 million per annum.

Separation Was a Good Choice

The separation of the Performance Chemicals business is on track for 2Q 2015. By spinning off of the highly cyclical portions of the business, the company can now focus on the agriculture side of the business. In the wake of slower demand for titanium dioxide, one of the major products of the segment, the company chose to spin off its Performance Chemicals segment.

Concluding Remarks

DuPont is aggressively expanding its agriculture business that is quickly becoming the company's growth avenue. The Encirca services product line will help farmers to increase productivity and profitability, which in turn, will yield the same results for the company. The investment in agriculture was supported by spinning off the Performance Chemicals business.

To sum up the above discussion, agriculture has emerged as a major growth catalyst for the chemical industry, and DuPont's efforts to capitalize on these opportunities are on the right track. Therefore, I recommend buying the stock.

Source: DuPont's Agri Business: The Future Growth Driver