DuPont (NYSE:DD) has had a great 2013. The company’s stock price has surged more than 40% year-to-date. It has gained from its position in the robust agricultural products market characterized by growing demand for genetically modified (GM) seeds and insecticides. The company also announced a plan to spinoff the cyclical titanium dioxide (TiO2) and other performance chemicals business, which weighed on its earnings growth during the year. This means that DuPont would rely even more on its agricultural products business for future growth, which currently contributes almost one-third to its total value by our estimates. In this article, we review the key trends that impacted DuPont’s performance and the strategic steps it took during the year.
We currently have $64 price estimate for DuPont, which is almost in line with its current market price.
Agricultural Products Drive Growth
DuPont’s agricultural products division continued its strong performance in 2013. The division led consolidated sales growth for the company amid higher demand for its seeds and crop protection products. At $9.9 billion, sales from the division grew 12% y-o-y during the first nine months of this year. 
DuPont’s seed sales have been primarily driven by the growing penetration of its AQUAmax and AcreMax products. Introduced in 2011, AQUAmax is a drought tolerant variety of corn seeds sold by DuPont. Farmers skeptical of water availability during the corn-growing season use AQUAmax seeds for better yields. The product’s demand grew sharply after the severe drought in 2012. This year, DuPont’s AQUAmax corn seeds were planted on 7 million acres compared to 2 million acres in 2012. 
Apart from this, the growing adoption of integrated and reduced refuge techniques also boosted demand for DuPont’s AcreMax line of products. The U.S. Environmental Protection Agency (EPA) requires that a refuge consisting of non-GM corn seeds be planted on a certain percentage of each field in the Corn Belt. DuPont’s AcreMax line of products provides farmers with a convenient method to comply with this regulatory requirement, as it contains both the seed varieties in the same bag, mixed in the right proportion.
In the crop protection segment, DuPont has gained from increased demand for its hugely successful Rynaxypyr insecticide. Higher demand for the product stems from its unique mode of action that reduces the environmental impact while being extremely effective against a wide range of insects. The compound selectively activates ryanodine receptors in insects that cause them to stop feeding on leaves within minutes of ingestion. It also moves inside the leaf tissue where it is protected from being washed-off. This leads to more effective and longer lasting protection of crops from insects, resulting in higher yields for farmers. The American Chemical Society recently named the scientists who developed Rynaxypyr at DuPont ”Heroes of Chemistry“. The company expects Rynaxypyr sales to top $900 million this year. 
Portfolio Transformation Continues
DuPont has been gradually increasing its focus on agricultural products, health and nutrition, and industrial biosciences businesses, which could allow it to leverage the close integration of these businesses based on innovations in the chemicals and biotechnology fields. (See: A Closer Look At DuPont’s Plans For The Biofuels Market) Some of the big portfolio actions taken by the company in this direction over the past few years include:
- Acquisition of the food, enzymes and bio-products company, Danisco in 2011
- Sale of the performance coatings business in 2012
- Acquisition of the international soy ingredients joint venture, Solae in 2012
- Acquisition of the African seed giant, Pannar in 2013
This year, DuPont took another step in this direction. In the second half of 2013, DuPont announced its decision to spin off the performance chemicals division that primarily deals in fluorochemicals and TiO2. It contributes more than 20% to DuPont’s total value by our estimates. DuPont’s decision to spin off the division was primarily driven by its objective to reduce cyclical volatility that is inherent to the performance chemicals business. We believe, the spinoff of TiO2 and other performance chemicals businesses will not only allow DuPont to focus more on science based integration of its Agricultural, Health and Nutrition and Industrial Biosciences divisions but will also reduce operating risk associated with the company’s consolidated operations. 
Expansion In Key Growth Markets
DuPont also expanded the reach of its agricultural products business in the key growth markets of Africa and Ukraine in 2013. In June this year, DuPont launched a new seed production facility in Ukraine’s Poltava region to tap the country’s growing demand for better yielding corn, sunflower and other seeds.  Ukraine is widely known for its abundant black soil, which is rich in minerals that enhance agricultural yield. Not only this, at over 55%, the country’s arable land as a percentage of its land area is one of the highest in the world.  In absolute terms the country has around 34 million hectares of arable land, which is about one-third of the arable land of the whole European Union (EU). With a focus on improving agricultural techniques, the country plans to double its annual agricultural production over the next decade from over 46 million tons produced in 2012. Ukraine is therefore an important market for DuPont’s agricultural products business.
DuPont is already a market leader in corn seeds and the second largest producer of sunflower seeds in Ukraine. The company’s sales from Ukraine have grown at 30% CAGR over the last five years, while its consolidated agricultural products sales have grown at ~10% CAGR over the same period.  With additional seeds production capacity in Ukraine, DuPont aims at bolstering its leading market share in the Ukrainian seeds market, which has a high growth potential.
August this year, DuPont also announced the acquisition of a majority stake in one of Africa’s largest seed producing and marketing company, Pannar Seed.  Africa faces a daunting challenge of feeding the growing population amid shrinking arable land. The continent’s population is expected to almost double to 2 billion by 2050, while arable land is expected to shrink to a third over the same period. The scenario clearly calls for an improvement in agricultural yields through efficient farming techniques.  Almost 20% of the global area under maize cultivation is in Africa. However, average yields in the continent are significantly lower, almost one-fifth of that seen in the developed markets.
This can partly be attributed to low adoption rates of GM seeds in African countries. GM seeds provide farmers with higher yields, lower susceptibility to insects, increased tolerance to chemicals used for eliminating weeds (herbicides) and extreme climatic conditions such as drought. As a result, farmers in developed countries have largely adopted GM seeds. GM corn varieties make up ~90% of total corn planted in the U.S.  However, only four out of more than 50 countries in Africa grow GM crops. Therefore, there is a huge long-term opportunity for DuPont to tap in the African markets. 
With the acquisition of Pannar Seed, DuPont aims to leverage its extensive reach in the African market, existing customer base, region-specific genetics developed by Pannar and established infrastructure facilities to grow its global seeds market share. Its own expertise in the global GM seeds market will further allow the company to refine the research and development procedures. While financial terms of the deal were not disclosed, DuPont did announce that it will be investing R62 million (South African Rand) by 2017 to establish a new research and development center in South Africa.Notes:
- DuPont SEC Filings, sec.gov [↩]
- DuPont at Morgan Stanley Global Chemicals and Agriculture Conference, dupont.com [↩]
- Q3 2013 DuPont Earnings Conference Call, dupont.com [↩]
- Performance Chemicals Segment Spin-off, dupont.com [↩]
- DuPont Opens Seed Production Facility in Ukraine, pioneer.com [↩]
- The World Bank Data, worldbank.org [↩]
- Ukraine poised for global ag role, agriculture.com [↩]
- DuPont Pioneer And Pannar Seed Commence Partnership, pannar.com [↩]
- Africa’s path to self-sufficiency, gmo-compass.org [↩]
- Adoption of Genetically Engineered Crops in the U.S., ers.usda.gov [↩]
- Global Status of Commercialized Biotech/GM Crops: 2012, isaaa.org [↩]