Assessing The Outlook For Dow’s AgroSciences Business

Dow’s Agricultural Science Products division contributed to around 10% in revenues and 11% in EBITDA during 2011, up from 9% in EBITDA during 2010. During the first nine months of 2012, the division contributed around 11% in net sales and 15% in EBITDA. The company reported a 5% decline in company-wide prices during the first nine months of 2012, compared with the same period in the previous year. Price decreases were reported in all operating segments, except Agricultural Sciences (up 2%). Company-wide volumes grew 2%, driven primarily by growth in Agricultural Sciences (up 10%). ^[1] As apparent from these statistics, this division is becoming increasingly important to the company’s operations. Below we look at some of the key drivers to this business.

Global Agricultural Products Market

The world population is expected to reach over 7.5 billion by 2020. High population growth does not only imply higher demand for food products, it is also reducing the arable land available for cultivation. With a shrinking base of agricultural land and limited water resources, there is a growing need to optimize food production practices with increased use of sustainable technological solutions.

Genetically Modified (GM) Seeds, one of the products in the segment, are highly resistant to herbicides, have higher yields than their natural counterparts, have improved nutritional value, and are more resistant to extreme climate conditions and pests. In addition to this, GM seeds also offer economic benefits to farmers due to higher pricing, who are increasingly opting for innovative and high-yielding variants of seeds.

The demand for other important products in the segment like herbicides (used to kill unwanted plants) and insecticides (used to protect plantation from insects), is also expected to grow with rising food demand. Hence we have factored a conservative 4.5% CAGR in the global agricultural science products market size.

Dow’s Agricultural Science Products Market Share

The company’s market share in the segment was 3.8% in 2009. In 2010 the company launched SmartStax, a brand of genetically modified seed made in collaboration with Monsanto Company. The technology used in SmartStax takes advantage of multiple modes of insect protection and herbicide tolerance, and was a great success. Dow Chemical’s market share in the segment rose to 4.0% in that year. The momentum continued into 2011, which helped the company extend its market share to 4.5%.

We expect the positive trend to continue with increased penetration of SmartStax hybrids, Refuge Advanced (a convenient, single bag solution for refuge compliance) and other new products. In the long run, this along with consolidation of proprietary seed businesses, should take Dow’s market share in the segment close to 8%, by the end of our forecast period.

Potential Growth Dampeners

While Dow as well as other chemical companies continue to increase their investments in the segment, there are certain industry-wide concerns which could dampen the growth momentum. One of the major concerns is health and environment impacts of GM food products. Various consumer rights and other non-governmental pressure groups have raised these concerns, which has led to create several legal and regulatory hurdles for GM food product manufacturers. The adverse impact of pesticides on the environment, including animal species and humans, is another concern for regulatory bodies, which could potentially restrict and/or ban the usage of certain crop control products.

1. Dow 2011 Annual Report, Dow Investors [↩]