Can DuPont Take a Bite From the GMO Pie?

Though agriculture has never been the most significant component in its long history, DuPont (NYSE: DD  ) is seeing the international growth potential in agricultural products and services, and is making a late but vast move to get into the field. The company is hoping that its agriculture-related businesses will perform stronger than some of its other underperforming units, but it's up against the agricultural technology giant Monsanto (NYSE: MON  ) . If DuPont plans to use agriculture to grow, it will need to find its own niche within the sector.

DuPont's transition into agriculture
DuPont has had the capacity to enter into the agricultural industry for centuries, and could have very easily done so several times throughout its history. DuPont's Belle plant has been producing ammonia for almost 90 years, a good share of which was used in producing the very first synthetic urea fertilizers. As a chemical company with a strong vision and stronger business leadership, DuPont shifted the end use of the produced ammonia from fertilizers to nylon and other plastics. At the time, plastics had growth potential far greater than that for synthetic fertilizers, and DuPont's move toward the faster-growing industry was an easy, albeit slightly risky, decision. A substantial move back to agriculture didn't occur until around 1980 when the company's direction was vastly diversifying.

Currently DuPont is making a huge shift into agriculture, seemingly at the expense of its diversification. In 1997, DuPont purchased a 20% interest in Pioneer and purchased the remaining 80% in 1999 while at the same time selling off its petroleum and natural gas investments. So began the company's rededication to agriculture.

DuPont had applied research and development efforts to the creation of hybrid seeds long before the acquisition of Pioneer. The success of the Optimum Quality Grains joint venture between DuPont and Pioneer prior to the acquisition was the defining sign that the company could not simply 'dabble' in agriculture and see the same level of success as could be realized by a more all-in effort. Since 1999, DuPont has shown the commitment to agricultural technology, and now agriculture is the company's largest and best performing business sector.

Sometimes your best isn't good enough
DuPont needs its agriculture sector to perform at or above its current levels in order to compensate for lackluster growth in other operational segments. The company's performance chemicals, industrial biosciences, and pharma segments all reported declining fourth quarter earnings in 2013. Pessimistic future projections for pharma and separation of the performance chemicals segment suggest that DuPont needs the agriculture segment to overachieve to compensate for the slower-growth business components.

DuPont's developments in genetically modified (GM) cereal crops to protect against insects and provide resistance to different herbicides are encouraging, but these efforts all are made with direct competition from Monsanto, which chose to make a grand transition into agriculture almost twenty years before DuPont. Monsanto's Roundup Ready and YieldGard seed technologies were well established before DuPont began considering herbicide-resistant genetic modifications for corn. Likewise, Monsanto has long had the edge over DuPont in soybeans even before their Intacta RR2 PRO soybeans demonstrated the first successful insect-protecting trait in soybeans. DuPont is challenged with the need to find their niche in a market that is already occupied by a dominant player. Preferably the market would be one in which it doesn't have to pay Monsanto for patent rights.

The key for DuPont in competing against Monsanto and other big players in agricultural technology will be to identify new and desirable seed traits and to get a strong (maybe superior) product to market before Monsanto. The Plenish high oleic soybeans may be one such product. The Pioneer brand Plenish soybean contains more monounsaturated fat than any other soybean, which could prove valuable during soy processing where trans fat alternatives are continually being sought. The product will need to compete with Monsanto's nutritionally upgraded Vistive Gold soybean that could hit the commercial market as early as 2015.  Despite starting a decade or more behind in this particular trait as it has with prior ventures, DuPont is on mostly equal footing with its biggest competitor. The market for high oil soybeans may include producers of bio-based oils serving as alternatives to petroleum-based products, making the stakes that much higher for both DuPont and Monsanto.

At what expense?
DuPont timed its high-risk transition into plastics perfectly to capitalize on the emerging market, but it is late with its transition into agriculture. Though the company continues to realize encouraging growth in agriculture, its classic strength in chemicals seems to have been sacrificed. When Monsanto transitioned out of chemistry and into agriculture, the gamble clearly paid off. DuPont is hoping for similar results with its ongoing transition into agriculture to what Monsanto saw thirty years ago, but the field has changed drastically since then. To be successful, DuPont will need to beat the bigger and more experienced Monsanto, and investors should question if DuPont is really up to the task.

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  • Report this Comment On February 04, 2014, at 10:04 AM, funfundvierzig wrote:

    Shamus Funk has authored a very insightful and accurate historical perspective on DuPont in the agricultural arena.

    One point long term DD investors will recall:

    DuPont Management's first major attempt a few years ago to create and market a first-generation genetically-modified seed trait, DuPont OptimumGAP, to compete with front-runner Monsanto ended in embarrassing failure. DuPont OptimumGAP cannot be planted by farmers in their fields "without risk".

    This colossal failure was soon followed by another in ag chemicals: DuPont Imprelis, a falsely, if not fraudulently marketed "very environmentally friendly" dandelion treatment for the lawn, which proceeded to decimate hundreds of thousands of mature landscaping trees across the country. This multi-$billion environmental disaster is the biggest, most costly new product failure in 21st century corporate America to date.

    DuPont OptimumGAP and DuPont Imprelis (now banned by the U.S. EPA) hardly inspire current confidence in the business of DuPont AG & NUT.

    Merely the perspective of one individual investor...funfun..

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