Why DuPont's Warning Calls Its Agriculture Strategy Into Question

The long-term economic fundamentals of the agriculture industry are extremely favorable. Agriculture is a major theme across the chemicals sector right now, and for good reason. Global populations continue to expand, and rapidly emerging economies have placed an enormous strain on food production. Millions of new entrants into the middle class across the world will result in a huge demand on food production.

In response, DuPont  dedicated itself to becoming a leader in agricultural products and services in the chemicals industry. It's steadily built a major presence in agriculture, which up until now looked like a wise strategy.

Unfortunately, management's strategy may actually backfire. Despite the solid long-term economic underpinnings of agriculture, DuPont recently cut its earnings forecast for the remainder of the year. This is making management look a little foolish for its belief that agriculture would be the next great growth opportunity.

Was DuPont's strategy off the mark?
DuPont expects $4.00-$4.10 in operating earnings per share this year. This is a fairly significant reduction from its prior forecast, which called for between $4.20-$4.45 in operating EPS. Management reiterated its expectations as recently as the end of the first quarter, and to scale back its expectations so soon afterwards reflects poorly on the company.

Specifically, DuPont's problems pertain to corn. Corn seeds are one of DuPont's biggest products, but sales of corn seeds will likely come in lower than expected because farmers decided to plant more soybeans this spring. This is likely to have a significant impact on the second quarter, which will drag down the entire year's results.

This is problematic for DuPont, since it's made big investments in agriculture to capitalize on what it thought was an emerging business opportunity. To that end, DuPont underwent a restructuring in which it shed assets it doesn't consider critical to its future. For example, in 2012 DuPont sold off its Performance Coatings unit to The Carlyle Group for $5 billion.

In addition, DuPont plans to spin off its performance chemicals segment as well, by the end of next year. This follows the company's overarching strategy, since performance chemicals were also cited as a reason why management lowered its earnings outlook. Lower-than-expected selling prices in refrigerants are also contributing to weakness this year.

As a result, DuPont's agriculture segment is its company's largest operating unit by far, and was its best-performing business last year. DuPont generates approximately 43% of its sales from agriculture now. This paid off last year, since the agriculture division posted solid 13% sales growth, much better than the overall company's 3% revenue growth in 2013.

DuPont is clearly not happy with its performance so far this year, and to compensate, management will significantly cut costs to try to keep earnings afloat as much as possible. Management expects to generate at least $1 billion in cost savings by the end of 2013.

As agriculture disappoints, DuPont management looks bad
A few years ago, DuPont embarked on an 'out with the old, in with the new' mentality. It disposed of older business segments that had suffered slowing growth, and invested heavily in its agriculture segment as part of a major restructuring. This made a lot of sense, since rising populations and economic growth across the world will result in growing demand for food and agricultural products.

DuPont had centered its vision for the future around three key areas, one of which was agriculture, the others being advancement materials and industrial biosciences. DuPont management felt its business is best positioned to serve these markets. That's because these are where rising demand for better food and advanced fuels and materials create highly promising growth opportunities.

Unfortunately, DuPont's strategy doesn't look so savvy anymore, because it recently cut its full-year earnings forecast. Management attributes this to weaker-than-expected performance in its agricultural business, which casts doubt on the company's focus on agriculture.

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The article Why DuPont's Warning Calls Its Agriculture Strategy Into Question originally appeared on Fool.com.

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