Corteva's Growing Premium Seed and Crop Protection Products Should Drive Long-Term Margin Expansion

Strategist

Seth Goldstein

Corteva is an agriculture pure play that was formed in 2019 when it was spun out of DowDuPont. The company is a global leader in seeds and crop protection products. Seeds generated around 60% of profits in 2023, with the remaining 40% coming from crop protection. Corteva develops its pipeline through the investment of around 8% of sales in research and development, which should allow sales and profits to grow from new products even as patents expire and generic products come to market.

Corteva's seed portfolio skews toward corn, which generated 68% of 2023 seed sales, and soybeans, which generated 20%. Although Corteva's market share in seeds is second to Bayer (Monsanto), the firm holds a solid portfolio of proprietary genetically modified seed platforms. GMO seeds make crops resistant to damaging insects while also allowing farmers to spray more-effective crop chemicals to control weeds. In the coming years, Corteva plans multiple new corn and soybean seed products. Anti-GMO consumer sentiment may limit Corteva's growth in developed markets such as Europe. However, the need to improve crop yields globally should lead to eventual GMO adoption in emerging markets, particulary throughout Asia, where we see long-term growth potential.

In Corteva's crop protection segment, a little over half of sales comes from herbicides, which complement GMO seeds and should see increased demand. Conversely, we see demand for insecticides, which made up 21% of crop protection sales in 2023, falling over the long term due to an increase in GMO seeds. However, Corteva's new insecticides will use new modes of action, such as environmentally friendly biologicals, to target resistant bugs. Corteva aims for biologicals to generate 25% of crop protection sales by 2035. Similar to seeds, Corteva plans to launch new premium products in the coming years as a way to improve the sales growth and profitability of its product portfolio.

Corteva's sales skew toward North America, which generated 50% of sales in 2023. The other 50% of sales are fairly balanced geographically. Brazil has historically been Corteva's second-largest market, generating a mid-teens percentage of sales.

Business Strategy & Outlook

We award Corteva a wide economic moat rating based on its portfolio of patented biotech seeds and crop chemicals. The company's patented products command pricing power as they protect farmer yields and reduce other expenses such as insecticides. Corteva's intangible assets stem from the research and development spending required for the continual development of proprietary seed and crop chemical formulations. As patents expire and bugs develop resistance to current products, seeds with new traits and new chemical formulations must be developed. As a result, moaty businesses in this space must continue to invest in R&D. Corteva's R&D as a percentage of sales tops all major competitors, with the company investing roughly 8% of sales in new product development each year. This level of investment is in line with peers including Bayer (Monsanto historically averaged around 10%), Syngenta (9%), and FMC (7%), which gives us confidence that Corteva is investing enough to continue to successfully develop new products.

Before the merger between Dow and DuPont, DuPont’s agriculture business was second to wide-moat Bayer in biotech seeds and had built a solid position in the market, controlling a strong germplasm, or seed bank, and a capable distribution and marketing operation. DuPont had even bested Bayer in recent years on the marketing front with its more regional strategy.

Additionally, Corteva's Enlist (soybean) and Qrome (corn) genetically modified platforms set the company up for long-term success as GMO seeds are adopted in emerging markets. The GMO seeds have also had two key product wins over Bayer in the last couple of years. In 2018, Qrome seeds were the first GMO corn approved for import into China. In 2019, Enlist seeds were approved for import, before a Bayer soybean received the same approval. We think import approval is the first step toward eventual GMO adoption. Although Corteva has yet to leapfrog Bayer on the technology front, it is beginning to close the gap and maintains a portfolio of patented traits that are difficult to replicate. As a result, Corteva should maintain its position as a clear number two and formidable competitor to Bayer. 

Further, Corteva has begun to license its Enlist platform technology to other seed companies, which sets up the seed business for a steady stream of profitable licensing royalties. In addition to the royalties, Corteva's licensing strategy will reduce competition. As potential competitors license a Corteva technology instead of developing their own, they are more likely to spend R&D toward enhancing the base technology rather than invest in products that could usurp market share from Corteva's seeds.

Wide

Economic Moat

Corteva Inc

Corteva, Inc. is a global provider of seed and crop protection solutions focused on the agriculture industry and contributing to food supply. The firm operates through the following segments: Seed and Crop Protection. The Seed segment is engaged in the developing and supplying of advanced germplasm and traits that produce yield for farms. The Crop Protection segment is involved in offering the global agricultural input industry with products that protect against weeds, insects, other pests, and diseases, and that improve overall crop health both above and below ground via nitrogen management and seed-applied technologies. The company was founded in 1802 and is headquartered in Indianapolis, IN.

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Corteva, Inc. engages in the provision of seed and crop protection solutions, which engages in the agriculture industry and food supply. It operates through the Seed and Crop Protection segments. The Seed segment involves the development and supply of advanced germplasm and traits that produce yield for farms. The Crop Protection segment includes the global agricultural input industry with products for weeds, insects, other pests, and diseases protection, through nitrogen management and seed-applied technologies. The company was founded in 1802 and is headquartered in Indianapolis, IN.

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