DuPont, Syngenta & Dow Chemical planning major deal

Date:11-20-2015

Agricultural majors are exploring options to combine their businesses as they grapple with low farm commodity prices, sources revealed recently.

DuPont , which remains buffeted by sustained weakness in its agriculture business, is looking to cut major agricultural deals with Syngenta  and Dow Chemical, according to reports. The Delaware-based company is reportedly exploring two separate deals as it continues to feel the pinch of falling commodity prices.

According to a Wall Street Journal report, Syngenta is in discussions with DuPont about a possible merger with the latter’s agriculture unit. Moreover, DuPont is reportedly in talks with Dow Chemical for another potential deal. The talks are, however, in early stages and might not eventually materialize.

In a bid to cope with the prevailing low commodity price environment, agricultural companies are looking for cost synergy opportunities and enhanced operational scale through consolidations.

Deal talks among major agricultural players are heating up since Monsanto  ended its pursuit of Syngenta in Aug 2015. Monsanto dropped its $46 billion takeover bid for Syngenta after the latter rejected the offer stating that it significantly undervalued the company. The merger would have created the biggest player in the world for seeds and crop chemicals.

The discussions have also gathered steam as U.S. firm income is set to tumble to its lowest level since 2006 this year. According to the U.S. Department of Agriculture, U.S. farm income is expected to skid 36% in 2015.

The projected decline reflects continued downturn in crop prices amid expectations of bumper harvests by U.S. farmers. A big harvest would lead to a glut of grains and oilseeds, thereby depressing prices of these commodities. Lower farm income unfavorably impacts grower’s purchasing decisions.

Lower crop prices are weighing on DuPont's profits. The company remains exposed to a challenging operating environment in the agricultural market. Its profits tumbled year over year in third-quarter 2015, hurt by bigger operating loss in its agriculture business.

Agricultural market conditions remain particularly weak in Brazil. Tighter profit margins and credit are making growers in that country more cautious in their spending. Lower insect pressure and reduced seed volumes are also contributing to a weakening demand for crop protection products.

Edward Breen, who took over as Interim Chair and CEO of DuPont following the retirement of Ellen Kullman on Oct 16, noted last month that the company will take a fresh look at its cost structure and capital allocation strategy to improve returns to shareholders amid the current difficult operating backdrop.

On the other hand, Dow Chemical saw a double-digit year over year decline in sales in its agriculture business in the third quarter, dragged down by lower agricultural commodity prices. Crop protection revenues fell on weak prices and volumes in Latin America. Dow, in its third-quarter call, noted that it will remain focused on executing its aggressive portfolio management initiatives.