Corteva Pricing Spineometer: 2 of 5 Vertebrae

Corteva Agriscience , an agrochemical and seed company, had a positive Q2 2024. Revenue rose 1.1% to $6.1billion and earnings before interest and taxes rose 23.4% to $1.3 billion over the same period last year.

A review of Corteva’s 1 August 2024 earnings call and associated financial reports provided insight regarding the importance of pricing on performance.

The seeds and agrochemicals markets are highly seasonal businesses.? Most sales are to the northern hemisphere and occur in the year's first half.? Sales to the southern hemisphere are mostly to Latin America and Australia, as Africa, outside of South Africa, has not fully engaged in the agricultural revolution that began in the last century.?

Despite the relative industry concentration of 4 to 6 major companies, pricing is highly competitive and strongly based on value.? Value is dependent on the crop.? At a basic level, increasing farm yields on a hectare basis for high value crops is the key value farmers seek.? Studies of the Economic Value to Customer are key to defining the benefits delivered. These studies require trial runs and studies of environmental impact.?

Value capture is a different challenge.? At a base level, agrochemical and seed companies can expect to capture 30% of the differential benefits of their offering in price.? Unlike seeds, much of agrochemical offerings are generic.? This implies the opportunity for heady price competition in agrochemicals while consistent market share growth and price capture in seeds that have a significant and measurable impact on crop yields.

Corteva operates in both segments of the market. They did $7.1 billion in seeds and $3.5 billion in agrochemicals in the first half of 2024.? In the seed segment, Corteva has meaningfully differentiated offerings in soy and corn.? In the agrochemical segment, Corteva offers more generic products and suffers from a stronger commodity-oriented price pressure.?

Some relief can be found in the biologicals sector.? Biologics are a new means of providing crop protection using natural organisms, rather than chemicals, to help stave off fungi, insects, and competing plants.? Corteva has actively invested in this market, as have its competitors.?

Also, Corteva, a global provider, enjoys the challenge of operating in very different markets. Each country has its own regulatory requirements and pricing dynamics.?

And then there are the weather and natural challenges.? Demand for Corteva’s offering is naturally highly dynamic.?

Corteva reported destocking challenges and competitive pressures in agrochemicals and typical seasonal challenges in seed, along with some currency challenges with the Turkish Lira related to the high inflation in Turkiye.

Charles Magro, CEO of Corteva, expressed a focus on volume rather than price capture at the current time, stating, “While North America corn acres are down year-over-year, the team has managed to hold volumes relatively flat and gained share in the first half, a testament to both strong demand for our latest corn hybrids as well as the strength of the Pioneer business model.”? Later, he stated, “When we look at CP (crop protection) for the second quarter, our price was down approximately 5%, but our volumes were up 6%, and we really needed to see the volume growth.”

Yet Charles Magro also expressed an understanding of the importance of the Economic Value to Customer.? He stated, “Farmers can always find cheaper seed, but with Corteva brands, they know they can trust our long history of incremental annual yield improvement, which gives them confidence in the outcome as well as peace of mind.”

David Anderson, the outgoing CFO of Corteva, expressed a high focus on appropriate value capture.? He stated, “Organic sales were up 4% on broad-based pricing gains as we continue to price for value.”

Throughout the quarterly earnings presentation were many expressions of the impact of price-mix and volume on profitability, an accounting approach of variance analysis.? Read Normative Decomposition of the Profit Bridge into the Impact of Changes in Marking Variables for an updated formulation that removes known biases from the standard accounting texts.

Industry benchmarks suggest Corteva to have 35 to 175 professionals dedicated to pricing.

1. Some would work with product managers to define the Economic Value to Customer and Corteva’s potential value capture with new products.?
2. Many would work in specific countries to define commercial policy and discounting rules in conjunction with commercial officers.
3. Studies of price capture by customer and segment could be used to provide pricing guidance at the sales level to ensure discounts and rebates are made in alignment with corporate goals.
4. Using profit-based incentives could be used to ensure tactical discounts and rebates are minimized while enabling sales volumes to be achieved.
5. Since Corteva sells both seed and agrochemicals, some level of bundling can be used to protect crop protection volumes while relying upon the high value of their seed technology to engage farmers' interest.
6. Given the reporting provided by Corteva, I would expect some pricing professionals to be engaged in converting accounting findings into actionable decisions.
7. The high seasonality of seeds and crop protection would drive a need for dynamic pricing, where pricing is responding to customer and competitive dynamics in real-time.

Research into the investment by Corteva in pricing yielded underwhelming results.

1. The pricing professionals identified at Corteva were in the single digits. Most of the pricing responsibilities were left to product managers, portfolio managers, marketing professionals, and commercial officers.
2. The roles of pricing included market intelligence, analyst, coordinator, manager, leader, and director.? No VP of pricing was identified.

Given the importance and capability of pricing at Corteva as indicated in financial reports, management statements, and our pricing team research, and given their performance, we have come to the following conclusion as of September 2024.

Corteva Pricing Spineometer: 2 out of 5 Vertebrae. Executives are aware of the importance of pricing and I am confident that many good pricing decisions are being made, yet the team of pricing professionals is far below expectations.? I strongly suspect there is much opportunity for improvement in this functional area.

CTVA (Corteva, Inc.) fell from 56 the day prior to their earnings call to 51 one week later. FY 2023 revenue of $17 billion with a 6.4% operating margin and P/E ratio near 40.?

For FY 2023, a 1% improvement in price would yield a 16% improvement in operating profits holding all else constant at Corteva.

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Catch Tim J. Smith, PhD live at the Professional Pricing Society’s Las Vegas Workshop #PPSVegas24 on 22 October.?