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Morningstar | The global demand for improved crop yields should benefit agriculture-focused FMC.

FMC has transformed its portfolio over the past few years from a collection of disparate chemical businesses to one focused primarily on crop protection chemicals. The crop protection chemical market currently faces near-term pressures. Farmer incomes have fallen alongside crop prices, and insecticide demand in Brazil is falling because of high adoption rates of insect-resistant genetically modified seeds. As emerging-market food consumption rises, the crop chemicals industry will return to growth to facilitate yield improvements.FMC has become a major crop chemicals producer through acquisition. FMC acquired Cheminova in 2015, increasing exposure to Europe and expanding the company's portfolio of crop chemicals. In late 2017, FMC acquired DuPont's divested crop chemicals portfolio, which included the blockbuster insecticide Renaxypyr, in exchange for FMC's health and nutrition business, cash, and working capital. In addition, both acquisitions greatly enhanced FMC’s R&D pipeline, which should allow the company to continue producing new crop chemicals as older products roll off patent. Lithium only accounts for around a fifth of its profits, but FMC is a major player in the lithium industry. As electric vehicle penetration increases, lithium demand should grow at a mid-double-digit pace. While we are bullish on lithium demand, we are skeptical of FMC’s strategy of focusing on hydroxide capacity expansions and purchasing carbonate. Lithium hydroxide is a higher-grade and higher-priced product, often produced as a derivative of lithium carbonate. While management believes that a focus on the production of hydroxide will shield the company from volatility in carbonate pricing, we contend that hydroxide pricing premiums will normalize to the cost of conversion as competitors enter the market. In contrast, we are in favor of FMC’s plans to expand its low-cost carbonate production in Argentina, since those cost advantages appear sustainable in the long run. FMC plans to spin off its lithium business by the end of 2018, which will be named Livent Corporation. We think the firm will be able to grow long-term profits from the expansion of its low-cost carbonate capacity.