The Downside of ADM's Focus On Biofuels

With ethanol a political football, ADM's chief executive, Patricia Woertz, and its stock are getting hit

By Joseph Weber

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Even before oil prices collapsed, Patricia A. Woertz had one of the most delicate balancing acts in business. Now things are getting downright precarious.

As chief executive officer of Archer Daniels Midland (ADM), the world's largest grain processor, Woertz has watched various parts of her $70 billion-a-year empire gyrate wildly during the past year. Her continued passion for corn-based ethanol angers many corporate customers at a time when enthusiasm for the controversial fuel additive is waning. Ethanol's profitability has eroded as oil has slipped, and social critics complain that it harms the environment and diverts corn supplies, raising food prices.

Woertz, a composed and deliberate leader, occasionally reveals the strain she's under. When skeptical company interns peppered her with questions about ADM's focus on ethanol during a discussion at headquarters in Decatur, Ill., she responded sharply: "We are not just an ethanol company. I'll say that again. Everybody hear that? We are not just an ethanol company."

She's right. While ethanol was the largest single contributor to ADM's profits last year, driving a unit that accounted for 19% of company profits on 7% of sales, it's dwarfed by the business of processing wheat, cocoa, soy, seeds for vegetable oil, and other staples.

But Woertz committed to an ethanol-heavy strategy when oil was on the way up and alternative "biofuels" looked smart. Now she's sticking with that bet. She plans to build two more plants by early 2010 that could increase production to 1.9 billion gallons a year, up from the current 1.1 billion. Although using corn for ethanol wins ADM few fans these days, alternatives are slow in coming. ADM has talked up a new joint venture in Brazil to produce the additive from sugar, but that production will meet only local needs.

SAGGING DEMAND

The overall ethanol market, meanwhile, is imploding. Popularized in the early 1900s when it was used in the Model T Ford, the additive is blended with fossil fuel to cut costs. Demand soared as crude oil prices rose, prompting increased production, and dropped dramatically when oil prices fell.

With the bankruptcy of leading distributor VeraSun Energy (VSE) two months ago, ADM has cemented its dubious position as industry titan. That dominance will probably make Woertz and her 27,000-employee company an even more inviting target for environmental groups and other ethanol opponents in industries ranging from food to oil. As if this weren't enough to worry about, Woertz, 55, will also have to deal with fallout from a Hollywood movie starring Matt Damon due in theaters in September that focuses on ADM's past price-fixing. Woertz shrugs off the challenges, arguing that she remains focused on "the things we can control."

For decades, ADM, a lobbying virtuoso, has benefited from lavish financial and regulatory support from Washington. Even with recent increases in federal ethanol subsidies, falling ethanol prices have made it tough for ADM and its rivals to cover their costs for the additive. The Renewable Fuels Assn., which represents ethanol makers, says it has suggested to the transition team that President-elect Barack Obama provide government guarantees for $1 billion in short-term bank loans for struggling producers and up to $50 billion more to develop ethanol technology and new biofuels. Woertz is doing her part. In 2008, ADM paid more than $1 million to lobby federal politicians on energy, trade, and environmental legislation, up from $900,000 for 2007 and $300,000 in 2006.

Reaction in Washington is apt to be cool. Political attention is fixated on crises on Wall Street and in Detroit. Obama has said he supports ethanol subsidies in general, but he is more interested in propping up the production of biofuels from sources other than corn. In addition, he favors more research on wind and solar energy.