Markets & Finance

More Than Ethanol Driving ADM


Archer-Daniels-Midland (ADM) has made its name as the world's largest grain processor, with a huge presence in staples such as soybeans and corn sweeteners. But lately, the Decatur (Ill.)-based outfit's biggest claim to fame is as the largest U.S. producer of ethanol. Surging prices for that now-vital liquid weren't the only factor behind ADM's stellar fiscal third-quarter results, posted May 2.

ADM easily beat analysts' profit expectations for the quarter ending in March, thanks to broad-based strength in its grain-processing businesses. Standard & Poor's equity analyst Joseph Agnese says "everything's aligned the right way now" for ADM, including its soybean businesses and its processing of corn into sweeteners and ethanol.

The news sent the stock soaring $3.90, closing May 2 at $41.90.

HEAT YOUR VEGGIES. After the company announced quarterly earnings of $348 million, up 29% from the same period in 2005, Agnese boosted his recommendation on ADM from hold to buy. While ADM's bioproducts business, which includes ethanol, performed well, it accounted for only about one-fifth of the company's operating profits. However, with rising gasoline prices and potential shortages now Topic A worldwide, ethanol inevitably comes into focus.

The company is angling to capitalize on new demand. During a conference call with analysts May 2, ADM officials, including newly installed President and CEO Patricia A. Woertz, said a proposal to build a new ethanol plant will go before directors shortly. And the company advocates the use of flex-fuel vehicles that can run on higher concentrations of ethanol than most cars available in the country.

In another venture into the alternative-fuel arena, ADM also said it will boost U.S. production of biodiesel, which can be made from vegetable oil, but as of yet is produced domestically on a limited scale.

ORGANIC SUBSTITUTE. The increasing use of ethanol in gasoline highlights the growing importance of fossil-fuel alternatives but also that, compared with gas, they still barely register. Rising ethanol prices have likely contributed nominally to the cost of gas in certain regions, but don't expect to see drivers cursing ethanol companies as they fill up or hear legislators blasting Big Ethyl's excessive profits.

Demand for ethanol has surged this year as oil refiners are adding it to gasoline so that it burns cleaner. In certain regions, including parts of the Northeast, refiners use the corn fuel to replace methyl tertiary butyl ether (MTBE), a chemical that contaminates groundwater and leaves oil companies vulnerable to lawsuits. Unfortunately for consumers, the switch has coincided with robust worldwide demand and political tensions that have kept the price of crude over $70 per barrel, and with the normal price hikes that come when summer approaches.

Ethanol has its own difficulties. Because the fuel absorbs water and impurities in a pipeline, it must travel by train, truck, or barge, separately from gasoline. It gets mixed in with the gas shortly before arriving at the filling station.

Accompanying the transition away from MTBE, there were concerns that ethanol would not reach its destination, causing shortages. The situation hasn't proved quite so dire. "Supply is meeting demand," says Mark Routt, a senior consultant with research outfit Energy Security Analysis. "The real question is at what price."

TARIFFS AND SUBSIDIES. Ethanol isn't cheap. With the New York harbor price of ethanol hovering around $2.75 Tuesday, compared with around $2.20 for gasoline, Routt says a standard 10% ethanol mixture boosts the price of a gallon of gas by 5 cents.

Ethanol is small beans compared with Big Oil. Still, those who want to make it a target have plenty of ammunition. For starters, U.S. ethanol producers enjoy some striking competitive advantages. There's a 54-cent-per-gallon tariff, plus a 2.5% ad valorem tax, on ethanol imported from Brazil, the world's other main producer, while there is a 51-cent-per-gallon government subsidy for ethanol mixed into fuel. It's a combination that critics say insulates domestic ethanol producers from competing against cheaper imports.

And price strength looks like it will continue. In its conference call, ADM said it expects the rise in ethanol prices to continue in the current quarter.

Because ethanol is becoming more prevalent in gasoline, "I think a lot of people don't realize that there are two ways to [interrupt] our gasoline supply" Routt says. "The one is the one everyone thinks of: [oil supply]; the other is ethanol."

NICKELS AND DIMES. Tom Slunecka, Executive Director of the Ethanol Promotion and Information Council, defends his industry: "The profits ethanol companies are seeing today is a very necessary thing." As ethanol production grows -- federal law mandates an increase in ethanol use -- he says it's "likely that the subsidies will adapt and change."

Despite this, ethanol is probably too small to reap a large-scale backlash. In 2005 the U.S. produced a bit less than 4 billion gallons of ethanol. It consumed 139.6 billion gallons of gasoline, according to the American Petroleum Institute.

While that statistic helps provide some needed context, a couple of other figures should also be kept in mind when considering ADM's place in the energy food chain. Integrated oil giant ExxonMobil's (XOM) profits of $8.4 billion for the first quarter dwarf ADM's robust period. And Slunecka points out that the grain processor's profits didn't even match ExxonMobil CEO Lee Raymond's $400 million retirement package.


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