Ethanol Fuels ADM's Performance

Demand for all corn-based products increased and earnings hit a record, but not all ethanol producers are benefiting

The ingredient that helps gasoline burn cleaner is also fueling jumbo profit growth for agribusiness giant Archer Daniels Midland (ADM). Boosted by swelling demand for ethanol, ADM reported its second straight year of record earnings on Aug. 1. The 26% increase in net earnings—to $1.31 billion—for the fiscal year ended June 30 was fueled largely by the company's corn-processing division, which saw higher earnings not only from ethanol, but sweeteners and starches as well.

Despite recent hoopla about the corn-based fuel, consumers generally do not have a choice about whether to put it in their tanks. ADM's impressive numbers, especially in the fourth quarter, owe something to refiners in some states beginning to using it instead of the gasoline additive methyl tertiary butyl ether (MTBE). Both fluids oxygenate gas so that it burns cleaner, but MTBE contaminates groundwater, making it a legal liability.

While surely helped by the switch from MTBE (see, 5/19/06, "Ethanol: Myths and Realities"), ethanol could continue to gain from favorable publicity. Worries about gasoline supply driven by ongoing conflict in the Middle East—and a desire to reduce greenhouse gas emissions—have raised the public profile of this domestic, relatively clean-burning fuel in recent months.


  For its most recent fiscal year, ADM's corn-processing business, which includes ethanol, sweeteners, and starches, enjoyed a 65% rise in operating profits, to $877 million. The corn bioproducts subsegment—which includes ethanol—climbed 72%, to $446 million.

The unit's results for the fourth quarter alone were also impressive. Helped by the move from MTBE, bioproducts operating earnings were some $174 million—almost seven times higher than during the same period in 2005. While the ethanol unit's revenues are a small slice of ADM's total, rising prices for the fuel have increased margins—and profits—significantly.

In an Aug. 1 conference call, Senior Vice-President Brian Peterson attributed the gains in corn processing to higher demand and prices for ethanol. Sweeteners, he said, got a push from the popularity of "power and energy drinks."


  The company's yearly numbers prompted Standard & Poor's analyst Joseph Agnese to raise his 12-month target on the stock to $50, from $45. The stock closed Aug. 1 at $43.90, down slightly on the day, but up a dazzling 77% year to date.

While ADM basks in the glow of ethanol's growth, there are some negatives for the industry. Ethanol producers are often criticized for receiving heavy government subsidies. U.S. producers also enjoy another advantage that has drawn some flak: tariffs on imported Brazilian ethanol, which is made from sugarcane.

And not all ethanol companies are getting a warm reception from investors. In recent months, the smaller ethanol outfits VeraSun Energy (VSE) and Aventine Renewable Energy (AVR) have gone public. At the time of their debuts, both outfits excited Wall Street, but Aventine is currently trading well below its offer price. VeraSun has performed better but is still below the close of its first trading day.

Even so, ethanol could be in store for future gains. The 2005 Energy Policy Act mandates an increase in ethanol production to 7.5 billion gallons by 2012. Some industry observers expect production capacity to grow even faster. ADM says it is building several additional ethanol plants scheduled to come online by 2008.


  While still looking to expand its ethanol business, ADM is already the largest American producer of the liquid, with about a quarter of the country's 4.3 billion-gallon annual capacity, according to a January report by the Renewable Fuels Assn., an ethanol trade group.

Of course, ADM's diet isn't limited to corn. On the year, the company also reported strong gains in its oilseeds divisions, with operating profits reaching $598 million, up 73% from fiscal year 2005. Those businesses include processing ingredients such as peanuts, soybean, and canola into oils and meals to be used in the food and feed sectors. Oilseeds can be used to make biodiesel, another alternative fuel. During the Aug. 1 call, Chief Executive Patricia Woertz said the company is also expanding its biodiesel production capacity.

Woertz joined ADM in May after a stint as a senior executive with oil giant Chevron (CVX). And while ADM's profits don't approach the eye-popping numbers of her former employer (see, 7/31/06, "Chevron Digs Deep"), its latest report is a reminder that the agribusiness outfit is enjoying an energy boom of its own.

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